Regulation D In 3-D: The 3-6 Rule

Special thanks to Mike Maher, U.S. Bank (formerly First Bank), Stuart Lehr, formerly with U.S. Bank and now with Bank of California, and John Burnett, Cape Cod Bank and Trust, for their help in developing this article.

We've been getting some questions recently on what types of transfers fall into the six limitation category and what types are limited to three transfers. The question turns on whether ACH transactions fall into the third party check category which is limited to three per month or the preauthorized debit category which falls within the six per month limitation. On this score, Regulation D is simply confusing. In fact, it is so confusing that we had our three experts carrying on a debate over the Internet. This article is developed from their detailed discussion.

One of the difficulties in understanding this issue is that although the structure of Regulation D has changed, the old interpretations are still available. To make matters more complicated, they are not identified as obsolete. When using older Regulation D interpretations, look carefully at the date the letter was issued.

In the "old days", Regulation D contained separate definitions for savings accounts and MMDAs. Interpretations from this period apply the 3-per-month limit to ACH debits. The primary method of identifying whether a transaction was subject to the limitation of three or six per month was to look at whether it involved a third party.

Savings account and MMDA account definitions have since been merged into 204.2(d)(2). When this happened, the FRB seemed to change its position on ACH debits. Interpretive letters issued after this merger of definitions all refer to ACH transactions as subject to the six transfers per month limitation, not the three transfers per month.

Under the current Regulation D, the FRB's approach is to specify what is included in the three per month limitation and include all other transactions in the six per month limit. The three per month limit, as currently laid out in Regulation D, includes checks and paper drafts, POS transactions, and similar orders. Preauthorized transfers are subject to the six-per-month rule. So the question becomes: what is a preauthorized transfer?

Here's where there is actually some help in the regulation. Preauthorized transfers are defined to mean any arrangement by the depository institution to pay a third party from the account of a depositor upon written or oral instruction (including an order received through an automated clearinghouse (ACH)) or any arrangement by a depository institution to pay a third party from the account of the depositor at a predetermined time or on a fixed schedule. 204.2(d)(2)

If you use the "two party/three party" method of deciding whether a transaction is subject to the three or six transfers per month, you will conclude that some ACH transfers are subject to the limit of three per month because they involve three parties. This is clearly a safe position to take. The drawback with it is that it will not be popular with customers and it will be confusing to them. Moreover, the customers that this offends tend to be in the large depositor category.

If you are ready to take on the debate, include ACH transfers in the six-per-month limitation and stay alert. This position is clearly supported by the regulation and recent interpretations. Keep handy a copy of the FRB's interpretive letter, 2-342.22, which clearly applies the six-per-month limitation to ACH transfers and the three-per-month limitation to debit cards and point-of-sale transactions. If your bank prefers a more conservative approach, you may want to treat third party transactions, regardless of method of payment, as subject to the three-per-month limit.

ACTION STEPS

Review your system for identifying excess transactions. How well is it working?
Review the system for coding transaction types and determine how it identifies transactions such as third party checks and ACH transfers involving third parties.
While you're at it, look at whether your bank's system and staff are accurately catching and notifying customers of excess transactions.
Review the effectiveness of your bank's approach to limiting transactions on MMDAs. Determine whether it is sufficient to pass muster in your next examination.
When working with Regulation D, keep in mind that the regulation predates electronic banking. Look to the more recent interpretations for guidance.
If you apply the six-per-month transaction rule to ACH transfers, monitor the transactions carefully and enforce the limitations strictly.
When you rely on the FRB's interpretive letters for Regulation D, look carefully at the dates of the letters and use the most recent as the more authoritative source.

[Editors Note: As of 7/2/09, the separate limit of three per month for checks, POS debit card transactions, etc., has been eliminated, and those transactions are now only subject to the 6/month limit that applies to other restricted transfers and withdrawals.]

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 18, 12/97