Reporting Director Overdrafts for Reg O
In this Compliance Clip (video), Adam discusses the overdraft restrictions for directors and executive officers under Regulation O. This video answer the question of whether or not it is a violation of Reg O when a director would have overdrawn his account by $5,000 if the bank had not returned the check for the director. Adam answers this question by diving into the requirements of Regulation O.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about reporting director overdrafts under Regulation O. Recently, we received a question that said this: Have we violated Regulation O if a board member would have overdrawn their account by $5,000, had the check not been returned by the bank?
The answer to this, of course, comes from Regulation O, but comes from Part 215.4(e), really part 1 and part 2. So let's take a look at the regulation and see what it says here. Part 215.4(e)(1) specifically says this, this is a prohibition against the overdrafts for directors and executive officers. It says, no member bank may pay an overdraft of an executive officer or director of the bank unless payment of funds is made in accordance with one of two things.
The first thing being, of course, a written preauthorized interest bearing extension of credit plan that specifies a method of repayment. This could be an overdraft line of credit that is an actual line of credit that's under Regulation Z, that has been approved and is an established line. Or it could potentially be a credit card or something like that. Maybe even a home equity line of credit, if your financial institution sets that up. So that's the first option.
The second option is a written preauthorized transfer of funds from another account of the account holder at the bank. So this could be a transfer from a savings account into a checking account or from a checking account into another checking account, where the other account that is the overdraft <inaudible> has an excess of funds that could swipe into the account that would be overdrawn. These are the two things that you're allowed to do, otherwise this prohibition under 215.4(e)(1) is there, unless we move on to 215.4(e)(2).
Part 215.4(e)(2) says the prohibition in paragraph (e)(1) of this section does not apply to a payment of an inadvertent overdraft on an account in an aggregate amount of $1,000 or less, provided, and this is the fine print, provided that number one, the account is not overdrawn for more than five business days and the member bank, so this is the federal reserve's version of the rule, but the member bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances. So we have two conditions here where the prohibition does not apply. You can't overdraw the account if, number one, it's a thousand dollars or less and if the account is not overdrawn for more than five business days. Then number two, the second part of this is that the fees have to be assessed like they would for any other customer.
Now, going back to our original question of does the bank violate Regulation O if a director would have overdrawn an account by $5,000, had the bank not returned the check. We look here and we see that the threshold is $1,000. So $5,000 is too much. However, what the bank did in the original question was they actually returned the check. So they sent it back. They did not let the account become overdrawn. If the account is not overdrawn, you do not have a violation of Regulation O because the account was not overdrawn in the amount of thousand dollars or more. It would have been had you paid it, but you returned the check, so the account was not overdrawn. Therefore, in the original question, that was not a violation of Regulation O.
This sums up overdrafts for Regulation O and that's all I have for you today in this Compliance Clip.