Longstanding difference between savings and checking accounts eliminated
The Federal Reserve Board (FRB) has issued an interim final rule to amend Regulation D. Regulation D categorizes accounts into “transaction accounts,” “savings deposits,” and “time deposits.” The interim final rule amends the definition of “savings deposit” by eliminating the six-per-month limit on so-called “convenient” transfers. The rule also allows depository institutions to immediately suspend enforcement of the six-transfer limit and to enable account holders to make an unlimited number of convenient transfers and withdrawals from their savings deposits. This interim final rule became effective on April 24, 2020. There is a comment period that runs until June 29, 2020. After the comment period, a “final” final rule will be published.
The six-transfer limit has generally been one of two distinguishing features between a transaction account (typically, a checking account) and a savings deposit (a savings account). The other feature that has traditionally distinguished savings accounts from checking accounts is the requirement that financial institutions reserve the right to require seven days’ notice prior to withdrawal from a savings account. The seven-day notice requirement is not being eliminated as a result of this rulemaking. However, the definition of “transaction account” is being expanded to include accounts with the seven-day notice limitation. To put it simply, instead of three unique types of accounts; (transaction, savings, and time accounts), there are now only two unique types of accounts (transaction and time accounts), as savings deposits are now a subset of transaction accounts.
The interim final rule does not include a sunset date – a date where the old definitions return. As a result, these definitional changes are permanent and can only be changed by subsequent rulemaking.
By way of background, Regulation D has traditionally imposed reserve requirements on financial institutions for transaction accounts, but not on savings accounts. However, the Federal Open Market Committee (FOMC), a branch of the FRB, had previously announced its intention to implement monetary policy in an “ample reserves regime.” Reserve requirements do not play a role in such a framework. As a result, effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent.
Additionally, the COVID-19 crisis has caused many consumers to have a more urgent need for access to their savings funds. Further, because many financial institutions have either closed branches or severely limited in-branch activities, there is an increased need for consumers to be able to access these accounts remotely or in some other convenient manner.
Because of the elimination of reserve requirements, and because of financial disruptions related to the COVID-19 crisis, the FRB decided to immediately make these amendments to Regulation D.
Impact on financial Iinstitutions
Frequently Asked Questions (FAQs)
Along with these amendments, the FRB has published a set of FAQs, which is also being maintained on the FRB’s website. According to those FAQs, financial institutions are not required to waive the six-per-month transaction limit, nor are they needed to enforce the limit—even though the threshold may be written into their deposit account contracts. In fact, financial institutions can choose to temporarily waive the transfer limits.
One FAQ suggests financial institutions can continue to charge fees for transactions that exceed the six-per-month limit as long as the current agreement discloses such fees, even if enforcement of the six-per-month limitation is suspended. Such a practice, suspending enforcement of the transaction limits but still charging a fee for exceeding the limits, seems questionable and is likely to come under scrutiny for UDAAP. Financial institutions that take such an approach should not do so without notifying their account holders of this policy and should only do so after obtaining the advice of counsel.
In another interesting FAQ, there is no requirement to change the name of an account to eliminate the word “savings” from the account name. However, financial institutions can reclassify the savings deposit to be a transaction account if they so choose, and the account can be reported to the FRB under either category (as they all roll up under transaction accounts anyway).
Many financial institutions have systems in place to prevent transfers from savings accounts in excess of the six-per-month transfer limits. Financial institutions that waive suspend or otherwise modify their savings account products to eliminate the transaction limits will need to update those systems to match their revised policy.
Financial institutions that make changes to their account products to remove or modify any transfer limitations will need to update their new account disclosures. Both Regulation D (Part 707 for credit unions) and Regulation E require transaction limitations to be disclosed. Financial institutions will want to review their account, opening software solutions to determine whether there is flexibility with the system to make such modifications or whether program updates are needed. Obviously, printed disclosures—or electronic disclosures based on the same—will need to be updated accordingly as well.
Existing accounts and change notices
The more significant issue for financial institutions may be how to inform existing customers or members of any product amendments—or a waiver (or temporary suspension) of the transaction limits.
The FAQs do not appear to address whether financial institutions that amend their savings account products are required to send change notices. The relevant FAQ only says that the “rule does not specify the manner in which depository institutions that choose to amend their account agreements may” notify their account holders. While the language stops short of a requirement, the answer does seem to imply that sending a change notice is, at a minimum, a good idea.
Regulation DD requires a change notice for changes to required disclosure information if the switch “adversely affects” the consumer. The changes coming out of the interim final rule actually benefit the consumer. Still, required or not, there are plenty of good reasons to send a change notice. There is also at least one circumstance where a change notice is required.
Good reasons to send a change notice include providing information to consumers that give them another financial management tool to help navigate the current pandemic. Additionally, sending a notice will help explain your institution’s policy and any remaining limitations, such as if the waiver is temporary or if any fees for exceeding the limits will be retained, or if such fees are also being waived. Providing a notice also offers another opportunity to touch your accountholders and let them know you’re here to help during these trying times.
One circumstance where a change notice may be required, however, is if a financial institution intends to provide a temporary waiver. Specifically, because of the current climate of uncertainty, some financial institutions may decide to temporarily waive the transfer limitations and not provide a date when the limitations will be re-imposed. For example, they may just say the transfer limitations are waived or suspended “until further notice.” In such a circumstance, at the time when the transfer limitations are suspended, a change notice is recommended. However, when the limitations are put back in place, that change now becomes adverse and, under Regulation DD, advance notice of the change is required. The advance notice period for when a change notice is required is 30 days under Regulation DD (or 21 days under Regulation E).
Review of account opening procedures; funds availability
One interesting question coming out of these amendments is whether, because savings deposits are now considered transactions accounts, there is an impact to the Regulation CC funds availability rules. The Regulation CC funds availability rules apply to transaction accounts, as defined in Regulation D. However, on May 13, 2020, the FRB updated its FAQ to clarify that these Regulation D amendments do not require institutions to apply the Regulation CC funds availability rules to savings deposits. Even though the Regulation D amendments classify savings deposits as transaction accounts, the Regulation CC exception for savings deposits remains intact. That said, many financial institutions already apply their fund’s availability policy to savings accounts.
Given that financial institutions can suspend the savings account transaction limitations, more institutions may consider applying their fund’s availability policy to savings accounts. After all, without the transaction limitations, there is very little difference between a savings account and a checking account. Also, if your fund’s availability disclosure states that it only applies to transaction accounts, and you do not plan to extend coverage to savings accounts, you should consider updating your disclosures to clarify that the policy does not cover savings accounts.
Here is a link to the Federal Register notice: https://www.federalregister.gov/documents/2020/04/28/2020-09044/regulation-d-reserve-requirements-of-depository-institutions
Here is a link to the FAQs https://www.federalreserve.gov/supervisionreg/savings-deposits-frequently-asked-questions.htm
The Federal Reserve Board has issued an interim final rule to amend Regulation D to eliminate the six-per-month limit on so-called “convenient” transfers from the definition of savings deposit. The rule also permits depository institutions to immediately suspend enforcement of the six-transfer limit. There is a 60-day comment period, but the rule became effective immediately. Financial institutions may but are not required to suspend enforcement of the six-per-month transaction limit. Financial institutions making changes to their account products will need to update their new account disclosures as well as make any corresponding system updates. The more pressing issue for many financial institutions will be how to inform existing account holders of any product amendments or the suspension of the transaction limitations. Lastly, financial institutions may want to review the application of their fund’s availability policy to savings accounts.