Major Bank Regulations: Equal Credit Opportunity Act (Regulation B) And Truth In Saving Act (Regulation DD)

1: Choose one of the major bank regulations discussed during the lecture, and either explain either why it is beneficial, or why it is harmful (your choice), from a public policy standpoint.

2: Choose one of the major bank regulations discussed during the lecture, and either explain either why it is beneficial, or why it is harmful (your choice), from a public policy standpoint.

3.Describe the various components and functions of the Bank Secrecy Act (BSA).

What is an “unfair, abusive or deceptive act or practice” (UDAAP)? Describe the elements, and give one example of, each of these three categories.

Equal Credit Opportunity Act (Regulation B)

1.Present report emphasize on Regulation B of Law of Banking and Financial Institutions. Regulation B deals with law relating to ‘Equal Credit Opportunity’. The aim of statue behind application of such regulation is to require financial institutions which are engaged in extension of credit to provide credit available to all creditworthy customers without regard to race; sex; marital status or any other factor. Further; the report also provides discussion regarding the manner in which it is beneficial or harmful to the public.

The Equal Credit Opportunity Act 1974 has been put into practice through Boards regulation B and the same to be followed by all the creditors. As per the rules provided in the regulation two major and comprehensive prohibitions have against discriminating lending practices have been provided in section 202.4 which specifies:

• Creditor is not allowed to discriminate against an application on a prohibited basis with the aspects relating to credit transactions.
• Creditor should not make any such written or oral statement through advertisement or any other method which discourages to applicants or prospective applicants which discourages a reasonable person from pursuing application for loan.

The above specified regulation is not only provide provision relating to treatment of person who have provided application relating to process but also relating to manner in which lender treats the applicant before the application. It is necessary for lending officers and employees to take care while dealing as they should take no such action on a prohibited basis which discourages any person from applying for loan. In accordance with the provisions provided no bank is allowed to advertise regarding its credit services and practices in a manner which tends to encourage specific customers and discourage other on a prohibited basis. Further, banks are not permitted to apply pre-screening tactics in order to discourage potential applicants on a prohibited basis. It is necessary for lending officers to refrain from asking prohibited information from applicants while pre-interview phase as well as during submission of written application. For avoiding discrimination in credit-granting process it is necessary to provide delicate balance between the requirement of creditor to ascertain about the information relating to prospective borrower and right of borrower for not to provide irrelevant information during credit transaction. Further, for resolving the same issue regulation has provided rules for taking, evaluating and to act on application along with rules which have been made available for furnishing and maintenance of credit information.

Regulation B and ECOA also establishes special purpose credit programs for applicants which satisfy specified eligibility requirements. Usually, these programs emphasize on economically disadvantaged class of individuals and are governed by federal or state law.  However, it has been observed that the provision of section 202.8 is rarely used by the creditors. Thus the agencies or lenders should take steps for assessing the status regarding the program and consult relating issue with staff of the Board.

Truth in Saving Act (Regulation DD)

Regulation B is beneficial for the public as it comprises provisions relating to availability of equal credit opportunity to every customer. As it is mandatory for every banking and financial institution to follow the provisions of this regulation; thus the same will enforce all institutions to follow the same. An equal opportunity is available to every customer for attaining the services relating to credit. The provisions relating to the manner in which lender has to behave prior- accepting application from customer has been also provided in this regulation which enforces lender not to behave in a manner which discourages any customer. Details regarding to special-purpose credit program has also made available in this regulation which is available for applicants who satisfy specified requirement. The specified program is available for both profit and non-profit organisations.

As the regulation specifically provides the rules relating to Extension of credit (section 202.7) and prohibition against discriminatory lending practices; it provides a base line which is necessarily to be followed by the lenders. Due to this public receive appropriate equal opportunity for receiving credit and lenders are prohibited in attaining personal information which is not necessary in accordance with fair lending rules. Further; the regulation encourages a fair practice which enhances the monitoring method to be applied for application procedure. The specified regulation plays an important role in maintaining consumer protection relating to lending transaction as it prohibits discrimination on the basis of religion, national origin; sex or any other variant.

2.The provision of regulation DD specifies that depository institutions should provide details relating to term of deposit account so that an ease is available to them in making related decision. The regulation applies to all depository institution but not to credit unions. It implements the Truth in Saving Act which was effective from June 1993 onwards. However, several amendments have been made relating to disclosures which are to be made in periodic statement and balance disclosures available to customers through automated system. The objective of the regulation is to enable consumers to make informed decision relating to their accounts at depository institutions by application of uniform disclosures. The details which have been provided comprise account opening specifications; details relating to change in term of accounts and other necessary details.

