Reg D and Staff Opinion

I am looking for the Staff Opinion or other guidance that states that waiting until the end of the statement cycle to inform customers that they have excessive Reg D transactions is not sufficient. Notification should occur as soon as the customer's activity is over the six transactions limit.

This is referenced in a previous BOL post titled "Notification of Excessive Transfers" dated 7/31/06.

I have looked and looked for it on the Fed's website but cannot locate it. Any help is appreciated.

I don't recall seeing any staff opinion or guidance other than this form of "footnote", which uses the term "...more than an occasional basis...". We wait until the end of the month before generating the report and notifying customers. This way it's done once per month for all 'offenders' and so tracking is easier.

4In 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 an 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.

I don't know why the Fed doesn't post its old but still valid staff opinions on its website. I think that one of the Federal Reserve Banks has the collection on its site, but I cannot find my link to it.

Where these dusty old opinions ARE published is in the Fed's print (!!) binder service, the Federal Reserve Regulatory Service, behind Regulation D in the Monetary Policy section of the service.

Is this the one:

2-342.15
SAVINGS DEPOSITS--MMDAs; Monitoring of Transfers
A depository institution proposes to offer a money market deposit account (MMDA) monitored to
discourage withdrawals or transfers in excess of those permissible for MMDAs. The monitoring system
would look to consecutive months in which there were transfer violations. After the first month in which
there were excess transfers, the institution would send a letter reminding the customer of the transfer
limit and informing the customer that the limit was exceeded. If excess transfers were made during the
next month, the institution would send a letter informing the customer of the violation and stating that
continued violation would result in elimination of the transfer capacity or conversion of the account to a
checking account. If the depositor exceeded the transfer limit for a third consecutive month, the
institution would send a letter informing the customer that the account has been converted to a
transaction account.
The proposed monitoring system would fail to ensure that there are no more than six transfers per month
and also fail to ensure that there are no more than three transfers by check, draft, debit card, or similar
order per month. A depositor could make unlimited transfers from the account for three consecutive
months before the institution would close the account. For example, a customer could write 20 checks
per week on its account in the first month. Only after the end of the month would the customer receive a
reminder of the transfer limit. This transfer activity could continue through the second month, when the
customer would receive another warning. Only after the third consecutive month of such activity would
the account be changed to a transaction account.
If an account becomes a transaction account as defined in section 204.2(e) because of excess transfers,
then Regulation CC, Availability of Funds and Collection of Checks (12 CFR 229), would also apply.
STAFF OP. of Dec. 6, 1988.
Authority: 12 CFR 204.2(d)(1) and (2).

That's the one, Randy! You are truly the compliance packrat of the week!

The Comptroller's Handbook for Depository Services (Nov 2008) also references Staff Op dated 2/15/90. I cannot locate it either. Do I need it as well to support that monthly monitoring is not sufficient?

2-342.17
SAVINGS DEPOSITS--Monitoring Transfers from MMDAs
A bank proposes to compile monthly reports of customers who had excessive money market deposit
account transactions the previous month, notify customers by letter regarding those excessive transfers,
and close any account if the transfer limits were violated during four consecutive months.
These procedures would not result in compliance with the six-transfer limit on MMDAs. Footnote 5,
referred to in footnote 6 of section 204.2(d)(2)(ii), requires institutions to monitor transfers and contact
customers who exceed the limits more than occasionally.
Footnote 5 provides that the rule limiting transfers need not be applied mechanically, but it does not
change the fundamental requirement that a depository institution may not permit or authorize more than
six transfersfrom an MMDA per month. Thus, if the circumstances warrant, an institution may not be
required to close or reclassify an MMDA in the event of an occasional excess transfer from the account.
As the staff stated in its opinion at 2-342.15, enforcement procedures that focus on excess transfers in
consecutive months and that ignore excess transfers in any particular month would not be sufficient to
prevent excess transfers from MMDAs, and would therefore fail to meet the monitoring requirements of
Regulation D.
Ideally, controls on excess transfers should be sufficiently flexible to address both excess transfers in
nonconsecutive months as well as the level of excess transfers in a particular month. Such controls would
help depository institutions distinguish inadvertent violations of the transfer limits from abuses of the
transfer limits. Thus, when a customer ignores the transfer limits applicable to an MMDA, the depository
institution should take steps to close the account more quickly than it would an account from which the
depositor inadvertently, and occasionally, exceeds the transfer limits by a single transfer. Nevertheless, a
monitoring system that would detect and prevent all excess transfers may be costly to administer. For this
reason, the staff has applied a general rule that an institution may continue to consider an account an
MMDA even if there are excess transfers so long as those excess transfers are not the result of an attempt
to evade the transfer limits, and if the excess transfers occur in not more than three months during any
12-month period. This working rule is not absolute, however, and the facts and circumstances must be
considered in each case.
The proposed standards for monitoring MMDAs would not adequately prevent excess transfers. They do
not take into account the number of excess transfers in an MMDA in any one month; a large number may
be evidence of an intent to evade the transfer limits. Further, the standards would permit excess transfers
in four consecutive months. Therefore, the proposed standards could result in violations of the transfer
restrictions on MMDAs. STAFF OP. of Feb. 15, 1990.
Authority: 12 CFR 204.2(d)(2).

