Banks are a place for us to handle our checking, savings, and possibly a loan. Beyond that, for many of us banking is a black hole. Why banks do what they do and how they do it is little understood outside of the banking community.

The more information you have, the better consumer you can be.

Being a Smart Banking Consumer

(Part 9): Privacy and Regulations

This article will discuss the most important banking laws and the implications for you as the banking client.

Privacy

Regulation P governs the way financial institutions treat nonpublic information about consumers. The regulation summarizes the obligations of a financial institution to provide notice to its customers about several things:

• A financial institution must notify its customers of its privacy policies and practices

• An institution must also notify the customer of the customer’s right to prevent a financial institution from disclosing nonpublic personal information to non-affiliated third parties by "opting out" of that disclosure

These notices are required annually, and upon opening an account at the bank.

While Regulation P is primarily a Federal Reserve policy, all bank regulatory agencies have adopted it. These bank regulatory agencies include the following:

• Federal Reserve (FED)– The FED oversees Bank Holding Companies. Bank holding companies are banks that own other banks. Each bank keeps a separate name. 

• Federal Deposit Insurance Agency (FDIC) – The FDIC is responsible for deposit insurance. Basically, the FDIC has oversight over all banks that have deposits. 

• Comptroller of the Currency- Banks that apply to be a national bank have branches in many states. The Office of the Comptroller of the Currency is responsible for these national banks.

• State Banking agencies – These agencies oversee banks that are in their respective state.

As is apparent, there is much overlap in the regulatory structure, and many banks have two or more regulatory agencies. For example, a bank could be a National Bank that is also overseen by the FDIC, as well as the state banking agency.

Regulation CC

One of the aspects of Regulation CC is the ability for the bank to “hold” your checking deposits for a certain amount of days. To “hold” means you do not have access to your funds until the hold is released. Banks have broad discretion, in many instances, as to when and how long to hold your deposits. It could be from 2 to 9 days depending on the deposit amount and your account history with the bank.

For example, if you normally deposit checks in the amount of $2,000, and one day you deposit checks for $30,000, the bank could hold your funds for as many as 7 days. The purposes of the hold are to: 1) ensure that all deposits are valid; 2) to avoid giving you access to your funds before the checks are verified as valid, and 3) ensure that the bank receives credit for those checks and gives credit to your account. The banks are required to provide notice that your funds are being held on the same day the bank decides to hold your funds.

Regulation DD

Regulation DD covers money market accounts and requires that all owners of money market accounts not make more than 6 withdrawals a month. Money market accounts are very volatile, that is, they are interest rate sensitive. As such, history has shown that funds move in and out of these accounts, largely depending on the interest rate offered. The bank will monitor your account each month for the number of transactions. If you violate the 6 withdrawal limit more than 3 times in 12 months, the bank will typically either close the account or move your funds to a different account.

Regulation E

Regulation E relates to the transfer of funds. Banks charge overdraft fees when account holders spend more than they have. The bank may approve those charges despite a lack of funds (negative balance) in your account but will do so for a fee. If you make multiple purchases with a negative balance, the bank will charge an overdraft fee multiple times.

The median overdraft fee in the U.S. is $35, according to Pew Charitable Trusts. Just a few purchases beyond your balance, and you can pay more than $100 in fees alone. In 2017, consumers paid $34.3 billion in overdraft fees, which was the most since the Great Recession.

One option the consumer has to avoid these fees is called overdraft protection, which is different from overdraft coverage:

• Overdraft protection allows consumers to link a certain number of eligible accounts to their checking account. Then, if they overdraft their primary account, funds are automatically transferred from one of these other accounts.

• Overdraft coverage means that the bank will give you up to a certain amount of coverage on charges for which there are insufficient funds. The coverage is basically a small loan. For example, you could have up to $300 of coverage, meaning that the bank will pay the overdraft amounts, up to $300 in checks. The bank will still charge a fee for this, but the checks will have been paid.

In both cases, you must sign up for either the coverage or the protection, or you can decline each. This is generally called “opting in" or “opting out.”

Being a Smart Banking Consumer continues in February.
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