By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM
QCan a bank pay an overdraft and waive overdraft fees for a bank director’s spouse, especially if it would not normally waive the fee for any other customer?
AThis is one of those issues where it may be prudent to treat the overdraft as a covered transaction under Regulation O, even if it technically may be exempt. The overdraft provisions under Regulation O’s §215.4(e) apply only to overdrafts of an executive officer or director but not to their “related interests” or those who may be otherwise associated with the person, such as their spouse.
However, the situation described must also be taken in context with the “tangible economic benefit rule” addressed in §215.3(f), stating that an extension of credit (which includes overdrafts) is considered made to an insider if the proceeds are used for the benefit of the insider. This raises questions if, for example, the overdraft occurs on an account of the insider’s spouse, given the difficulty in proving or disproving who received the benefit. Therefore, unless other details indicate that the overdraft is in no way related to the insider, it may be easier to, by policy or otherwise, not show favoritism in making the decision to pay or return the item as well as to impose the standard overdraft fee. (Response provided Aug. 2018.)
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QDoes Regulation B (Equal Credit Opportunity Act) require a bank to provide an adverse action notice when the bank decides to close an account due to a system-generated Bank Secrecy Act alert? Would this fall under the exception to Regulation B’s definition of adverse action (§1002.2(c)(2)(iv)) that excludes “a refusal to extend credit because applicable law prohibits the creditor from extending the credit requested”?
AYes, it appears that an adverse action notice would be required in this scenario. If a bank closes an account, the bank must notify the customer that the account has been closed. What the bank provides as a reason is up to the bank: it just must be specific and truthful. However, the bank needs to be careful in what it discloses to the customer due to the Suspicious Activity Report confidentiality rules. When explaining why the account is closed, the bank cannot indicate anything that would suggest that a SAR has been or will be filed.
The section you quoted applies more to a situation in which the request for credit is made by someone with whom the bank cannot establish an account: a minor, for example, or a person on the OFAC list. Note, too, that this section applies to “a request” for credit—this customer already has an account and the bank is terminating it. The applicable section is section §1002.2(c) (1) (ii), which defines adverse action as a “termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts.” (Response provided Aug. 2018.)
Answers are provided by Leslie Callaway, CRCM, CAFP, director of compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, compliance analyst, ABA Center for Regulatory Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. Answers were current as of the response date shown at the end of each item.
