Overdrafts: Linked Accounts and Regulation D - Part 2

Written by Steve Van Beek

We received some great feedback on Part 1 of Linked Accounts and Regulation D - including some great questions.  Let's delve into this area a bit more - including a preliminary question.   

Treating Savings Accounts as Transaction Accounts.  A couple of commenters asked if their credit unions could treat their savings accounts as transaction accounts - and reserve accordingly.  Yes, credit unions do have the ability to treat their savings accounts as transactions accounts and allow unlimited transactions from those accounts.  

The trade-off is unlimited transactions from savings accounts so long as the CU reserves for those accounts as well.

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Back to the CFPB's discussion of "linked accounts."  Remember, here is Part 1 from yesterday.  Here is how the CFPB described linked accounts in their blog post:

"Link your checking account to a savings account. If you overdraw your checking account, money will be taken from your linked savings account to cover the difference. You may be charged a transfer fee when this happens, but it is usually much lower than the fee for an overdraft."

This is just a casual mention of the ability to link accounts so I'm not too worried about the lack of any information regarding potential transaction limitations under Regulation D.

Penalty Fee Box.  Let's move on to the CFPB's prototype "Penalty Fee Box" disclosure.  The first page of this document has been getting all the press - but take a look at Page 2 (scroll down or click here).  The second page includes "Three Ways to Lower these Fees" and a brief description of each method.  Here is the section on "linked accounts":

"Link a savings account to your checking account. 

When you overdraft your checking account, any available money will be automatically transferred first from your savings account to avoid overdrawing your account.  A $5 transaction charge applies for each automatic transfer." 

There is also a notation which would indicate whether or not the member currently has their accounts linked.  

Again - no mention of any potential transaction limitations from Regulation D.  

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Why is this such a big deal?  In the grand scheme of things, this isn't the biggest issue.  But let's follow an example of how this could play out in the future (followed by my commentary).

• The CFPB continues to encourage members to link their accounts (no problems here);
• There is no mention of any potential transaction limitations (potential issue);
• Member A links his accounts (no worries here);
• Over the next few months, Member A occasionally overdraws his checking account and funds are transferred from his savings account each time (no worries here - this is how the set-up is supposed to work);
• In August, Member A goes on a two-week vacation and overdraws his checking account 6 times during the vacation (uh-oh, Member A is up against the Reg D limit);
• Later in August, Member A tries to make an online transfer from his savings account to his checking account (a Reg D transaction) which is blocked because he is at his transaction limitation for the month (big problem here).

Who does Member A call when he is furious over the inability to conduct an online transfer of funds from his savings account to his checking account?  Your credit union.  Member A isn't placing a call to the CFPB, yet.  Depending on how frustrated Member A is, he may decide to file a complaint against your credit union to the CFPB or NCUA.  

What's worse?  Member A's inability to transfer these funds could actually result in additional issues with his checking account.  If Member A is unable to transfer these funds - his checks might start to bounce or ACH transactions get returned.

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I'm not trying to present a dooms-day scenario or indicate that linked accounts are bad.  Linked accounts are great options for consumers and I know quite a few credit unions offer them as the first option in the case of an overdrawn account.

But - look how this situation played out.  The CFPB's discussions haven't mentioned Regulation D.  Consumers don't know very much about Regulation D and are consistently flummoxed by explanations about why they cannot access their funds in certain ways (i.e., "explain to me again why I can't transfer my own money from one of my accounts to the other"). 

The short version:  To help ensure everyone – especially consumers – are aware of the potential transaction limitations for savings account, the CFPB should take a hard look at providing information about these transaction limitations to consumers when discussing linked accounts

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I've gone and done it again.  I promise you this is not some master plan to keep you on the edge of your seats for the next installment of "Linked Accounts and Regulation D."  However, this post is already very long so we'll address a couple of other issues in an upcoming Part 3.  

Comments

[Dick Bastiansen]

Some analysis of how many overdraft protection users have a savings account seems like it would be a good idea. In my experience very few have another account.
Also, a comparison of the consumers costs incurred when an overdraft is not paid versus the fee charged when it is paid might be a good idea.
Over the years we have tried to counsel those who have significant fees for ODP coverage. 99% of them say they know what they are doing and that is how they want it. They get hostile. I'm not sure we changed anybody's mind.