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Friday, May 06, 2011

How new banking regulations affect business accounts

The DFA creates a new, independent consumer protection agency housed at the Federal Reserve. It was created to ensure American consumers are provided with plain, accurate information they need to shop for mortgages, credit cards and other financial products and to protect them from abusive, deceptive and illegal practices.

The legislation also supposedly ends the "too big to fail" bailouts of financial companies that threatened the national economy. DFA includes a council to identify and deal with systemic risks posed by these large complex companies before they actually experience problems.

It also provides shareholders with more of a say on executive pay and corporate affairs.

With respect to bank deposit accounts, the DFA extended the expiration of the Temporary Liquidity Guaranty Program from Dec. 31, 2010, through Dec. 31, 2012. This program provides Federal Deposit Insurance Corp. (FDIC) insurance coverage regardless of the balance of the account and ownership capacity of the funds on all noninterest bearing transaction accounts.

Interest on lawyer trust accounts (IOLTA) are also covered.

Money market deposit accounts (MMDAs) and negotiable order of withdrawal (NOW) accounts are not eligible for the FDIC coverage regardless of the interest rate, even if no interest is paid.

However, the coverage in the amount of $250,000 is permanent and covers the same MMDAs, NOW accounts and time deposits also known as savings accounts or certificates of deposit.

In July 2010, the federal government passed regulations requiring banks to get customer permission to use their overdraft protection products in connection with debit and ATM card use. If you opt out of overdraft protection and try to use a debit card for a purchase but have insufficient funds available, your transaction will be turned down at that time.

This may be cause for some embarrassment but you will not be charged for an overdraft.

This regulation also applies to business accounts but not to checks or to automatic bill payments. It is mandatory that banks adhere to these regulations.

Another significant and very controversial provision in the DFA, known as the Durbin Amendment, charged the Federal Reserve with limiting the fees that banks can charge retailers and service providers for processing debit card transactions.

The Federal Reserve regulators have considered capping the fees at 12 cents per transaction, which is about one quarter of the current average.

Before the amendment was passed, there wasn't very much testimony or debate. At this writing, Sen. Jon Tester, D-Mont., has introduced legislation that would delay implementation of the amendment by one year to 18 months while additional studies are completed and more debate by Congress occurs.

Lastly, the Dodd-Frank Act repeals Regulation Q, which prohibits banks from paying interest on business checking accounts. This is to occur on July 21, 2011.

The impact of this repeal is unknown at this time from both the banking and business sides of the checking account. It could possibly change the way banks charge for checking account services and loans. In response to these changes, corporate treasurers may find it necessary to modify cash aggregation practices as well.

There has been a tremendous increase in banking regulations in the last few years. Industry experts predict there are more changes to come.

It is essential that business owners and corporate treasurers are educated on these changes and the effects they will have on applicable programs and transaction fees.

Contact Fred Dawson Jr., executive vice president and chief credit officer for Commerce Bank of Arizona, at fdawson@commercebankaz.com or (520) 325-5200. Commerce Bank is an Arizona owned community bank specializing in serving small- to mid-size businesses in Arizona.

 

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