High-Yield Checking Accounts: Know the Rules

Supervisory Insights Winter 2012

n today’s low interest-rate environ-

ment, many bank customers may

be looking to earn higher interest

rates on their deposits. In response,

some banks are offering high-yield

checking accounts to attract the

attention of these customers. This

article reviews the typical features of

high-yield checking accounts, with a

focus on specific aspects of disclosure

that, based on examiner observa-

tions, appear most likely to contribute

to customer confusion about these

accounts. By providing customers with

clear and unambiguous disclosures,

banks can minimize the potential for

customer dissatisfaction and the poten-

tial for violations of laws or regulations.

Typical Features of the High-

Yield Account

High-yield accounts typically offer

free checking, with no minimum

balance requirements, and the poten-

tial for earning a high annual percent-

age yield (APY),

provided certain

conditions (“qualifiers”) are met.

(Note: The APY is not necessarily the

same as the advertised interest rate).

Some common qualifiers include

engaging in a certain number of debit

card transactions monthly (usually 10

to 15 transactions), making at least

one direct deposit or Automated Clear-

inghouse (ACH) payment monthly,

enrolling in the bank’s online banking

program, and agreeing to receive elec-

tronic bank statements.

Community banks frequently offer

these accounts to attract deposits and

compete with larger financial institu-

tions. The accounts permit banks to

profit from interchange fee income

generated through the use of the debit

card. In addition, the electronic bank

statement qualifier allows banks to

reduce expenses associated with print-

ing and mailing statements, and may

reduce future overhead expenses as

consumers shift from visiting branches

to conducting online transactions.

Many banks cap the balances to

which the higher APY will apply to

control interest expenses. Therefore,

balances above the cap amount do not

earn the higher APY even if the quali-

fiers are met; however, these accounts

may still earn an attractive APY when

compared to competing financial insti-

tutions. To encourage consumers to

open these accounts, banks offer a

fall-back interest rate (the interest rate

consumers earn when the qualifiers

are not met), which may be slightly

higher than current market interest

rates. This rate structure makes these

accounts an attractive alternative to

traditional personal checking accounts.

As a hypothetical example for illus-

trative purposes, a bank may offer

a personal checking account with a

4.01 percent APY,

which is much

higher than the 0.10 percent APY of

other banks in its area. To qualify for

this higher APY, customers must: a)

use their debit card a minimum of 10

times per month; b) make one direct

deposit or ACH payment monthly; and

c) enroll in online banking. There is

no minimum balance requirement as

balances below $25,000 receive the

higher interest rate while balances of

$25,000 or more receive an APY of

High-Yield Checking Accounts:

Know the Rules

Section 1030.2(c), formerly Section 230.2(c) of Regulation DD (Truth in Savings) defines annual percentage yield

(APY) as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate

and the frequency of compounding for a 365-day period and calculated according to the rules in Appendix A of

this part.

Ibid.

Supervisory Insights Winter 2012

1.01 percent if the qualifiers are met

each qualification period. Where the

qualifiers are not met, an APY of 0.25

percent will be applied regardless of

the account balance, which is still

significantly higher than the interest

rate being paid by other banks in the

area.

Disclosure Issues Most

Frequently Observed with

High-Yield Accounts

In a number of instances, FDIC exam-

iners have had concerns about the

disclosures or promotional materials

associated with high-yield accounts.

In such instances, examiners have

found the disclosures or promotional

materials to be unclear or ambigu-

ous about what customers need to do

to earn the higher APY. Where such

concerns exist, they may pertain to

the Truth in Savings disclosures that

explain the account terms, as well as

to a bank’s advertisements,

brochures,

and promotional materials on its Web

site. If these materials indicate that

the higher APY can be obtained by

performing a few simple tasks with-

out fully describing the actual steps

consumers must take to earn the

higher interest rate, there is a potential

for customer dissatisfaction and regula-

tory violations.

For example, the requirement that

account holders must make a mini-

mum number of transactions monthly

with their debit card may not be about

the account holder “using” the debit

card a certain number of times, but

rather about the minimum number

of debit card transactions that must

post and settle during the statement

cycle or qualification period. These are

different things as there is often a delay

between the time an account holder

makes a transaction and the time the

transaction is posted to the account

and settled by the bank. Whether the

qualifier for the higher APY will be met

depends on whether the minimum

number of transactions, as that term is

defined, happen within the statement

cycle or qualification period.

