Video: Increasing Reg CC Thresholds to Avoid 5 Year Adjustments
In this extended Compliance Clip (video), Adam take a little bit different approach to our Compliance Clips and discusses the pros and cons of increasing the Reg CC threshold amounts above and beyond the new mandated amounts, in attempts to avoid another required adjustment (and customer redisclosure) in 5 years, when the rule is set to again adjust for inflation. In other words, some financial institutions are considering increasing their hold amounts from $225 and $5,525 to something like $300 and $6,100 (watch the video to see where the $6,100 comes from) in order to avoid another adjustment in 5 years - but are these amounts enough?. This Compliance Clip takes a deep dive into the thought process some compliance professionals are taking to determine their course of action regarding the upcoming Reg CC changes. If you are a super-nerd when it comes to deposit compliance, this clip is for you.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about increasing Reg CC thresholds above and beyond what the regulation requires. This is a little bit different Compliance Clip from what I normally do because I had a question come in today that I found very interesting, and I thought I would share with you just to change things up a little bit on this Compliance Clip. This discussion is very super geeky, super nerd-type of discussion, but it's something I think that is really good to take you to this thought process, when we’re talking about compliance management. So I'm going to take a little bit different approach to this Compliance Clip and hopefully you can follow along. Now, please don't take any of these numbers as accurate. I think that they're close and they're right, but I did them for discussion purposes so you want to take everything with a grain of salt in this video, and just use it for considering in your own financial institution.
The question we have here today is: What amount should we change our Reg CC Thresholds to so that we can avoid another threshold change in five years? As a quick refresher, to explain this question, what we have is Regulation CC is changing some thresholds on July 1, 2020. What those threshold changes are the $200 is going to $225 and $5,000 is going to $5,525. Now, these are the minimum amounts that you have to provide available to customers. You are permitted as a financial institution to provide amounts greater than this. And what's essentially going to happen is every five years is going to be an adjustment for inflation, which is going to require you to retrain your staff and to send a disclosure to your customers. So what this question is really asking is can we raise our amounts above and beyond the $225 and the $5,525 so that we won't have to do this again in five years? Which I think that's a really good question. Is there an efficiency in increasing that up to maybe $300 and maybe $6,000? So, great question.
As far as the actual amounts, those are going to be up to you because everything's based on inflation and we won't know those numbers until before the change really in 2024. Let's take a look at a few things here. First of all, this inflation adjustment is based on the CPI-W index. Basically, this is the index that is used for the Department of Labor, used for social security, used for a number of things that look at inflation in the United States. What they do is they use that, they round that to the nearest $25. So, they increase, they increase that dollar amount and they’ll round up to the nearest 25, and that's how we ended up with $225 and $5,525.
The current changes are about 10 and a half percent. That's really what it comes to. When you look at the actual changes and how it all rounds and falls into place, what I found was it was about 10.35, which is really quite your next number, your next potential inflation. If this 10.35 is what we'll be using again, we’ll put it at we’re going from $5,525 up to about $6,100. If some of you are thinking about increasing it to 6,000, that might not be enough because if we use the exact same numbers that we used before, that number would actually be closer to $6,100 as our next inflation adjustment in 2025. Now, of course, this is pure speculation because we don't have the actual inflation adjustment numbers in front of us. But it's something to think about, something to consider, especially when we're asking the question on whether or not we should increase the amount above and beyond the existing $225 and the $5,525. For the other amount, the person who asked me this question suggested $600. I think that would be plenty because 225 is probably going to increase to 250 based on current amounts. But of course we will see.
I want to focus our numbers really on that $5,525. If you remember, a couple of things in the 2020 data is actually based on seven years of inflation. So that 10.35% number is actually based on seven years of inflation, going back from July of 2011 to July of 2018. This first period that the CFPB used for this inflation adjustment actually is a little bit longer than the upcoming periods of five years, because they had to go back all the way to when the Dodd-Frank Act was implemented, because they felt it was not appropriate to exclude those first couple of years. So the first period is seven years. Some would argue that this number would actually be less than 10 and a half, less than 10.35, and so a lower number might actually be justified. Well, what I decided to do is crunch the numbers to get some quantitative analysis going. I pulled up the CPI-W index and went back for eight prior periods, so what would have been eight inflation adjustments prior to 2020. So, if we look back, the five year adjustments over the last 5 years will look like this: July 2013 to 2018 would have been 7.305. That is less than that 10 and a half number, so that amount would be lower. But let's go back a little bit further and see what historically has happened over the last eight adjustments. So from July 2008 to 2013, we have 5.836. Okay, it's looking favorable for a lower number. But when we look at July 2003 to July of 2008, we ended up with 16.395%. Going back further to 1998 to 2003, 11.256%, from 1993 to 1998, we had 11.5196%, from ‘88 to ‘93,we had almost 18%. And of course, going back even further, ‘83 to ‘88, it's 16 and a half percent. And going back to 1978 to 1983, we had 34.234%. Now that's if my calculations are correct. So I was just doing some rough scribbles.
