Confusion Surrounding Free Checking

Confusion Surrounding Free Checking:

Written by Steve Van Beek

There continues to be an increased focus on checking accounts - especially with the implementation of the Durbin Amendment and the responses of the larger banks.  

One of the side issues is the increased focus is the use of the term "free" to describe a checking account product.  Banks and credit unions are reviewing their existing products to determine if they can still be properly called "free" even though there are some fees that apply.

This review has usually ended up with confusion and internal discussions at the financial institution on whether an account can be called "free" or not.  

Here is 12 CFR 707.8(a) of Truth in Savings which contains the general prohibition:

"§ 707.8   Advertising.

(a) Misleading or inaccurate advertisements. An advertisement must not:

(1) Be misleading or inaccurate or misrepresent a credit union's account agreement; or

(2) Refer to or describe an account as “free” or “no cost” or contain a similar term if any maintenance or activity fee may be imposed on the account. The word “profit” must not be used in referring to dividends or interest paid on an account."

Unfortunately, the rule just gives us a general prohibition without any specifics.  The specifics are buried in the Official Staff Commentary of Truth in Savings - Appendix C.  See specifically the commentary to 12 CFR 707.8(a) as well as the cross-reference to the commentary under 12 CFR 707.4(b)(4).  

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Now, why would the regulators use a general prohibition and then put all the details in the commentary?  I think part of it was so the regulators would be able to adjust the commentary if new fees or new uses of an account began to pop up.  However, the accounts changed drastically over the years and the staff commentary has not been updated to reflect the current environment.   

The Consumer Financial Protection Bureau now has power over Truth in Savings (both Reg DD for the banks and Part 707 for credit unions).  Will they clarify the requirements?  The CFPB has discussed clarifying regulations and removing unnecessary burdens in multiple speeches in the past.  If the CFPB does clarify which fees can be charged on a "free checking" account - they will probably come up with a much more consumer-friendly determination.

For now, we wait to see if the CFPB steps into Truth in Savings.  And, we continue to crawl through the official staff commentary searching for clues as to which fees can and cannot be charged on a "free checking" account.