Example: An account holder’s statement cycle runs from August 1st to August 31st

and the consumer needs ten debit card transactions to meet the qualifier. On August

30th the account holder realizes she has made only five debit card transactions since

August 1st. To satisfy the qualifier, she purchases five candy bars (or other small-dollar

items) and performs five separate Point-of-Sale (POS) transactions on August 30th. She

thinks she has satisfied the ten debit card transactions qualifier, but because these

five transactions do not post and settle to the account until two days later, she will be

credited with only the five transactions she had prior to the candy bar purchases. The

consumer fails to meet the qualifier despite having “used” her debit card ten times

during the statement cycle or qualification period.

Section 1030.2(b), formerly Section 230.2(b) of Regulation DD defines an advertisement as a commercial

message, appearing in any medium that promotes directly or indirectly: (1) The availability or terms of, or a

deposit in, a new account; and (2) For purposes of §1030.8(a) formerly §230.8(a) and §1030.11 formerly §230.11 of

this part, the terms of, or a deposit in, a new or existing account.

Supervisory Insights Winter 2012

High-Yield Checking Accounts

continued from pg. 13

Example: An account holder pays her monthly gym membership automati-

cally from the account on the last day of each month, but the payment does

not post and settle until the first of the next month. Result: the consumer does

not meet the ACH qualifier to record the requisite number of transactions

within the statement cycle or qualification period.

Further complicating the issue is

that some banks may disqualify small-

dollar purchases made at the end of

the month. FDIC examiners have

heard anecdotal evidence that banks

tell consumers that making several

small-dollar purchases at the end of

the month to obtain the higher APY is

manipulating the system, and will not

be tolerated. Consumers have been

warned that continuing such behavior

could result in their account being

closed. However, this behavior and

consequences was not disclosed to the

consumer at the time the account was

opened. Similar confusion can occur

with ACH payments.

In both of the above examples, it is

important that the bank’s promotional

materials, Web site, and disclosures do

not lead the account holder to believe

that the mere occurrence of making

the debit card transactions or ACH

payment each month would be suffi-

cient to meet the high-yield account

qualifier. Clear and conspicuous disclo-

sures that the transactions must post

and settle during the account state-

ment cycle or qualification period to

qualify for a high APY would avoid this

potential problem. Disclosure problems

also may exist in connection with the

account requirement that consum-

ers enroll in online banking and agree

to receive monthly statements elec-

tronically. Examiners frequently have

observed that banks’ advertisements

and disclosures do not inform account

holders that enrolling in online bank-

ing means logging into their online

account at least once every month and

viewing their periodic statement. This

is information that consumers would

need to know to ensure they satisfy

this qualifier.

Regulatory Concerns

Regulation DD (Truth in Savings)

generally (1) governs how banks

disclose account terms to consumers at

account opening; (2) defines what must

be disclosed when subsequent events

impact the account; and (3) outlines

requirements for promoting accounts.

In accordance with Regulation DD,

depository institutions are required

to make disclosures clear, conspicu-

ous, in writing, and in a form that the

account holder may retain.

Ambigu-

ous disclosures may result in violations

of various sections of Regulation DD,

including: Section 1030.1(b) (formerly

230.1(b)), requiring depository institu-

tions to provide account disclosures

that give consumers the ability to make

meaningful comparisons among insti-

tutions; Section 1030.3(b) (formerly

230.3(b)), requiring that disclosures

reflect the terms of the legal obligation

of the account agreement between the

consumer and the institution; Section

1030.4(b) (formerly 230.4(b)), requir-

ing that account disclosures include,

as applicable, information on rates,

compounding and crediting, balance

information, fees, transaction limita-

tions and bonuses; and Section 1030.8

(formerly 230.8), requiring that adver-

tisements not be misleading, not refer

to accounts as “free” or “no cost” if

certain fees may be imposed, only state

the APY and interest rate, and provide

other information if certain triggering

terms are present.

See Section 1030.3(a), formerly Section 230.3(a) of Regulation DD.

Supervisory Insights Winter 2012

When disclosures, Web sites, adver-

tisements,

and promotional brochures

are unclear and use ambiguous termi-

nology, they may violate Regulation

DD and may be considered an unfair or

deceptive act or practice under Section

5 of the Federal Trade Commission Act

(Section 5).

Table 1 summarizes the

standards for determining whether a

practice is unfair or deceptive under

Section 5.

Violations involving unfairness or

deception are serious because of the

potential for consumer harm, as well

as reputational risk to the financial

institution. In such instances, a bank’s

compliance rating may be downgraded

and formal or informal enforcement

actions may be imposed. The FDIC

also may require banks to conduct

account-level reviews to identify

harmed consumers and request restitu-

Advertisements take a variety of forms, but some of the more common problems have been observed in lobby

advertisements, bank Web sites, third-party created brochures, new account literature, radio scripts, and news-

paper advertisements.