RANT FOLLOWS

There has never been a compliance issue that is a more colossal waste of time.

When I read posts that describe these elaborate letter writing campaigns to offenders and those that ask how soon they can open another savings account for someone whose account has been closed for violations, I've always wondered: Do you just not have anything to do? As interest rates have declined to the point where they struggle to generate a 1099, it gets even more ridiculous.

If you want people to comply with the restrictions impose a $10 - $15 fee for each debit over the number allowed. They'll stop and you can look for something constructive to do with your time.

RANT ENDETH

I have one bank that just internally classifies the accounts as an interest bearing DDA after the second occurrence and leave the rest of the terms and conditions on the account the same. No letters - no nothing.

That is a new take. I hate monitoring these accounts. Do they just change a class code and just leave the product code so all the charges remain the same?

I would like to know more about that.

That is exactly what they do.

Is that permissible to do? Isn't the whole goal to stop them from using a savings account as a checking? Would examiners be ok with this?

If you turned it into a DDA (interest bearing or otherwise) that's what you just did. Personally, if I were going to try a mechanism other than fees, I would convert it to a non interest bearing account. They would get one letter and it would say "Presto, chango you have a new type of account..." and include a disclosure for that account type.

None of these options are in defiance of examiners. They just expect you to put a stop to it using a method consistent with your prior statements.

Just trying to figure out how to get it to work here. Ideally if we can just change an internal code without any negative affect to the consumer, that would be the easiest. They think they still have their regular savings account with the same fees, etc but we just classify it as a DDA for reporting.

Aren't savings accts/money markets priced differently than your DDA accounts as part of a profitability strategy? So internally classifying them as DDAs aand reporting them as such for reserve purposes will make those accounts more "expensive" to the bank than a normal savings/money market. Or am I not thinking this through correctly.

You are on the right track, but in this specific discussion all that's been contemplated is converting one offending savings account to a DDA, not the entire class.

Yes, it would be just one account.

Trying to figure out how to internally do it.

We send a letter after the first and second violation. The customer commits the third violation, so we make the decision to convert the account to a transaction account. Do we have to wait 30 days after we send the third letter along with the new disclosure to convert the account or can we convert it immediately?

We have a 3-strike rule as well. At month end of the 3rd strike we send a notice of account change and disclosures for the new account. Our savings disclosure clearly states that violating the withdrawal limits will result in account change. We don't wait 30 days.

Just convert them on the first occurrence and quit wasting time on letters one and two. If you code them as interest bearing DDA accounts on your system and you don't change any fees or charges, you don't even have to let them know.

We are considering doing it the way rlcarey suggesting doing away with all the monitoring/letters. I'm getting questions on how we do this - specifically:


•Do we also change the GL when changing the code to transaction account?
•Do you have to do it after the first violation or could you do it after the second (since one time isn't on more than an occasional basis)?
•For those doing it this way, did you create a separate product type on your core that mirrors a savings, but just has the one code set as transaction account rather than savings for reporting purposes?

