Written by Stephanie Lyon, Regulatory Compliance Counsel
Bonjour from New Orleans, where the compliance team is on-site for NAFCU's Regulatory Compliance and BSA Seminars. On October 17, 2016, the Government Accountability Office (GAO) released a report with observations of the impact Regulation D has on financial institutions and consumers. Just for context, Reg D is a Federal Reserve regulation that, in part, requires credit unions to limit certain kinds of transfers and withdrawals from savings deposits to avoid having to maintain reserves against those accounts. Many credit unions have expressed their discontent with this regulation as it appears to be as relevant and helpful as dial-in internet. Unfortunately, the findings of the GAO report are bad news for those who hoped Reg D would eventually get retired.
Mainly, the report found that numerous financial institutions faced some kind of operational burden associate with monitoring and enforcing the transaction limit. The report indicated however, that while some credit unions experience operational difficulties, members seem to be unaffected by Reg D’s transaction limit. The full report along with the highlights can be found here.
As Regulation D is unlikely to disappear overnight and the GAO report indicated most credit unions have restricted accounts, I feel it is a good time to review the transactions that count towards the Reg D limit. The regulation places a limit on non-transaction accounts such as share savings and money market accounts. See, 12 C.F.R. § 204.2. Transaction accounts, such as share checking accounts, are unaffected by this limit as the credit union must reserve against the funds in these accounts. The rule limits the number of convenient transfers that may occur on a savings account per month or statement cycle of at least four weeks to a total of six. See, 12 CFR § 204.2(d)(2). NAFCU made a helpful chart that breaks down the restricted and unrestricted transactions of savings deposits as defined by 12 C.F.R. section 204.2:
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Restricted Transactions (total of 6 per month) |
Unrestricted Transactions |
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Transfers and withdrawals to another account of the same member at the same credit union or to a third party by means of:
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What happens if a member exceeds the transaction limit? There is a famous footnote in section 204.2(d)(1) that provides guidance on that matter. Footnote 4 states:
4 In order to ensure that no more than the permitted number of withdrawals or transfers are made, for an account to come within the definition of [savings deposit], a depository institution must either:
a) Prevent withdrawals or transfers of funds from this account that are in excess of the limits established by paragraph (d)(2) of this section, or
b) Adopt procedures to monitor those transfers on an ex post basis and contact customers who exceed the established limits on more than occasional basis. For customers who continue to violate those limits after they have been contacted by the depository institution, the depository institution must either close the account and place the funds in another account that the depositor is eligible to maintain or take away the transfer and draft capacities of the account. An account that authorizes withdrawals or transfers in excess of the permitted number is a transaction account regardless of whether the authorized number of transactions is actually made. For accounts described in paragraph (d)(2) of this section, the institution at its option may use, on a consistent basis, either the date on the check, draft, or similar item, or the date the item is paid in applying the limits imposed by that section.
The guidance gives credit unions with two choices, the first is to restrict transactions above the allotted number and the second is to monitor and contact offending accounts that exceed the limit more than occasionally. This begs the question, what does an “occasional basis” mean? While not an absolute rule, the Federal Reserve has opined that if a member exceeds the limitations more than three times in a 12 month period, then the member has done so more than occasionally. However, this opinion is not absolute and the facts and circumstances should be considered in each case. The full opinion can be found on page 180 of a Regulation D Guidance document from the Federal Reserve Bank of Philadelphia. Note that the guidance document refers to footnote 5 which is now footnote 4 as the guidance predates some amendments to Reg D.
Finally, credit unions who offered linked savings deposits to cover overdrafts may find some of NAFCU’s older blogs helpful. You can find the blogs here, here, and here.
Laissez le bon temps rouler!
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New NCUA Examiner’s Guide
This past Friday, NCUA announced an update to its online Examiner’s Guide. We will be revising this guidance to identify any major changes such as the updated guidance on interest rate risk, risk-focused examinations, total analysis process and fidelity bond coverage. The new guide is searchable and interactive, yay technology!
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