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#2085800 - 06/29/16 05:10 AM Rewards/High-Interest Checking Accounts
Puzzled Offline
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Joined: Dec 2012
Posts: 157
Hello,

I have seen several older posts on this subject but nothing recent. We have developed a high interest checking where we will pay10% up to $5000 and nothing above $5000. The account will also require that the customer have a certain number of debit transactions and direct deposit to earn the 10%. If they don't meet these activity restrictions and have a balance under $5,000, they won't earn any interest. The prior posts are stating that per Regulation DD commentary from August 1994-59 Federal Register 40217, Comment 7, institutions cannot condition the payment of interest on anything but minimum balance requirements. There is also reference to FDIC SCANs Bulletin Number Chiro-05-07 (Rewards Checking requirements).

Can anyone point me to something current that states that we cannot condition the payment of interest on the customer meeting certain activity requirements on the account?

Regulation DD Commentary
a) Permissible Methods
(a)(1) Balance on Which Dividends Are Calculated
Comment 7(a)(1)-1
Based on the comments received and further analysis, the FRB believes that account inactivity does not
affect an institution's duty to pay interest. (See comment 7(c)-3,
which provides that institutions must accrue interest on funds until
the funds are withdrawn from the account.)

FDIC 2007 Guidance
Potential Violations of Truth in Savings Associated with "Rewards" Checking Products

Financial institutions have begun offering deposit products with higher-than-market interest rates, which can be earned by customers if they meet specific transaction-based criteria. Often, these specific criteria involve conducting a certain number or dollar amount of debit card transactions, utilizing an automatic bill pay service, or conducting a certain level of internet banking transactions, all on a monthly basis. However, some such programs condition the earning of interest on these criteria in violation of Regulation DD, which implements the Truth in Savings Act. A bank may pay a higher rate of interest for meeting debit card, internet, or automatic transaction requirements, but may not completely elimiate the payment of interest on interest bearing accounts for not meeting these specific requirements. Similarly, a bank may have a requirement for 10 such transactions, but not specify that each transaction be at least $100 or more, for example.

Important points to remember are:


Banks may not eliminate the payment of interest on anything other than minimum balance requirements.

Banks may not require that transactions be of a certain dollar value (individually or in aggregate).

Banks may implement bona fide tiered rate deposit accounts, where a higher rate may be obtained if conditions other than a minimum balance are met.

Banks may require a certain number of transactions in a given account cycle in a bona fide tiered rate account to obtain a higher level of interest.

Banks with existing Rewards Checking programs should ensure that their programs comply with the important points identified above and Regulation DD. Examiners have cited violations of Regulation DD for failure to comply with the above restrictions. Banks considering these types of deposit products should perform appropriate due diligence to ensure they meet regulatory requirements.

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#2085802 - 06/29/16 11:43 AM Re: Rewards/High-Interest Checking Accounts Puzzled
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
There has been nothing recent on this issue. I am surprised you have gotten away with this for so long. You can pay .01% on the balances under $5,000 if they don't meet the transaction requirements, but you cannot eliminate the interest totally.

These have been historically losing accounts anyway and historically only touted by bank marketing firms. They are fraught with UDAAP concerns and fail to generate much more than the minimum balances to earn the higher rates. If you are paying 10% on the first $5,000, you could have borrowed $135,000 from the Fed for the same cost. Unless you are struggling for deposits, which most banks are not, it is a really expensive program based on interest costs, marketing costs, the cut you give to the marketing firm that set you up, managing the high risks, constant maintenance, etc.
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#2085849 - 06/29/16 02:10 PM Re: Rewards/High-Interest Checking Accounts rlcarey
Puzzled Offline
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Joined: Dec 2012
Posts: 157
Hi Randy, the account is in development by our own marketing department and has not been formally introduced-there is no third party vendor involved. I am just trying to send the marketingdepartment the citation that says we cannot not pay interest because of customers not meeting certain transaction requirements. The above reference from Regulation DD commentary seems to be referencing dormant accounts and not apply to this situation. I also looked at more recent FDIC guidance (Supervisory Insights-Winter 2012) that gives a list of common errors on high-interest yield checking accounts. It mentions a fall back rate but the article doesn't state that you cannot condition the payment of interest on activity.

Commonly Observed Issues with High-Yield Checking Account Promotional Materials and Disclosures (*)
Bank advertisements, promotional materials, Web sites, and disclosures may:[/b]
„ -Highlight the highest APY and omit the fall-back APY.
-„ Provide the highest APY and fall-back APY, but not state the qualifiers to achieve the higher APY.

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#2085887 - 06/29/16 03:58 PM Re: Rewards/High-Interest Checking Accounts Puzzled
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Even the Fed - which was the author of Regulation DD agrees:

http://www.nxtbook.com/nxtbooks/sb/ababj0307/index.php?startid=48
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#2085899 - 06/29/16 04:22 PM Re: Rewards/High-Interest Checking Accounts rlcarey
Puzzled Offline
100 Club
Joined: Dec 2012
Posts: 157
I totally agree with you I was just hoping to find something current. All banks I have seen with these accounts do have a fall-back rate so obviously they are doing this for a reason.

This is from FDIC Supervisory Insights (Winter 2012)

Commonly Observed Issues with High-Yield Checking Account Promotional Materials and Disclosures (*)
Bank advertisements, promotional materials, Web sites, and disclosures may:
„ Highlight the highest APY and omit the fall-back APY.
„ Provide the highest APY and fall-back APY, but not state the qualifiers to achieve the higher APY.

From the current Regulation DD Commentary:
6. Dormant accounts. Institutions must pay interest on funds in an account, even if inactivity or the infrequency of transactions would permit the institution to consider the account to be “inactive” or “dormant” (or similar status) as defined by state or other law or the account contract.

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#2085904 - 06/29/16 04:43 PM Re: Rewards/High-Interest Checking Accounts Puzzled
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Just make sure you suggest to management that they get a full cost benefit analysis from the marketing department before going off on this adventure. There is a reason that many banks have jettisoned these programs over the years. I have seen these programs in a number of banks that I consult with and most had serious issues with the regulators as they picked apart the disclosures, some were ordered to pay restitution (even down to a few cents an account) when they thought the disclosures were not specific enough, and they never generated the interest from the customer base or generated the amount of deposits that were originally projected. In reality, you will end up cannibalizing your current customer base from less expensive and less risky accounts.
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