Reg D Transfer/Withdrawal Letter Guidance

Federal Reserve Responds to Reg D Questions

IMPORTANT NOTE: Effective July 2, 2009, the separate treatment of third party payments by check, debit card, draft or other similar payment orders is ended by an amendment to § 204.2(d)(2) of Regulation D. After July 1, 2009, the discussion below is moot (all the payment types described will be subject to the six-per-month limit) and should be considered for historical purposes only.

How do the transfer limitations of Regulation D apply when a customer uses home banking software or Internet banking to make payments from the customer's savings deposit to a third party? Does it matter how the payment actually takes place, i.e., the method used or procedure followed? What if the payment is made via ACH or by a check drawn by the customer's bank to the payee?

In a letter dated November 9, 2000 to counsel for a financial institution, the Federal Reserve's Associate General Counsel Oliver Ireland responds to precisely those types of inquiries. Many thanks to a wonderful BOL user for supplying this valuable guidance for posting on BankersOnline.com. The text of the body of the letter is reproduced below.

This responds to your letter, dated September 18, 2000 and sent by e-mail on September 22, 2000 to Heatherun Allison of my staff concerning Regulation D limitations on home banking transactions from savings deposits. In your letter, you describe three different scenarios for home banking bill payments from savings deposits accounts and inquire about the applicability of Regulation D's transfer limitations to each scenario.

1. Bill Payment/No Outsourcing

A. ACH Credit. The depositor delivers a bill payment transfer instruction to the depositor's depository institution ("DI") via the depositor's home banking software program or through the DI's web-based banking program instructing the depositor's DI to make payment from the depositor's savings deposit to a third-party payee. The depositor's DI then initiates a payment at the originating bank through an ACH credit directly to the third-party payee (i.e.,directly to the bank account of the third-party payee). These transfers are subject to the six-per-month transfer limitation. ***

B. Check. The depositor delivers a bill payment transfer instruction to the depositor's DI via the depositor's home banking software program or through the DI's web-based banking program instructing the depositor's DI to make payment from the depositor's savings deposit to a third-party payee. The depositor's DI then creates a check drawn on the depositor's savings deposit (sometimes referred to as a "demand draft" or a "preauthorized draft") and sends the check to the third-party payee. The third party payee then deposits the check in the third party payee's account at its DI. The check is then processed through the usual check collection system and its presented for payment at the depositor's DI. These transfers are subject to the three-per-month transfer limitation. ***

The three-per-month conclusion in this case is based on the fact that the DI is acting as the agent of the depositor in receiving instruction from the depositor to create a "demand draft" or preauthorized draft" drawn on the depositor's savings deposit and payable to a third-party payee. In a 1997 letter, staff opined that "checks issued by the (DI) pursuant to telephonic instruction of the depositor's and payable to . . , a third party (and) mailed to (the) third party . . . count against the six per month limitation . . . . "Letter dated January 21, 1997 to Mr. Chip Trimmier ("Trimmier Letter"). The Trimmier Letter states that the transfer does not count against the three-per-month limitation because "the instruction is given directly to the (DI) by the depositor rather than delivered to the (DI) through and payable to the third party, and since the check is not made by the depositor , . . ." Trimmier Letter (emphasis added). Sec also Staff Opinion, FRRS 2-342.22 (July 13,1992) (withdrawals but not transfers initiated by telephone where the proceeds are paid to third parties subject to six-per-month limitation [assuming check is drawn on an account of the DI and not the depositor's savings deposit account); withdrawals payable to third parties initiated by checks or drafts drawn on the depositor's savings deposit account subject to three-per-month limitation). The significant factor in this case is that, In the factual situation outlined in the Trimmier Letter, the check is issued by the DI, that is, a cashier's check or other item drawn on the DI itself. In the factual situation outlined in L33., however, the check is drawn on the account of the depositor, and the DI is merely acting as the agent of the depositor in creating the check drawn, on the depositor's savings deposit account pursuant to an instruction (whether or not telephonic) by the depositor.

2. Bill Payment/Outsourced/Payment drawn Directly Against Depositor's Account.

A third-party service provider that processes ACH credits or demand drafts on behalf of the depositor's DI is acting as the agent of the depositor's DI. The depositor delivers a bill payment transfer instruction to the depositor's DI Via the depositor's home banking software program or through the DI's web-based banking program instructing the depositor's DI to make payment from the depositor's savings deposit to a third-party payee. The depositor's DI then forwards the instruction to the service provider, or else the instruction is otherwise received by the service provider. The service provider accomplishes the payment by generating an ACH debit or a demand draft on the depositor's savings deposit in favor of the depositor's third-Party payee. These transfers are subject to the three-per-month transfer limitation.

As in the previous example, the significant factor in arriving at the three per-month conclusion in this case is the fact that the third-party service provider is acting as an agent of the DI, who is itself acting as the agent of the depositor in creating a check drawn on the depositor's savings deposit account and payable to a third-party payee. The inclusion of an additional agent into the scenario does not change the analysis. The DI may not have, or may not choose to allocate, the resources to provide bill payment services directly through the DI's own employees. It is therefore permissible for the DI to provide those services to its customers under contract with a third-party service provider. In this example, the depositor need not be (and may not be) aware that the actual bill payment function is being handled by an agent of the DI. ***

3. Bill Payment/Outsourced/Depositor Funds Transferred to Account of Service Provider.

A third-party service provider that processes ACH credits or demand drafts on behalf of the depositor's DI is acting as the agent of the depositor's DI. 'The depositor delivers a bill payment transfer Instruction to the depositor's DI via the depositor's home banking software program or through the DI's web-based banking program instructing the depositor's DI to make payment from the depositor's savings deposit to a third third-party payee. The depositor's DI then forwards the instruction to the service provider, or else the Instruction is otherwise received by the service provider. The service provider initiates an ACH debit against the depositor's savings deposit and transfers those funds to an account of the service provider. The service provider then initiates either an ACH credit or a demand draft drawn on the service provider's account in favor of the depositor's third-party payee. These transfers are subject to the six-per-month transfer limitation. The factual situation is similar to that described in I.A supra, with the service provider In this instance acting as the agent of the DI. ***

4. Bill Payment/Payment Instruction Given By Depositor to Depositor's Agent.

A bill payment service provider offers bill payment services directly to depositors. In this scenario, the depositor enters into an agreement with the service provider directly, rather than entering Into an agreement with his own DI for the provision of bill payment services. The depositor provides payment instructions directly to the service provider for processing on behalf of the depositor, and the service provider carries out those instructions as the depositor's agent, Specifically, the depositor instructs the service provider directly by telephone to make payment to the depositor's third-party payee. The service provider then initiates an ACH debit or creates a demand draft or preauthorized draft against the depositor's savings deposit at the depositor's DI in the amount of the desired payment. This debit or draft may be payable to the service provider, or it may be payable directly to the depositor's third-party payee. These transactions in either case are subject to the three-per-month limitation. The factual situation is similar to that described to 1.B. supra, with the service provider in this instance acting as the agent of the depositor. ***

First published on BankersOnline.com 6/11/01; updated 5/26/09