Regulations Rule the Banking World - The Top Eight to Know

Some of the founders we talk to these days are concerned with their capital's relative safety and security in both traditional banks and neo-banks alike. Given the recent collapse of FTX and several other crypto-bank and centralized-ledger startups, their concern is not off base. However, the difference between those financial institutions and banks is quite clear. Banks are highly regulated, but those companies are not. While checks and balances often slow down processes, they play a significant role in the reduction of risk, fraud, and other financial crimes. 
This guide breaks down the major banking regulations that make up that system—let’s dive in!

Introduction to banking regulations

Banking regulations vary from country to country, in the United States, they are established and enforced by the Federal Reserve System. The goal of these regulations is threefold: 1) protect the public (both consumers and businesses) from fraud 2) prevent financial crimes, and 3) ensure the stability of the banking system. Ultimately, the regulations are in place to ensure that banks are run in a safe, sound, and ethical manner and that they compete fairly with one another. Banks and other financial institutions that fail to comply face fines and other penalties, such as Wells Fargo which paid $3.7B after prioritizing profits over people, Capital One which paid $390M for cutting corners on data protection, and JP Morgan which paid $200M for evading regulators.

Regulation B: Equal Credit Opportunity Act

The Equal Credit Opportunity Act, or Regulation B (Reg B), prohibits lenders from discriminating against borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. It also requires lenders to provide borrowers with certain disclosures, such as the terms and conditions of the loan and the annual percentage rate (APR).

The purpose of Regulation B is to ensure that all borrowers are treated fairly and are given the same opportunities to obtain credit. Reg B also helps to protect both startups and consumers from discrimination and deceptive lending practices.

Regulation CC: Funds Availability

Regulation CC (Reg CC) governs the availability of funds in a depositor’s account. It requires financial institutions (and banks) to provide their customers with certain disclosures about the availability of their funds, such as the amount of time it will take for funds to be available. It also sets limits on the dollar amount that can be held before becoming available.

The purpose of Regulation CC is to ensure that both consumers and startups can access their funds in a timely manner regardless of whether they choose to send/receive funds via ACH, Wire or RTP payment. Reg CC also helps protects depositors from being charged excessive bank fees for accessing their funds.

Regulation D: Reserve Requirements

Regulation D (Reg D) requires banks to maintain a certain percentage of cash reserves on hand at all times (reserve ratio). It also limits the number of withdrawals to just six per month for savings and money market accounts. Banks satisfy reserve requirements by maintaining a certain amount of money in their own vaults and by keeping a balance at their district's Federal Reserve Bank.

In response to Covid-19, the Federal Reserve suspended both of these requirements, bringing the reserve ratio down to zero (0%) and lifting the maximum number of withdrawals. Even though these have been lifted at the federal level, individual banks can self-select what reserve ratio they meet and what withdrawal limits they place.

The purpose of Regulation D is to help maintain the stability of the banking system and to protect depositors from financial losses. It also helps to ensure that banks have sufficient capital to meet the withdrawal requests of their depositors.

Regulation DD: Truth in Saving Act (TISA)

Regulation DD, The Truth in Savings Act (TISA), was enacted to promote awareness about deposit accounts and to encourage banks to offer competitive rates. Under the TISA, banks are required to provide detailed information to startups and consumers about the terms and conditions of their deposit accounts. This information must be provided in a standardized format  so that consumers can easily compare different deposit accounts offered by different banks.

TISA also requires banks to disclose information about their deposit accounts including interest rates (and APY), fees, transaction limitations, minimum balance requirements, and any other fees associated with the account. Additionally, banks are required to provide a standardized disclosure form that outlines all of the terms and conditions of the deposit account.

Regulation E: Electronic Funds Transfer Act

The Electronic Funds Transfer Act, or Regulation E, governs electronic payments and transfers. It requires financial institutions to provide consumers with certain rights and protections, such as the right to dispute unauthorized transfers, the right to receive refunds for transfers that were not authorized, and the right to receive statements outlining all electronic transfers. These rights encompass the use of ATMs, debit cards, direct deposits, point-of-sale (POS) transactions, transfers initiated by phone, automated clearing house (ACH) systems, and pre-authorized withdrawals from checking or savings accounts.

The purpose of Regulation E is to ensure that depositors are protected when they make electronic payments or transfers. It also provides financial institutions with certain responsibilities, such as providing startups and consumers with certain disclosures and resolution guidelines for errors and disputes. The specific information that banks and other financial institutions need to provide to depositors includes, but is not limited to:

• The contact information for the department that should be notified in the event of an unauthorized transaction
• The procedure for reporting and filing a claim
• All depositor rights, including periodic statements and POS receipts
• Depositors' liability for unauthorized transactions and transfers
• The institution’s liability to its depositors if it fails to make or stop certain transactions

Regulation I: Disclosure Requirements - Depository Institutions Lacking FDIC Insurance

Regulation I requires banks and other depository institutions that do not have FDIC insurance to provide disclosure statements to their depositors. These disclosure statements must include information about the institution’s deposit insurance coverage and the associated coverage limitations, the institution’s financial condition, and the risks associated with deposits at the institution. Check out this guide for a more in-depth look at FDIC insurance coverage limits.

Regulation P: Privacy of Consumer Financial Information

Regulation P is designed to protect the privacy of depositor’s financial information. This regulation requires financial institutions to provide their customers with detailed information about their policies for collecting, using, and disclosing financial information. Reg P also requires financial institutions to provide consumers with the option to opt out of the sharing of their information with third parties, and the option to limit the use of their information for marketing purposes.

Regulation Z: Truth in Lending

The Truth in Lending Act (also known as Regulation Z, or Reg Z) is a consumer protection regulation that requires banks to provide accurate information about the terms and conditions of their loans. This regulation helps ensure that consumers are able to make informed decisions when taking out a loan and that banks are not taking advantage of their customers.

Under Regulation Z, banks must provide clear, accurate disclosure of all loan terms such as the interest rate, fees, payment schedules, and other important information. The disclosure must also include a summary of the loan terms, known as the loan estimate. This document must be provided to the consumer before they agree to the loan.

Banks must also provide certain disclosures at the time of loan closing. These disclosures must include the total amount financed, the annual percentage rate, the total of all payments, the amount of any late fees, and the amount of any prepayment penalties.

Please note: Reg Z does not apply to business or commercial loans.

Final thoughts on banking regulations

We don’t blame you for being nervous about where to park your funds, as it’s a big commitment. That said, you can rest assured, most banks are indeed safe, whether that be through the regulations that help ensure the safety and security of deposits, FDIC Insurance which protects deposits up to $250,000 in the event of a default of a financial institution, or internal checks, balances and policies, such as reserve ratios, that protect the institution from losses. If you’re in the market for a new checking or savings account, check out what we have to offer at Arc.