Let’s Talk About Dividends
In the past month or so, I’ve received various questions that involve dividends, so I thought it would be helpful to provide a refresher on what dividends are and how dividends differ from interest. So, first up, what are dividends? Section 707.2(h) of NCUA’s Truth in Savings rule defines “dividend and dividends” as:
“(h) Dividend and dividends mean any declared or prospective earnings on a member's shares in a credit union to be paid to a member or to the member's account. For purposes of this part, the term does not include the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, the absorption of expenses, non-dividend membership benefits, or extraordinary dividends.” (Emphasis added).
Additionally, as this NCUA Legal Opinion Letter explains, “[d]ividends paid by a federal credit union (FCU) represent a distribution of earnings to members, a return for investing in or saving with the credit union.”
How does this differ from interest? As noted in section 707.2(o), interest is defined as:
“(o) Interest means any payment to a member or to a member's account for the use of funds in a nondividend-bearing account at a state-chartered credit union offered pursuant to state law, calculated by application of a periodic rate to the balance. For purposes of this regulation, the term does not include the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, the absorption of expenses, non-dividend membership benefits, or extraordinary dividends. Except as is specifically otherwise provided in this part, in the case of an interest-bearing account held in or offered by a state-chartered credit union pursuant to state law, the word “interest” shall be substituted for all references to “dividend” or “dividends” in this part.” (Emphasis added).
As you can see from the above definition, interest is any payment that is made to a member or a member’s account “for the use of funds in a [non-dividend-bearing] account at a state-chartered credit union offered pursuant to state law.” (Emphasis added). What about federal credit unions? Can they offer interest-bearing deposit accounts? The commentary to section 707.2(i) provides additional information and states that:
“1. General. Member savings placed in share accounts are equity investments, and the returns earned on these accounts are dividends. Federal credit unions may only offer dividend-bearing and non-dividend-bearing share accounts. State-chartered credit unions may offer both share and deposit accounts if permitted by state law. State law, including without limitation regulations and official interpretations, will determine if returns earned in accounts in state-chartered credit unions are dividends. Dividends exclude the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, the absorption of expenses, non-dividend membership benefits and extraordinary dividends. Dividend-bearing accounts must be either fixed-rate or variable-rate accounts.”
As noted above, federal credit unions may not offer interest-bearing deposit accounts and may “only offer dividend-bearing and non-dividend-bearing share accounts.” The commentary goes on to state that state-chartered credit unions, on the other hand, may offer “both share and deposit accounts” so long as it is permitted by state law.
