Can we require everyone who has a loan with us to open a deposit account. The account is free, but we would like for everyone to deposit their payments there and when the funds are available we withdraw the money to make the payments.

While you could require a deposit account, under the traditional bank product exemption from tying rules, you can't require consumers to use auto-payment by depositing to an account. It is prohibited by Reg E - 205.10 (e).

"(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."

You can encourage them to use direct debit by offering a reduced rate, etc. but even if they sign up they must have the ability to change their mind at any time.

You can require it of business accounts.

Would it be a violation if when we receive a loan payment, instead of applying it to the loan we deposit it into the account and take it out the same day and apply it to the loan. Would that be considered automatic payment.

Why would you even want to do this?

Management decision. That's all I can really say.

They want everything to be filtered through the checking account for the purpose of monitoring and in case of returned items. Do you think this would be a violation of Reg E?

I don't know about Reg E but I'd read your loan agreement carefully. It probably addresses how payments will be posted and doing something this wacky may contradict your written contract.

Other concerns: are you going to effective date the payment to the date received so as to avoid charging extra interest on the principal reduction that should have been posted? Is someone going to verify that a late charge didn't assess during this waiting period? Is someone going to monitor days past due to ensure that you don't incorrectly report someone as past due to the credit bureau when they weren't actually late? This would be a servicing nightmare.

Yes all that will be monitored. My main concern right now is if it a violation. Techinically we are not requiring the client to auto debit, but would a regulator agree.

I think regulators will give it scrutiny but it would not be a violation because you are allowing the customer to send in the payment. What are you gaining in terms of processing that you wouldn't get by running it through a loans in process account? I have never worked anywhere that had a problem with that.

Your loan system should be tracking payments, etc. I don't see the benefit of taking the extra steps. They provide more room for error!

I would say it is in direct violation of Reg E. You are requiring them to deposit into a deposit account to automatically take the payment from that account. I think it smacks of compulsory use. Are you really saying that someone could not make a direct payment to their loan account. BSA hazn't made you crazy - it's your management. Glory be............ I'm sorry, but this has to be one of the more cockamamie ideas I have ever heard of - and trust me, I once managed consumer loan payments for a bank that had over 1MM consumer loan accounts.

While I don't agree with the Reg E since the customer can mail the check any time they wish, even late, (I think the regulators would pronounce the bank stupid) I agree that this is a bizarre idea.

I just can't understand why the checks can't clear through a loans in process account like every other bank. There is absolutely no benefit to this. In terms of extra steps, I think it actually would cost the bank money.

So how would you ever know when to pull the payment from the checking account if the customer made an extra payment or paid early? What happens on the payment due date and there is no money in the account? I don't think we have the whole picture, because it sure seems unworkable.

Is management trying to boost the appearance of your deposit balances for some reason?

You guys are making me laugh. I agree with how ridiculous this is. But the policy has been put in place by upper management and I can't seem to change their mind. For rlcarey, the way it would work is that a client sends a loan payment it is processed to the DDA and at the same time taken out and applied to the loan. So the money will always be there. It of course would have to be given immediate availability. The client does not need to sign any agreement.

Soooo, depending upon your posting order, the deposit could come in to my account. And, unless the loan payment comes out first, other checks or debits might post ahead of it and then there wouldn't be sufficient funds for the loan payment. Hmmmmmmm. I feel sorry for you.

I think they are setting themselves up for an intensely manual process! It makes no sense at all. I don't understand the followup statement that the payment will always be there. Not if the customer doesn't send it in on time! If you are just going to debit the account on a set day of the month and not wait for the payment to arrive, then you have a Reg E violation besides a silly process. Perhaps you should write a memo cautioning management about the problems (Reg E, clearing of other items, potential for errors) and skip away. Very unusual situation!

Are you sure you are talking about using a DDA account? Is this one account or does every customer have one? I'm soooo confused?

Is this account only used for this purpose, or can they make other deposits and write checks on the account?

What happens on the normal payment due date when the customer doesn't make a payment?

I can't help it - I have to keep asking question - your management is now making me crazy - there has to be some redeeming factor here that we are missing.

I have a suggestion...a field trip to another bank to see how loan payments are processed!