I was sure there was a reg for this but I’ve searched and searched and can’t find it.

Isn’t there a regulation prohibiting requiring a consumer to pay a loan via ACH (as in, automated, prearranged draft/debit from checking, either at our bank or elsewhere)? We want to have it as a condition of granting an unsecured consumer loan.

Maybe I'm just making up regs!

It is actually in Reg E.

1005.10(e) Compulsory use. (1) Credit. No financial institution or other person may condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account.

From Official Staff Interpretations: 10(e) Compulsory Use
10(e)(1) Credit
1. Loan payments. Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved. Examples include:
i. Mortgages with graduated payments in which a pledged savings account is automatically debited during an initial period to supplement the monthly payments made by the borrower.
ii. Mortgage plans calling for preauthorized biweekly payments that are debited electronically to the consumer's account and produce a lower total finance charge.
2. Overdraft. A financial institution may require the automatic repayment of an overdraft credit plan even if the overdraft extension is charged to an open-end account that may be accessed by the consumer in ways other than by overdrafts.

Reg E
1005.10(e) Compulsory Use

Commentary Paragraph 10(e)(1)—Credit

1. Loan payments. Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved. Examples include:

i. Mortgages with graduated payments in which a pledged savings account is automatically debited during an initial period to supplement the monthly payments made by the borrower.

ii. Mortgage plans calling for preauthorized biweekly payments that are debited electronically to the consumer's account and produce a lower total finance charge.

2. Overdraft. A financial institution may require the automatic repayment of an overdraft credit plan even if the overdraft extension is charged to an open-end account that may be accessed by the consumer in ways other than by overdrafts

Great minds think alike!

OP here: Ugh! Thanks! Now compliance gets to go break another loan product...this will be interesting.

Anon - compliance is not "breaking" anything...quite the opposite, you are fixing a broken product that could lead to regulatory fines if your bank continues down that path. don't allow yourself to be painted as the goat in this...

Good point Happy!

OP sez: Me-eh-eh-eh-eh [a goatlike noise]. But I see your point, thanks.

What about deposit products? Our Bank wants to increase deposits by requiring an ACH into a savings (or Christmas club) account and provide a higher rate as an incentive. Are there any prohibitions against this? Internal transfers within the bank.

Original Anon,

While you cannot require the use of ACH as a method of repayment, the regulation acknowledges you may offer more favorable terms if they do agree to use ACH. There's no need to be the naysayer who "breaks" a product when you can offer a built in alternative. Just tell them to wse the carrot instead of the stick.

Anon II?,

Your respondents have quoted the relevant section of Reg E; it contains no parallel restrictions regarding deposits...

Bringing this thread back to life.

I'm trying to understand a particular wording in the in the commentary. Commentary mentioned "type" of credit. What does type mean? I can see it as meaning fixed/variable, purpose, or consumer/commercial.

I feel like it's not as descriptive as the Reg Z commentary related to offering a loan that has a prepayment penalty.


(note I'm using the 2018 amended wording):

10(e)(1) Credit

1. Loan payments. Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved.

For any loan program that you have (the exception being an overdraft line of credit) you cannot restrict the payment methodology to electronic automatic payments.

Note that Reg E by definition only applies to consumers so this prohibition would not apply to loans made to businesses.

Fixed Mortgage
ARM Mortgage
Auto Loan
Unsecured line of credit
Cash secured loan
Home Equity Line of Credit
Education Loan

and so on...if the loan is made to a consumer automatic payments cannot be required as a condition of approval.

I just wanted to add that I have worked with many a banking attorney who applied this to business purpose loans to individuals because of Reg E's definition of consumer. You might want to check with legal counsel.

“Consumer” means a natural person.

sorry, to address the question, what do you see as "type" for the context of the commentary?

10(e)(1) Credit

1. Loan payments. Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved.

I think you are reading way to much into one word. The context of the statement in which it is located simply means that if I offer a loan program, say a fixed rate auto loan, and my base rate is 4.50% for a new 2018 car, I can offer a .25% discount and offer a 4.25% rate for loans with an automatic payment, provided that I also offer a fixed rate auto loan without an automatic payment at 4.50%.

If I offer a variable rate HELOC at Prime -.25% for automatic payments, then I must also have a HELOC product that offers a variable rate at Prime without automatic payments.

This requirement applies to any consumer loan program that is not an overdraft line of credit.

i agree with Brian. You can offer a car loan with a discounted rate for auto debit but must have an option for no auto debit.

Same for a HELOC or any other product.

You can't say "well we will only offer HELOCs with auto debit because we have other kinds of consumer loans without auto debit". The customer must be given a choice of auto debit or not for the kind of loan they are requesting, not some totally different kind of loan product.

As is mentioned in this part of the Regulation, "except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account." This provides a clear out for overdraft credit plans. There is also further commentary to 1005.10(e) that states:

[2. Overdraft. A financial institution may require the automatic repayment of an overdraft credit plan even if the overdraft extension is charged to an open-end account that may be accessed by the consumer in ways other than by overdrafts.]

This makes it clear that the account as a whole can be accessed in other ways than just the overdraft and the automatic repayment restriction would still not apply. However, I am a bit confused. The way I interpret this is that the auto repayment restriction would not apply to such an account in general, but could still only be used/required in conjunction with amounts associated with overdrafts. Meaning that if credit was accessed through a method other than the overdraft, then those amounts could not require automatic repayment and such amounts would have to be allowed repayment by another method. Do you agree with that, or do you think that all transactions could be required to be subject to auto repayment only?

So, basically, you have a Personal LOC that can be drawn against for overdrafts, but then can also be drawn against through other methods. Can you require auto repayment on any transaction made, or can you only require auto repayment on those amounts that coincide with the "overdraft credit plan" extensions?

Interesting addition, bump^

What about a landlord who is, mid-lease, informing us (and all of her other home rental tenants) that effective immediately we are required to pay rent via monthly auto ACH and there is no other option? This seems to fall under the category of a "debt," since once you are in a lease, you owe the monthly rent for the duration of the lease. Seems like the federal banking regulations would cover this as well? Any ideas?

You would have to go back to your rental/lease agreement.
That stipulates the terms of your agreement to rent property from the landlord, and their terms and conditions for the rental.

Someone who rents a home is not a creditor under the regulation. Whether that is a discriminatory practice under the Fair Housing Act - protected individuals may be more likely not banked or do not use banks - is another issue.

Would offering a grant to reduce the loan amount qualify as an "incentive" thus allowing a bank to mandate autopayment/ACH? If the borrower refused autopayment/ACH, then the grant funds would be unavailable to them.

In my opinion, a grant is an incentive that would allow the bank to mandate autopayment/ACH.

Thoughts, please? Thank you.

Sounds similar to an interest rate break to me. What is the value of having a loan on ACH versus not? I think a lot of banks have no idea of the costs versus the benefits derived. I have yet to see a loan not actually go bad just because of autopay. Also what happens to the grant after the customer closes their asset account that is being debited?

Understood - thanks for the quick review and confirmation.