We are considering establishing a new business product that would be a tiered interest-bearing checking account that only allows for internal transfers to and from a business’s operating account. There would be no limit on the number of internal transactions between accounts, but check-writing, ACH credits and debits, and online bill pay would be prohibited for these accounts. Customers would have the option of setting up an automatic sweep between the accounts or manually authorizing transfers through online banking. Will placing transaction limitations on this account subject it to Regulation D’s six-transaction limitation? If the customer sends external payments to these accounts, what return reason code should we use for ACH items, and what are the appropriate return actions for remotely created checks and paper checks?

We do not believe the account described here would be subject to Regulation D and its six-transaction limit for savings deposits, since your proposed account terms authorize more than six internal transactions.

To meet the definition of a “savings deposit” account under Regulation D, the account agreement must reserve the bank’s right to require at least seven days’ prior written notice of a withdrawal, create no maturity date, and impose a limit of six transfers and withdrawals per month by pre-authorized or automatic transfer, check, draft, debit card, telephone, or similar order made by the depositor and payable to third parties. The six-transfer limit applies to transfers between a depositor’s accounts at the same institution as well as to transfers to third parties.

We believe the account you are looking to create would be considered a transaction account under Regulation D, since the account terms allow for unlimited internal transactions at the same institution. “Transaction accounts” allow account holders to “make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, or other similar device for the purpose of making payments or transfers to third persons or others . . .” and include “[a]ll deposits other than time and savings accounts.” Transaction accounts are subject to Regulation D’s reserve requirements.

Regarding ACH returns, the NACHA rules provide that a receiving depository financial institution (RDFI) must use the appropriate return reason code as specified in Appendix Four of the rules; however, if no appropriate return reason code is defined within Appendix Four, “the RDFI must use the code that most closely approximates the reason for [r]eturn.” If your customer were to authorize an ACH payment to the account, we believe the return code that most closely approximates the reason for the return would be R20. Even though this code is intended for returns of payments sent to non-transaction accounts as defined in Regulation D, we believe it is the most applicable since outside transactions on the account are prohibited.

If your customer sends a paper check for deposit by mail or presents it in person, we believe you may return the check to your customer without entering it into the check collection system. And since remotely created checks (RCCs) are generally created by the payee and drawn on their customer’s bank account, we recommend setting up the account so that your customer does not have the ability to create RCCs. Additionally, if your account terms provide that the customer will not authorize outside payments to the account, we recommend closing the account if such authorizations persist.

Since this is a new product for your bank that raises questions under a number of regulatory provisions, we would encourage you to have your bank counsel to review it before it goes live.

For resources related to our guidance, please see:

FRB, Regulation D Compliance Guide to Small Entities (“Regulation D imposes reserve requirements on three types of deposits or other liabilities: transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. . . . Savings deposits are not subject to reserve requirements. Savings deposits generally have no specified maturity period. The two most significant features of the ‘savings deposit’ definition are the reservation of the right to require advance notice of withdrawal, and the monthly limit on the number of ‘convenient’ transfers or withdrawals that may be made from the account.”)

Regulation D, 12 CFR 204.2(d)(1) (“Savings deposit means a deposit or account with respect to which the depositor is not required by the deposit contract but may at any time be required by the depository institution to give written notice of an intended withdrawal not less than seven days before withdrawal is made, and that is not payable on a specified date or at the expiration of a specified time after the date of deposit. The term savings deposit includes a regular share account at a credit union and a regular account at a savings and loan association.”)

Regulation D, 12 CFR 204.2(d)(2) (“The term ‘savings deposit’ also means: A deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements of § 204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties. . . .”)

Regulation D, 12 CFR 204.2(e) (“Transaction account means a deposit or account from which the depositor or account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, or other similar device for the purpose of making payments or transfers to third persons or others or from which the depositor may make third party payments at an automated teller machine (ATM) or a remote service unit, or other electronic device, including by debit card, but the term does not include savings deposits or accounts described in paragraph (d)(2) of this section even though such accounts permit third party transfers. Transaction account includes: (1) Demand deposits; . . . (6) All deposits other than time and savings accounts, including those accounts that are time and savings deposits in form but that the Board has determined, by rule or order, to be transaction accounts.”)

NACHA Operating Guidelines, Section I, Chapter 2, “Legal Framework” (“A ‘transaction account’ is an account from which the depositor may make transfers or withdrawals by check, debit card, or other electronic instruction. If an account does not permit the depositor to make more than six such transfers or withdrawals per month, subject to certain conditions, the institution may classify the account as a ‘savings deposit’ and not a transaction account. Savings deposits are not subject to the reserve requirement. If the financial institution permits more than the authorized number of transfers or withdrawals per month from an account, that account is a transaction account even if the institution calls it a savings deposit or ‘savings account,’ and is thus subject to transaction account reserve requirements. If a depository institution gives a customer access to savings accounts via the ACH Network or another electronic payments mechanism, the account generally must be classified as a transaction account, unless the specified kinds of withdrawals and transfers are limited in number each month to not more than six per month (including ACH debit).”)

NACHA Rules, Appendix Four – Return Entries (“If no appropriate Return Reason Code is defined within this Appendix Four, the RDFI must use the code that most closely approximates the reason for Return.”)

NACHA Rules, Appendix Four – Return Entries (“R20 – Non-Transaction Account ACH – ACH Entry to a non-Transaction Account. . . . A non-Transaction Account, as defined in Regulation D, would include an account against which transactions are prohibited or limited.”)

Regulation CC, 12 CFR 229.2(fff) (“Remotely created check means a check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn. . . .”)

FFIEC Retail Payment Systems Booklet, Remotely Created Checks, Footnote 1 (“A remotely created check (sometimes called a ‘demand draft’) is a check, often created by a payee or its service provider, drawn on a customer's bank account. The check often is authorized by the customer remotely, by telephone or on-line and therefore does not bear the customer's handwritten signature.”)