IBA Compliance Connection

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For an upcoming compliance examination, the FDIC has requested a list of all loans secured by deposit accounts where the yield on the account is under 5% per year. Are you aware of any laws that would prohibit us from taking deposit accounts as collateral where the yield is less than 5% per year?

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No, we are not aware of any prohibition on taking deposit accounts as collateral for loans based on the deposit account’s yield. Regulation Z does impose several additional requirements when a deposit account will be securing a consumer credit card account (requiring disclosures and specific language in the credit card agreement), but it does not prohibit this arrangement.

The examiners’ request likely relates to a separate requirement under Regulation Z’s disclosure requirements for closed-end consumer mortgage loans covered by the TILA-RESPA Integrated Mortgage Disclosure (TRID) rules. An additional disclosure requirement applies when securing a covered mortgage loan with a security interest in a deposit account earning less than 5% per year. If your bank takes a security interest in a deposit account earning less than 5% per year for a covered mortgage loan, Regulation Z requires your loan disclosures to include “a statement that the annual percentage rate does not reflect the effect of the required deposit.”

For resources related to our guidance, please see:

  • Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 12(d)(2), Comment 1 (When securing a consumer credit card account with a deposit account, the “security interest must be affirmatively agreed to by the consumer and must be disclosed in the issuer’s account-opening disclosures under § 1026.6. The security interest must not be the functional equivalent of a right of offset; as a result, routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer does not result in a security interest that falls within the exception in § 1026.12(d)(2). For a security interest to qualify for the exception under § 1026.12(d)(2) the following conditions must be met: . . .”)
  • Regulation Z, 12 CFR 1026.18(r) (Under the TRID rules, when securing a covered closed-end consumer mortgage with a deposit account, the creditor must disclose “a statement that the annual percentage rate does not reflect the effect of the required deposit. A required deposit need not include, for example: . . . (2) A deposit that earns not less than 5 percent per year; . . .”)
  • Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 18(r), Comment 4 (“When a deposit earns at least 5 percent interest per year, no disclosure is required under § 1026.18(r). This exception applies whether the deposit is held by the creditor or by a third party.”)
  • Regulation Z, Appendix H, Model Form H-7 (“Required Deposit Model Clause: The annual percentage rate does not take into account your required deposit.”)
  • FDIC Compliance Examination Manual, Truth in Lending Act, page 19 (“Required Deposit — 12 CFR 1026.18(r) A required deposit, with certain exceptions, is one that the financial institution requires the consumer to maintain as a condition of the specific credit transaction. It can include a compensating balance or a deposit balance that secures the loan. The effect of a required deposit is not reflected in the APR. Also, a required deposit is not a finance charge since it is eventually released to the consumer. A deposit that earns at least 5 percent per year need not be considered a required deposit.”)