Cali--did you ever get your questions answered? I am thinking about doing this but want to make sure everything is covered.

Sent you a PM - we made the switch.

When you all started talking about the alternative procedures a couple months ago, I ran the idea by our consultants and they were not sold. Maybe I did not explain well. I'd be interested to see how others fare with the change.

Our consultant (attorney at a compliance group) was completely on board. Yes, I agree that how you explain it to the consultant makes a big difference. If they think you are changing this from a checking to a savings (vs. just changing to transaction account for reporting purposes only), they'll instruction that you need to give notice, disclosures, etc.

First and foremost, with the way our changes to this are set, NOTHING changes for the customer - everything stays as it was disclosed in their TISA.

We increased our excess debit fee across the board slightly and gave 30 days notice to all customers, updated the TISA disclosure going forward.

Customers exceeding the limit still receive a letter after the first violation letting them know they violated, the fees incurred with that, etc.

After the second violation, we change the code on the system that is just for reporting purposes to transaction account since that could be seen as exceeding the limit on more than an occasional basis. Again...everything from the customer's perspective stays the same....just how we report it is different. It still functions as a savings account and still has the same name, etc.

Should interest rates ever go up, we may later consider also giving them a lower interest rate, but that doesn't make sense right now given how low rates are. If we decide to do that, of course, we'll give the customer a "heads up" in the letter, disclose exactly as we need to with the new APY, etc. We'll cross that bridge and work it all out when we come to it.

But, for now, we are saving a lot of time, expense, and headache.

I just came across this topic. Streamlining our process for Reg D monitoring will change lives at my financial institution. Why is re-disclosure not required when the account is changed? Our TISA disclosure is very general in regards to excessive transactions, so are you disclosing more at account opening? Doesn't the customer need to know they now have a checking account?

Because giving them unlimited transaction ability does not adversely affect the consumer.

1030.5 Subsequent disclosures.

(a) Change in terms. (1) Advance notice required. A depository institution shall give advance notice to affected consumers of any change in a term required to be disclosed under Sec. 1030.4(b) of this part if the change may reduce the annual percentage yield or adversely affect the consumer. The notice shall include the effective date of the change. The notice shall be mailed or delivered at least 30 calendar days before the effective date of the change.

And:

(b)(5) Transaction limitations.

1. General rule. Examples of limitations on the number or dollar amount of deposits or withdrawals that institutions must disclose are:

iii. Institutions need not disclose reservations of right to require notices for withdrawals from accounts required by federal or state law.

Contrast that with what you have to do if you open a new transaction account and move the MMDA or savings funds into it:

Reg. DD, §1030.4, comment (a)(1)-1.iii (on delivery of account disclosures upon account opening):

We finally have worked with our core and found a way to make this happen.

We will create a new savings product that is identical to our current account. The only different is the product will not be subject to Reg D and will be reported as a transaction account.

This is going to save time in our monitoring.

We will create a new savings product that is identical to our current account.

Then it is not a savings product.

I really think you risk misleading customers if you continue labeling this hybrid "thing" a savings product. You also risk confusion in-house, I think. What prompts such a move? Are there really so many customers who are straying from the savings transaction limits that you need to take such action? Why not transfer them to the right account, or close them out, or take away their transfer capabilities?

We will just build it on that side but it will be reported as a transaction account.

We can build the same account on the DDA side of our core. It will be the same exact terms they have in the account now. If we build on the DDA side, do we have to send a change in terms on how we are classifying the account?

From rlcarey earlier in the discussion:


My understanding is that ahkcompliance's bank is now doing just as rlcarey suggested above - thereby creating efficiencies in no longer having so much time spent on letters/monitoring.

Yes! We need to build a new product type that is exact identical to the current but remove the Reg D spec. The new internal code will identify the account as transaction and our CFO will know to account for it accordingly.

Do you mind if I PM you about how you made the switch, AHKCompliance? Very interested in making the change and going this route as well.

Here, silence sort of gives consent, particularly on a string that's several months old. If you click on ahk's avatar and "send a PM" functions, assume you have permission.