Reg D Excessive Transaction Monitoring
In this Compliance Clip (video), Adam answers a question many bankers have been asking: With COVID-19, do we still have to comply with the excessive transaction monitoring requirements of Regulation D? This video revisits the long-standing rules of Regulation D and reiterates what must be done for monitoring excessive transactions on savings accounts.
UPDATE: After this video was recorded, the Federal Reserve provided additional guidance that financial institutions must continue to monitor excessive transactions on savings accounts, but has the option of reporting such accounts as transaction accounts. See this article for more information regarding the additional Federal Reserve guidance.
Video Transcript
The following is transcript of this video.
This Compliance Clip is going to talk about Regulation D excessive transaction monitoring, especially as it relates to monitoring excessive transactions during a time of a pandemic like we have experienced in 2020. Let's revisit the rules for Regulation D monitoring.
Basically, Regulation D sets transaction limitations on savings accounts where a customer is not allowed to make more than six restricted transactions from the account during the statement cycle or the calendar month. So we have these transactions that are restricted, that are limited to six. There are unrestricted transactions, and these are things like coming into the branch, going to the drive-through or even going to an ATM where the customer has to come to your physical location. Those transactions are actually unlimited. What we are talking about here are the restricted transactions. Things like one-time debit card transactions or an ACH transaction, or an online transfer or a phone system transfer, something like that. These are all restricted transactions that are limited to six per month or statement cycle, depending on which one you use in your organization. Most people use the statement cycle.
If a customer repeatedly makes excessive withdrawals from these restricted transactions, Regulation D, by definition, changes the account type from a savings account to a transaction account. It’s kind of complicated, but the way it works basically is these accounts that have excessive transactions, by definition, morph into a checking account, and therefore you would have to report them appropriately on your Call report. So it could be Call reporting problems and a number of different things that relate. Therefore, financial institutions have to monitor and manage excessive restricted transactions and take appropriate action if a consumer exceeds the maximum permitted under Regulation D.
Essentially, what happens is financial institutions have to have a system to monitor excessive transactions that are restricted on savings accounts. Each month your financial institution should be looking at your savings account transactions, determining how many restricted transactions occurred, and then determining if they were over six, you should have a process in place to contact your customer, to ask them to stop. If they don't stop, you either have to convert it to a checking account or close it. That's essentially what we're talking about here.
Over the last several weeks, I received a number of questions relating to the pandemic of 2020 in regards to whether or not banks still need to monitor savings accounts for excessive transactions. Some banks have said that we've closed our lobbies and we only have a drive-through option, so customers are coming to drive throughs and taking out multiple transactions. Do we need to deal with this when they're making payments online? How does this apply?
Remember, first of all, that restricted transactions are only limited to those restricted transactions. Customers coming to your drive-through, they still have unlimited transactions. You may charge a fee, but that fee is completely up to you for those unlimited transactions. You can waive the fee, if you want to do that, that is fine. What you have to do is continue to monitor for these restricted transactions. If customers are making excessive transfers online from their savings to their checking, that becomes a problem. Personally, I believe that you can contact your customer the first time and educate them on what they're permitted to do. So instead of making ten one hundred dollar transfers from a savings to a checking account, they should just make one transfer of a thousand dollars from savings to a checking. Do enough the first time, so they're not doing it multiple times and exceeding that restricted amount of six.
Unfortunately, beyond that, there's not a lot of guidance that the regulators have provided, but the Federal Reserve has given us some guidance on what our programs should entail. It's interesting because I had a Compliance Cohort member email me earlier today, as of the day of his recording, stating that they reached out to their regulator, which happened to be in the FDIC and asked them specifically and said, “Hey, look, what can we do for Regulation D monitoring? Do we still have to do this?” And their response, basically, one of their responses referenced an article that I wrote a while back. So I will link that article in the notes below this video, so that you have access to that. I go into all the detail of what I'm about to talk about here, getting the citations from the Federal Reserve and break it down, but in short, the only Federal Reserve guidance we have are these three main things.
First of all, when you're monitoring for excessive transactions, you're supposed to close a converted account when a customer exceeds a three-strike rule on consecutive month violations. So there's this three-strike rule, basically, three strikes and you're out. If you exceed your restricted transactions three times in three consecutive months, then your financial institution is supposed to close or convert the account to a checking account. This would be an example where a customer maybe had seven, eight or nine restricted transactions in a savings account three months in a row. Then at the end of three months, we need to either close the account or convert it to a checking account. Beyond that, the Federal Reserve gives us this guidance. They say there is a four-strike rule for violations in nonconsecutive months, but within a rolling 12 month period. So if a customer has eight transactions in January, then a couple months later in March, they have another eight transactions. And then in June they have nine transactions. And then in October they have another eight transactions. Essentially four different months that exceed the six restricted transaction limitations, then what you should do at that point is close or convert the account. So it's a four-strike rule for nonconsecutive months. The Federal Reserve also gives us this guidance. They say there's a one-strike rule when a customer exceeds their restricted transactions in a single month by an excessive number of transactions. So if the customer has say 20 or 30 or 60 transactions during a single month, then you would need to convert that account on a one-strike basis.
This is really all the guidance that the Federal Reserve has given us. Hopefully your programs are already designed to monitor this. But as of this point, the point of this recording, nobody has given any guidance to relieve the restrictions of Regulation D so this is what we should be following in our organizations.
That's all I have for you for this Compliance Clip.