 The main emphasis of provisions specified in the regulation is on advertisement provisions available in section 230.8. It is applied to the one who advertises an account provided by depository institution including deposit brokers. The specified advertisement comprises a commercial message which has been provided through any medium either directly or indirectly. As per the available provisions annual percentage yield is a percentage rate which represents the total amount of interest which is paid on an account in accordance with the interest rate compounded for 365 days as per the rules of Appendix A of regulation DD. Due to this provision the consumer who are having depository accounts are easily able to assess the whether the amount of interest provided is appropriate or not. As it is necessary for depository institution for following the specified provision for calculation of interest as well as provide the information so that consumer can recheck it.

Provisions of Regulation B

The provision of Regulation DD particularly defines Depository institution, grace period, interest and interest rate so that consumers as well as depository institution do not face any problem in application of these words. Prohibition relating to advertisement which misleads or misrepresent an institution’s deposit contract is specified in the provision of Regulation DD. Some of the examples of violations are specified below:

• Corresponding to overdraft service as, ‘line of credit’ unless the same has been in accordance with provisions of Regulation Z.
• To show that institution will honor all the checks in case institution retains discretion not to honor checks or authorize transactions.
• Making consumer belief that negative balance can be maintained even in overdraft service requires maintaining a positive balance.

No deceptive act or practice is regarding advertisement is allowed to be continued as per the provision of Regulation DD as well as section 5 (a) of Federal Trade Commission Act.  The provision of above specified regulations prohibits unfair practices which are likely to cause major loss or injury to consumer which cannot be reasonably avoided by countervailing benefits to consumers. Other provisions specify details regarding the disclosure which are necessarily to be provided in order to assist the consumer in taking appropriate decision and to assess the details which have been provided by the institution which comprises: account disclosures (section 230.4); subsequent disclosures ( 230.5);  payment of interest (230.7) and other relevant disclosures.

From above analysis of provision it can be depicted that provisions of Regulation DD are beneficial for public; as it provides elongated details relating to disclosures which are required to be made so that appropriate required information can be attained by consumer. Further; the same provisions enable consumer in assessing in ascertaining the manner in which interest and balance for calculating such interest has been determined. Consumer is assured regarding the transactions and policies which will occur in future as institutions are prohibit providing any such terms in advertisement which mislead them. Thus; no fake satisfaction can be made to consumers by institutions.  As entrusted methods are applied i.e. daily balance method or average daily balance method are only allowed and methods like Ending balance method or Low balance method are prohibited for calculation of interest. The same ensures consumer that appropriate interest will be received on the amount which they had invested.

The provisions bind institution to take steps and follow policies after assessing them on reasonable basis as practices which provide fake trust to the consumer are strictly prohibited. It can be said that it provides assurance to the consumer regarding interest as well as amount of investment. A strict detail regarding advertisement provision have also made available through the provision which enable the consumer to take appropriate decision regarding investment. As the decision is taken after assessing all the true facts and not on the basis of fake satisfaction. Thus it is beneficial for public.

3.Bank secrecy act was created in 1970 by the congress of the United States. The main purpose of the bank secrecy act is that financial institution to help united state government to detect the case of money laundering, tax evasion and any other criminal activity.

1. Identification of risk - every financial institution have their own risk profile. So organization needs to create and design policies to cover risk that fits it risk profile.
2. Independent audit - Auditing must be done by a independent party who has proper knowledge of conducting external audit. Mostly it should be conducted every 12 to 18 months but it is depend upon the risk profile of the financial institution.
3. Reviewing internal control- financial institution must analysis their procedure and policies so they are in position to follow anti money laundry compliance. Internal control ensures that the provision of bank secrecy act is properly followed or not.
4. Bank secrecy act officer- he or she must be well qualified and should be designated by the board of director. He or she must have sufficient and appropriate authority to design and implement a program. He or she is responsible for compliance of bank secrecy act.
5. Bank secrecy act training- Every employee of the company should be aware of their responsibility. Training should be done periodically because employee changes their job.

1. It helps in preventing money laundering
2. It reduces  the risk of tax evasion
3. It help united states government to detect any criminal activity

UDAAP is covered Under dodd-frank act , which restricts bank from doing dishonest practices regarding overdraft services and credit card services. The various term under UDAAP is as follows:-

Unfair – it means a practice that causes significant injury to consumer which consumer cannot avoid. For example if defective material is sold to the customer due to which product does not justify purchaser needs.

Deceptive – an act is called deceptive when

1. The presentation , omission of a word misleads the consumer
2. The omission, representation is material to end user.

For example different model of car is sold in comparison to contract agreements.

Abusive – A practice of using offensive word to the consumer involving physical violence and emotional cruelty. Example of abusive act is workplace harassment.