The Consumer Financial Protection Bureau (CFPB) has jurisdiction over insured depository institutions with

total assets exceeding $10 billion with respect to certain consumer laws and regulations, including the Truth in

Savings Act and Regulation DD. The CFPB also has authority under Sections 1031 and 1036 of the Dodd-Frank Act

to take action against abusive acts or practices including those that are unfair or deceptive. Thus far, the CFPB

has not exercised its authority with respect to abusiveness.

Table 1

Section 5 of the FTC Act

Standards of Unfair or Deceptive Acts or Practices (*)

Unfairness

 An act or practice is unfair if it causes or is likely to cause substantial injury to

consumers.

 The injury is not reasonably avoidable by the consumer.

 The unfair act or practice is not outweighed by countervailing benefits to

consumers or competition.

Public policy also may be considered in determining whether an act or practice is

unfair.

Deception

 A representation, omission, or practice must mislead or be likely to mislead the

consumer.

 The consumer’s interpretation of the representation, omission, or practice must

be reasonable under the circumstances.

 The misleading representation, omission, or practice must be material.

A deceptive representation can be expressed, implied, or involve a material omission.

The key is the overall net impression created by the written disclosures. Fine print may

be insufficient to correct misleading text.

(*) All standards for unfairness and deception must be met for a Section 5 violation to

occur. Please refer to the following Financial Institution Letters (FILs) for more detailed

information: FIL-57-2002 (Guidance on Unfair or Deceptive Acts or Practices) and

FIL-26-2004 (Unfair or Deceptive Acts or Practices by State-Chartered Banks).

Supervisory Insights Winter 2012

tion be provided to adversely affected

consumers. For example, paying the

difference between the interest rate

that should have been paid compared

to what was paid or refunding Auto-

matic Teller Machine (ATM) fees.

Restitution can be costly. The FDIC

also may require banks to pay civil

money penalties, which can be large

depending on the seriousness of the

violations and the number of harmed

consumers.

During compliance examinations,

FDIC examiners have identified several

common issues with the promotional

materials and disclosures for high-yield

accounts that may constitute a viola-

tion of Regulation DD or an unfair or

deceptive act or practice under Section

5, depending on the specific facts and

circumstances. Table 2 lists some of

the more common problems noted.

Violations associated with high-yield

checking accounts often stem from

inadequate coordination between

marketing and compliance person-

nel during the product development,

introduction, and marketing phases

of a high-yield checking account.

Similarly, management may rely too

Table 2

Commonly Observed Issues with

High-Yield Checking Account Promotional Materials and Disclosures (*)

Bank advertisements, promotional materials, Web sites, and disclosures may:

 Highlight the highest APY and omit the fall-back APY.

 Provide the highest APY and fall-back APY, but not state the qualifiers to achieve the higher APY.

 State some, but not all of the qualifiers.

 Represent unlimited, free, nationwide ATM access but condition free access, through the Truth in

Savings disclosures, on the consumer meeting certain qualifiers and limit ATM fee refunds to a

certain number per statement or qualification cycle.

 Omit the qualifier requiring enrollment in online banking and receipt of electronic banking statements

or fail to explain how the consumer can enroll. Enrollment is not always conducted at account open-

ing and consumers may not be aware of how to enroll.

 Omit the requirement that a consumer must log-on and view electronic banking statements during

each statement or qualification cycle.

 Omit the requirement that debit card/POS and ACH transactions must post and settle during the state-

ment or qualification cycle.

 Omit the requirement that debit card/POS transactions must be PIN-based or signature-based.

 Fail to state ATM transactions do not count as debit card transactions.

 Fail to explain qualifiers must be met during a certain period, i.e., statement cycle or qualification

cycle, and/or not define the period. A statement cycle may be from the 20th (a calendar day) of a

month to the 20th (a calendar day) of the next month. However, some banks use a “qualification

cycle” within which the qualifiers must be met. Qualification cycles may be from the 19th of a month

(a business day) to the 18th of the next month (a business day). Because the statement cycle is based

on calendar days and the qualification cycle on business days, the two periods may not coincide.

(*) This list is illustrative and not all-inclusive.

