Regulation D is an interesting regulation for compliance professionals as it isn’t a consumer protection rule, but rather was created by the Federal Reserve to help set monetary policy. That said, compliance professionals typically focus on just a few elements of Regulation D such as ineligible entities on NOW accounts, waiving early withdrawal penalties, and, of course, monitoring for excessive transactions on savings accounts.
Understanding Reg D Excessive Transaction Rules
Section 204.2(d) of Regulation D defines a savings account as an account that, under the terms of the deposit contract or by practice of the depository institution, permits the depositor to make “no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties.”
In layman’s terms, the Federal Reserve is saying that a savings account should generally only have minimal withdrawals (i.e. 6 per month/statement) from the account. Otherwise, it should be a transaction account since transactions accounts are used for unlimited withdrawals while the purpose of a savings account is to old onto money and not take it out. The only caveat to this is that some types of savings transactions - such as in person, over-the-counter transaction - don’t count against Regulation D’s restriction of six withdrawals or transfers per month/statement cycle. The result is that there are essentially two types of transactions under Regulation D’s excessive transaction rule: “restricted” transactions and “unlimited” transactions.
Restricted Transactions
The first type of transaction covered under Regulation D is what shall be referred to as “restricted transactions.” Restricted transactions are those that count against an account holder when determining excessive transactions and are limited to six per month/statement cycle. Specifically, Regulation D restricts the following types of transactions on savings accounts:
Debit card transactions;
Checks written from a savings account;
Preauthorized automatic transfers from one account to another at the same institution;
Automatic transfers from a savings account to cover an overdraft in a transaction (i.e. checking) account;
Online banking transfers;
Telephone (or fax) transfers
As you can see, these transactions are all extremely convenient to the account holder, especially when compared to the types of transactions that are not limited, as they generally don’t need to drive to the bank or an ATM to withdraw funds from the account.
Unlimited Transactions
The other type of transaction we must consider when calculating the number of excessive transactions on a savings account are what could be called “unlimited” transactions. Unlimited transactions are less convenient to an account holder and generally require them to physically go to a branch or ATM, or to jump through a bit more hoops than what restricted transactions require for withdrawing funds from a savings account. These transactions include:
Withdrawals made in person at a branch of the bank
ATM withdrawals
Withdrawal requests made through the mail
Withdrawal requests made by the phone, if funds are disbursed via check mailed to the depositor
Withdrawal requests through a courier
As you would expect by the term “unlimited,” unlimited transactions do not count toward the restriction of six transactions per month/statement cycle.
Violations of Reg D Excessive Transaction Rules
Under Regulation D, financial institutions have a responsibility to take action when excessive transactions are found on a savings account. These actions generally include two options: 1) to close the account and place the funds in another account that the depositor is eligible to maintain, or 2) to take away the transfer and draft capabilities of the account (such as blocking ACH debit access to the account or blocking OD transfers from the account). Another option often utilized by financial institutions is to convert the account to a transaction account (though it is important to remember that applicable account disclosures would be needed). If appropriate action is not taken by a financial institution, violations of Regulation D can occur.
Violations of Regulation D’s excessive transaction rule can also occur when a financial institution fails to recognize excessive activity on savings accounts. For example, some financial institutions do not sufficiently monitor all applicable savings account products such as money market accounts, passbook savings accounts, or grandfathered products that are no longer available as new accounts.
In addition, some financial institutions have incorrectly totaled applicable transactions, resulting in incorrect calculations of the number of actual withdrawals that count toward excessive transactions. For example, some financial institutions have found that incorrect transaction codes used to generate reports of excessive transactions are missing transaction codes that should count toward the total number of restricted transactions, resulting in incorrect totals of excessive transactions. Furthermore, some financial institutions have procedures in place that will permit an excessive amount of transactions to occur before taking appropriate action on the account. Regulator guidance (i.e. the three strike rule found in various regulator examination manuals) clarifies that financial institutions should have procedures in place to identify excessive transactions within a single month and to take timely action on such accounts.
Managing Reg D Excessive Transactions
When managing this area, one should ensure that their financial institution is prudent in determining the number of restricted transactions. To accomplish this, there are a number of things a financial institution can do.
First, financial institutions should validate reports used to calculate the number of restricted transactions on each account to ensure they are providing accurate information. As most financial institutions rely on reports/queries to manage their excessive transactions, it is imperative to ensure the integrity of those reports. One of the biggest challenges financial institutions have when using reports/queries to manage excessive transactions relates to differentiating which type of transaction - i.e. restricted or unlimited - applies to each transaction code used to generate the query/report. Therefore, financial institutions must be prudent to ensure that each transaction code is appropriately classified and included in applicable queries/reports.
In addition to ensuring the integrity of reports/queries used to determine excessive transactions, financial institutions should ensure they have appropriately developed policies and procedures to close/convert applicable accounts which violate Regulation D’s excessive transaction rule.
First, warning letters should be provided and accounts should be closed for repeat offenders when the number of restricted transactions exceeds six transactions per month/statement cycle. To do this, a financial institution could adopt the Federal Reserve’s “3-strike” rule, which includes:
3 strikes for violations in consecutive months
4 strikes for violations within a rolling 12 month period where there are not 3 consecutive months of violations
1 strike when a single month has severe excessive transactions
As you can see, the “3-strike” rule varies based on how frequently the excessive transactions occur.
3 Strikes for Violations in Consecutive Months
When a savings account has three consecutive months where excessive transactions occur, Federal Reserve guidance explains that the rule is “three strikes” and you are out. In other words, three consecutive months of excessive transactions should result in account closure. This rule comes from a (2/15/1990) Federal Reserve Board staff opinion which states the following:
“Accounts exceeding the transfer limitations for three consecutive months should be converted to a transactions account. The guidance states, 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.”
4 Strikes for Non-Consecutive Months
While the “3-strike” is three strikes and you are out for three consecutive months with excessive transactions, the Federal Reserve indicates that the “3-strike” rule changes to “four strikes and you are out” when there are excessive transactions in four non-consecutive months during a rolling twelve month period. This too is explained by a (2/15/1990) Federal Reserve Board staff opinion:
“For this reason, the Board 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.”
1 Strike for a Single Month of Significant Excessive Transactions
Finally, financial institutions should have policies and procedures which allow them to identify and promptly close accounts that experience significant excessive transactions during a single month, rather than waiting, for example, for the customer to have three months where their withdrawals exceeded the maximum number of transactions. This requirement comes from the following Federal Reserve guidance:
“[The footnote] 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 transfers from 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. 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 Board 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.”
Actions When Excessive Transactions Are Identified
When a financial institution identifies excessive transactions in a savings account, the Federal Reserve has made it clear in their guidance that financial institutions should not longer permit the account to be a savings account:
“Generally, if a savings deposit account exceeds, or is authorized to exceed, the ‘‘convenient’’ transfer limit, the bank should take away the transfer and draft capabilities of the account or close the account and place the funds in another account that the depositor is eligible to maintain. If the depositor is a natural person, the funds may be placed in a NOW account. If the depositor is not a natural person, the bank may be required to reclassify the account as a demand account, as businesses are not allowed to hold NOW accounts.”
