Overdrafts: Linked Accounts and Regulation D - Part 3; Reg D Statement Insert

Written by Steve Van Beek

Happy Friday everyone!  I wanted to continue our exploration of linked accounts and Regulation D.  You can find Part 1 here and Part 2 here.

I'm sure there are a few folks wondering what has gotten Van Beek so worked up over this linked account and Regulation D issue.  Is he really that adamant about the CFPB informing consumers about potential transaction limitations from Regulation D?  Yes - but there is more.  

Existing Exception to Regulation D.  There is an exception in Regulation D which indicates a transaction to repay a loan at the same institution is not considered a Regulation D transaction.  Thus, if your member makes an automatic monthly payment to their car loan from their savings account - this is not a Reg D transaction.

So why doesn't the Federal Reserve treat transfers from savings to cover an overdraft in the same manner?  This is what I'm trying to find out.  This is what I want the CFPB to ask the Federal Reserve.  This is what would help consumers and credit unions (not to mention the benefits from the reduced headaches to compliance officers).  

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Shall we take a look at the lovely language of Regulation D?  [Now is the time for a coffee refill]

Here is from 12 CFR 204.2(d)(2) - the definition of "savings deposit":

"(2) The term “savings deposit” also means: A deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements of §204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties. A preauthorized transfer includes any arrangement by the depository institution to pay a third party from the account of a depositor upon written or oral instruction (including an order received through an automated clearing house (ACH)) or any arrangement by a depository institution to pay a third party from the account of the depositor at a predetermined time or on a fixed schedule. Such an account is not a transaction account by virtue of an arrangement that permits transfers for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer) or that permits transfers of funds from this account to another account of the same depositor at the same institution or permits withdrawals (payments directly to the depositor) from the account when such transfers or withdrawals are made by mail, messenger, automated teller machine, or in person or when such withdrawals are made by telephone (via check mailed to the depositor) regardless of the number of such transfers or withdrawals."  (emphasis added).

Why is Reg D so confusing?  Perhaps a discussion for another blog post.  

Existing Exception for Repaying Loans.  It's right there buried in the middle of the definition of savings deposit.  Note the key - it must be a transfer to repay a loan at the same depository institution.  A member's transfer, from savings, to repay a mortgage loan at your credit union is not a Reg D transaction.  A member's transfer, from savings, to repay a mortgage loan at a bank across the street would be a Reg D transaction.

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Back to the heartburn issue - why doesn't the Federal Reserve provide clarification that transfers from savings accounts to cover overdrafts from accounts at the same depository institution are not Reg D transactions?

I'm not sure there is good answer to this question.  Perhaps they haven't thought of it.  Perhaps there hasn't been another Federal regulator asking them to consider making this clarification to help consumers understand and manage their account activity.

One thing is clear - the current version of Regulation D is not doing consumers or credit unions any favors.  The CFPB has the power to pick up the phone, call the Fed and ask them to get on board and make life easier for all involved.  

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NAFCU Members:  We have a free Regulation D statement insert that is available as a NAFCU member benefit.  You can see the PDF here.  Additional free statement inserts for NAFCU members are here.  

This statement insert might be useful to provide to members who consistently bump up against the Reg D transaction limitations.  Providing this as a statement insert (or dropping it in the mail after a member calls with a concern) might be a good way to improve member understanding of Reg D.  

Comments

[Joyce]

I just got back to the office and of course, this blog is the 1st place I go to for a quick catch-up of what I missed while out. These are excellent blogs, Steve! And so on-point. It certainly does seem as tho the CFPB forgot all about Reg D's limitations but I also have to wonder that with today's technology there must be some other way that we can determine reserve funds. The 6 limit is certainly outdated but the regulators need to look beyond just this number of 6...they need to improve the way the reserve requirement is determined. I'm sure they won't have to look far to come up with a better method and this part of the OD mess will be solved.

[Steve Van Beek]

Joyce,
As always - very good points. With the ability to transfer funds via a smartphone from anywhere on the world, the existing Reg D setup does look a bit outdated.

Thanks again.