This gives you an idea. Are we comfortable with the lower amount of 10%? Because if you look at all these adjustments, the most recent two would have been under 10%. Everything else would have been a buck 10%. So is that $6,100 enough? We don't know. We're actually almost two years into this five-year cycle because they're going from essentially 2018 through 2023 in July. So we're almost two years into the cycle at the time of this recording. So you can play whether or not you think that number will be safe. Now, with the current pandemic of 2020, we may see inflation back off, we may see it skyrocket, who knows what it's going to do. So that's something to consider when you're looking to potentially increase your amounts above and beyond in order to try to avoid any adjustment in the year 2025.
Going on, I found some pros and cons on potentially increasing that adjustment to try to avoid that. You can absolutely avoid it. Say increase your $225 amount up to $500 and your $5,525 amount up to $10,000. That would clearly avoid it for several years, but there's some pros and cons to consider in doing this. First of all, a pro would be that it is easier teller math. It is easier teller math. It's easier to calculate when there's a round number. When you're trying to subtract $5,525 out of a check that's an odd number, it's not that easy to do. But if you're subtracting even $10,000 or $5,000 like we used to do, it's a whole lot easier to do the math in your head, especially for your tellers at the teller line. So that's a big pro. Another pro is that you wouldn't have redisclosure to your customers. You wouldn’t have to redisclose to customers again in five years.
There are some cons as well. If you don't have a high enough number, like we just talked about, then you'll have to redisclose anyway, and it's just kind of confusing for staff for your real purpose. Another con is if the rules change between now and 2025, you’re going to have to redisclose anyway. If you recall back in the 2010, 2011 timeframe, there was a proposal to amend Regulation CC where they're talking about revising the whole rule when it comes to check holds changing things like our special exception holds, reducing it from seven days down to four. They actually reopened that proposal in December of 2018 and they haven't finalized it yet. There's been talk that they're going to make any changes correspond with the inflation adjustment changes. The speculation is that they will make that change potentially to align with the 2025 change. So if they do make another change to Regulation CC that has to go into effect in July of 2025, and we do all this work to try to avoid redisclosure, we're going to have to redisclose anyway. So that's a potential con.
Another potential con is eventually somebody is going to have to remember to make the change, because eventually the inflation adjustments amounts are going to exceed what numbers you have set. Whether that's in 5, 10, 15, or 50 years, somebody is going to have to remember that. And if your organization doesn't have a culture of remembering every five years that has to change, when that time comes, it may get missed. I think it's probably going to be easier to do it every five years and just remember it, have a process in place, increase efficiencies around it. Another con is this is going to confuse the heck out of your auditors and examiners when they come in. They'll probably just going to be confused because they're going to be used to the actual numbers and not your numbers, they’ll have to remember what you do to try to figure out what is going on. Another con is any training that you use, whether it's online training, a lot of banks will use the ABA's training, or you purchase vendors to conduct training for your tellers, whatever training you're going to use, they're going to reference the actual amount from Reg CC. If you use a different amount, it’s going to confuse your tellers and essentially require you to do in-house training for them to understand Reg CC. Another con is you would be taking on more of a safety and soundness risk by increasing amounts above what you're allotted to do. So that 's something to consider.
There's lots of pros and cons and lots of things to consider when you're considering increasing these amounts above and beyond the thresholds that are established by Regulation CC. I think it's not that big a deal. In five years, all we're going to have to do is put a statement message on for customers. Tell our staff these dollar amounts have changed, conduct some training on those new dollar amounts depending on what they are, but to tell our customers, I don't think it's that big a deal, because we can use a statement message to notify our customers. If you have a print of holding disclosure, then that’s them, there is an expense there, but since the statement message is permitted, that's an easy way to disclose these changes and to make it clear for your customers, and so I think that's another con on increasing these thresholds and it's really a pro for sticking with the dollar amounts.
Now, again, this is a completely different type of Complaints Clip. I just found this conversation I had through email, through this question I received today very interesting. I like talking about compliance because part of me is a super nerd underneath and I thought it'd be fun to share with you, and just to kind of give you that mindset of compliance management. Because as a compliance professional, it's always good to think about these things, to consider what can be done to be more efficient in our organization. What's a good decision for your organization and what is not a good decision, and to quantify that and to crunch your numbers. Hopefully this was a good example for you. Some things to consider when you are looking at molding out of your Reg CC programs.
Hopefully this is a little bit of food for thought, a little bit of compliance nerdiness for you for today.