Overdrafts: Linked Accounts and Regulation D - Part 2
Written by Steve Van Beek
We received some great feedback on Part 1 of Linked Accounts and Regulation D - including some great questions. Â Let's delve into this area a bit more - including a preliminary question. Â Â
Treating Savings Accounts as Transaction Accounts. Â A couple of commenters asked if their credit unions could treat their savings accounts as transaction accounts - and reserve accordingly. Â Yes, credit unions do have the ability to treat their savings accounts as transactions accounts and allow unlimited transactions from those accounts. Â
The trade-off is unlimited transactions from savings accounts so long as the CU reserves for those accounts as well.
"Link your checking account to a savings account. If you overdraw your checking account, money will be taken from your linked savings account to cover the difference. You may be charged a transfer fee when this happens, but it is usually much lower than the fee for an overdraft."
This is just a casual mention of the ability to link accounts so I'm not tooÂ worried about the lack of any information regarding potential transaction limitations under Regulation D.
Penalty Fee Box. Â Let's move on to the CFPB's prototype "Penalty Fee Box" disclosure. Â The first page of this document has been getting all the press - but take a look at Page 2 (scroll down or click here). Â The second page includes "Three Ways to Lower these Fees" and a brief description of each method. Â Here is the section on "linked accounts":
"Link a savings account to your checking account.Â
When you overdraft your checking account, any available money willÂ be automatically transferred first from your savings account to avoidÂ overdrawing your account. Â A $5 transaction charge applies for eachÂ automatic transfer."Â
There is also a notation which would indicate whether or not the member currently has their accounts linked. Â
Again - no mention of any potential transaction limitations from Regulation D. Â
Why is this such a big deal? Â In the grand scheme of things, this isn't the biggest issue. Â But let's follow an example of how this could play out in the future (followed by my commentary).
- The CFPB continues to encourage members to link their accounts (no problems here);
- There is no mention of any potential transaction limitations (potential issue);
- Member A links his accounts (no worries here);
- Over the next few months, Member A occasionally overdraws his checking account and funds are transferred from his savings account each time (no worries here - this is how the set-up is supposed to work);
- In August, Member A goes on a two-week vacation and overdraws his checking account 6 times during the vacation (uh-oh, Member A is up against the Reg D limit);
- Later in August, Member A tries to make an online transfer from his savings account to his checking account (a Reg D transaction) which is blocked because he is at his transaction limitation for the month (big problem here).
Who does Member A call when he is furious over the inability to conduct an online transfer of funds from his savings account to his checking account?Â Your credit union. Â Member A isn't placing a call to the CFPB, yet. Â Depending on how frustrated Member A is, he may decide to file a complaint against your credit union to the CFPB or NCUA. Â
What's worse? Â Member A's inability to transfer these funds could actually result in additional issues with his checking account. Â If Member A is unable to transfer these funds - his checks might start to bounce or ACH transactions get returned.
I'm not trying to present a dooms-day scenario or indicate that linked accounts are bad. Â Linked accounts are great options for consumers and I know quite a few credit unions offer them as the first option in the case of an overdrawn account.
But - look how this situation played out. Â The CFPB's discussions haven't mentioned Regulation D. Â Consumers don't know very much about Regulation D and are consistently flummoxed by explanations about why they cannot access their funds in certain ways (i.e., "explain to me again why I can't transfer my own moneyÂ from one of my accounts to the other").Â
The short version:Â To help ensure everyone Ã¢ÂÂ especially consumers Ã¢ÂÂ are aware of the potential transaction limitations for savings account, the CFPB should take a hard look at providing information about these transaction limitations to consumers when discussing linked accounts
I've gone and done it again. Â I promise you this is not some master plan to keep you on the edge of your seats for the next installment of "Linked Accounts and Regulation D." Â However, this post is already very long so we'll address a couple of other issues in an upcoming Part 3. Â