High-Yield Checking Accounts

continued from pg. 15

Supervisory Insights Winter 2012

heavily on third parties to ensure the

product complies with applicable laws,

rules, and regulations and may not

involve compliance personnel in this

determination. Senior management is

responsible for performing proper due

diligence to ensure that third-party and

in-house products are implemented

and administered in accordance with

the law. Early involvement of compli-

ance personnel in the origination

of both developed and third-party

products can greatly reduce the use

of ambiguous terminology in describ-

ing account terms and qualifiers.

Conversely, not involving compliance

staff in the development of new prod-

ucts represents a significant weakness

in a bank’s Compliance Management

System (CMS).

As an example of such issues, FDIC

compliance examiners have identi-

fied problems in high-yield checking

account products related to a bank’s

use of products developed by third

parties that initially comply with

regulatory requirements, but are then

adjusted by the bank’s marketing

department in an attempt to make the

program more attractive to consum-

ers. Third-party products may state

that debit card transactions need to

post and settle to meet the qualifi-

ers. However, marketing department

personnel change the language to state

that consumers have to simply “make”

or “have” a certain number of debit

card transactions per month to meet

the qualifiers. Such adjustments, if not

monitored and detected by the bank’s

compliance personnel, could result in

violations of consumer protection laws

and regulations.

Such issues may reflect a need for

the bank to strengthen its compli-

ance program. A proactive compliance

program requires the sampling and

monitoring of disclosures, advertise-

ments, and promotional materials

to ensure potential problems can

be addressed early. By periodically

sampling and monitoring disclosures,

advertisements and promotional mate-

rials, the bank’s compliance personnel

can promptly detect any issues that

may cause consumer confusion.

When examining a bank offering a

high-yield account, examiners will:

 Closely scrutinize bank advertise-

ments (in all forms) connected with

high-yield accounts to determine

whether the terms and conditions

are disclosed in a manner that is

clear and unambiguous for account

holders.

 Check the bank’s complaints and

inquiries to determine whether

customers have expressed confu-

sion with the bank’s explanation

of the qualifiers related to the

account. This is often best accom-

plished by interviewing front-line

branch personnel who interact with

customers.

 Ensure deposit disclosures clearly

and conspicuously define account

terms and conditions for the

consumer. Terms and qualifiers

should be consistent and allow a

reasonable consumer to understand

them. Examiners should focus

on broadly defined terms such

as “make,” “use,” or “have” etc.,

and how institution management

defines them.

Supervisory Insights Winter 2012

Best Practices

Banks can minimize exposure to

violations of consumer protection laws

and regulations by incorporating the

following best practices into their CMS:

 Involve the compliance officer

or compliance consultants in the

product development, implementa-

tion, and promotional phases of the

product;

 Ensure materials contain clear and

conspicuous terminology. Define all

terms and provide detailed infor-

mation explaining how to satisfy

each qualifier and note any relevant

limitations (post and settlement

time, qualification cycle, etc.). View

materials from the perspective of a

“reasonable consumer.”

 Monitor consumer inquiries and

complaints for signs that informa-

tion in disclosures, brochures, Web

sites, or promotional materials

is unclear. Banks receiving such

inquiries or complaints should be

proactive and alert their compliance

officer that consumers are express-

ing confusion about account terms.

Tracking inquiries and complaints

can help banks make modifications

to ensure consumers are not misled

and that promotions, Web sites, and

disclosures conform to all applicable

laws and regulations;

 Review training materials and

scripts used in promoting accounts,

including a review of promotional

materials provided by third-party

vendors;

 Ensure bank personnel responsible

for opening accounts are properly

trained in account qualifiers, under-

stand product features, and can

clearly convey this information to

consumers;

 Clearly state the purpose of the

account and disclose examples of

inappropriate behavior or account

misuse. Identify the ramifications

of engaging in such behavior. For

example, the bank might state that

the account cannot be used for

multiple small-dollar POS transac-

tions at the end of the statement

cycle to earn the higher APY; and

 Explain (clearly and conspicuously)

what happens if the consumer does

not meet the qualifiers.

Conclusion

When examiners encounter a bank

offering high-yield checking accounts,

they will closely review whether the

bank’s communications with consum-

ers about these types of products are

clear and conspicuous. Bank manage-

ment should have devoted the time to

design and implement accurate and

unambiguous promotional materials,

Web sites, and disclosures. Banks that

invest the time will reduce the likeli-

hood of violating consumer protec-

tion laws, rules, and regulations, and

enhance their credibility with account

holders by reducing customer frustra-

tion and dissatisfaction.

John B. Bowman

Senior Examination

Specialist/Certified Regulatory

Compliance Manager

Division of Depositor and

Consumer Protection

[email protected]

High-Yield Checking Accounts

continued from pg. 17