Can direct deposit be a requirement of an extension of credit?

I believe that will violate Reg E if you're dealing with a consumer.

Richard is correct. 205.10(e) forbids this.

(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.

This does not mean you can't incent the customer to have direct deposit or funds transfers for payments. Typically this is done with a rate reduction.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

I agree with you; but the "Powers" would like to know if the bank can require that employee loans be on auto-draft. They also argue that the bank can require all employees to have an account (at our bank) for ACH deposit of payroll. Oh, and one more thing, they are considering requiring all employees to use on-line bill pay.

I thought the Reg was pretty clear on this, but maybe I missed a commentary or something.
Does anyone know of any exception that allows banks to impose stricter rules on its employees?

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Opinions expressed are not necessarily those of my employer.

Whoa!!! I think the "Powers" are way off-base on this one. Don't think you can do any of these. There's no way my employer would require me to use billpay!

205.10(e)(2) says you need to handle the "powers" delicately. They can't have their cake and eat it too. As it relates to employees having to use direct deposit:

Employment or government benefit. No financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment or receipt of a government benefit.

As it applies to requiring auto-draft payments, they can't do that either. The cite above pertaining to compulsory use says that they can't deny the loan based on the fact that the borrower doesn't want this auto-draft.

The risk and employee grief isn't worth the minimal increase in profitability of these requirements. Again, you can price the products differently, but you can't condition the extension or employment conditions.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

I believe an employee has the right to request a check and opt out of EFT also. Plus, they are no longer required to maintain an account at the bank.

The commentary actually allows an EFT to be required, but not at any particular FI.

Commentary 205.10(e)(2)1. Payroll. An employer (including a financial institution) may not require its employees to receive their salary by direct deposit to any particular institution. An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer), or receiving their salary by check or cash.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

I cannot imagine why "the Powers" at this bank would want to coerce employees to have their deposit accounts at the bank. Bank employee accounts are often unprofitable (they usually have all fees waived, and often have low average balances).

On second thought, I can imagine why, and it would be the one reason I would want my account somewhere else! Management at the bank in question is clearly in need of some compliance training!

[This message has been edited by John Burnett (edited 08-27-2001).]

Thanks to everyone!!

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Opinions expressed are not necessarily those of my employer.