Compliance Blog

Feb 29, 2012
Categories: Accounts

Overdrafts: Linked Accounts and Regulation D - Part 1

Written by Steve Van Beek

I must confess - I haven't made it through all of the CFPB's Overdraft information from last week.  I did want to discuss one issue that jumped out at me when I first glanced at the material and heard the CFPB roundtable on overdrafts.  

Linked Accounts.  One of the alternatives the CFPB (and others at the roundtable) mentioned was the option of members being able to "link" their checking and savings accounts.  By doing this, if a member overdrew their checking account the funds would automatically transfer from the member's savings account.  

Of course, this is by no means a silver bullet.  In order for this to work, the member would need to have enough funds in their savings account to cover the overdrawn amount.  While this is sometimes the case, it isn't always the case.  

Assuming a member has enough funds in their savings account to cover the overdrawn transactions from the checking account, there is another issue that seems to float under the radar whenever overdrafts and linked accounts are discussed.

Regulation D.  I guess I spoiled the surprise in the title of the blog post, but this is something the CFPB - and everyone involved with looking at overdraft issues - needs to be aware of.

Regulation D limits the number of withdrawals from a savings account to six per month.  This includes any withdrawals/transfers to cover overdrafts in a checking account.  And, this is a combined six per month.  So, if a member were to make two other "Reg D" withdrawals in a given month, the member would only have four left for transfers to the checking account to cover overdrafts.

A Question for the CFPB:  What happens when a member has linked accounts and overdraws 8 times in a month?

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The Quandary.  Regulation D did not transfer to the CFPB as it is not a consumer regulation.  The Federal Reserve retained authority over Regulation D and has been resistant to numerous calls to expand the six-transaction limitation on savings accounts (although they did remove the antiquated 3/6 distinction a few years ago).  Sidenote: A portion of NAFCU's latest letter to the Fed on Reg D can be found in this January 17 blog post.  

Here are a couple of questions that I have for the CFPB:

  • Will you be talking to the Federal Reserve about the Regulation D transaction limitations?
  • Assuming you are unsuccessful in your discussions with the Fed, will the CFPB work to inform consumers of the Regulation D limitation when it promotes overdraft coverage via "linked accounts"?

To me, these are incredibly important questions to ask.  First, credit unions and other financial institutions do not operate in a "one regulation" environment.  It seems that every potential action a credit union makes is impacted by one regulation or another (or multiple).  

This overdraft issue is a perfect example - the CFPB wants consumers to link their accounts but have they thought about Regulation D?  I sure hope so but I'm afraid that sometimes regulators get "tunnel vision" and only focus on their regulations.  

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I wanted to add a bit more but this post has gotten a bit lengthy so we'll have Part 2 tomorrow.  Stay tuned.