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Your CEO has asked you to come up with a campaign to attract new interest-bearing checking account holders. You develop an offer to pay for the first order of preprinted checks (a $12.50 value) to any customer who opens an interest-bearing checking account with a

You think you have a winner, but after consideration, you hesitate. You recall vaguely that some disclosure and reporting requirements are triggered when a bank gives cash or gifts worth more than $10 to a customer. Do these compliance requirements apply to your campaign?

If you are like many marketers, you are not sure. After all, you are a marketer, not a compliance officer.

Gifts and cash giveaways are a great marketing tool for financial institutions. But banks and thrifts must recognize that free stuff often carries a burden of regulatory disclosure or IRS reporting. It's not a heavy burden, but it is one that you must carry.

Let's look at the three areas of regulation that you need to be familiar with if you want to make intelligent decisions about the compliance implications of marketing campaigns. These are:

Truth in Savings and its implementing Regulation DD.

* Regulation Q.

* IRS reporting rules in the Internal Revenue Code and regulations.

In this article, we will talk about the first two topics--the Truth in Savings Act and Regulation DD and Regulation Q. In a follow-up in next month's issue, we will discuss IRS reporting rules.

Truth in Savings: The lightest load?

The Truth in Savings Act and its implementing Regulation DD require that a bank disclose key pieces of information about its deposit accounts to allow consumers to comparison shop for the deposit accounts that best fit their needs. The annual percentage yield (APY) is one such piece of information. The APY is a very "clean" comparative value. It looks at the interest rate being paid on an account and the term of the account and comes up with an annual value a customer can easily compare with accounts at different banks.

But the APY does not tell the customer the whole stoW. It does not, for example, include the value of any free stuff ("bonuses") that might be given to customers in addition to the interest the account will earn. A customer must therefore receive bonus information to more accurately compare deposit accounts.

And that is the Truth in Savings burden: disclosing sufficient information about the bonus to enable the customer to comparison shop. But before you can properly provide bonus information to a customer, you need to understand what constitutes a "bonus."

Defining "bonus"

Let's start with the incentives a bank might offer that are not bonuses. A bonus does not include waiving fees, reducing fees or absorbing expenses. When you waive the safe deposit box rental fee for a year for each new account customer, you have no bonus worries.

You will have bonus considerations, however, if your giveaway meets both of the following conditions:

* The free item--a premium, gift, award or other consideration--must have a value of more than $10. The free item may be in the form of cash, credit, merchandise or any equivalent.

* The free item must be offered to a consumer in exchange for opening a new deposit account, maintaining an existing account, renewing an existing account, or increasing the balance in an existing account.

Seems simple enough, but let's apply these conditions to some typical situations to get a better feel for what constitutes a bonus.

* Example 1: Your bank regularly hands out pens. Each pen is worth 39 cents and anyone who comes into the bank for any reason gets one. This is not a bonus; it does not meet either of the conditions.

* Example 2: Your bank decides to offer other giveaways and adds yardsticks and flyswatters to the items a person can pick up when at the bank. Again, the items are offered to anyone who comes into the bank for any reason, and the items have a minimal value, less than $2 apiece. These items are not bonuses.

* Example 3: Later in the year, your bank decides to promote its 12-month certificate of deposit. As an incentive to customers to deposit $5,000 in a new certificate, the bank offers a toaster as a gift. The toaster is given only to those who actually open an account. The bank pays $9.95 for each toaster.

This is not a bonus. Even though the customer must open an account to receive the toaster (thus meeting one of the conditions), the value of the toaster is still less than $10. And even though your certificate customers may have previously received a $2 yardstick, you do not add this value to the toaster because the yardstick was not offered in exchange for opening a certificate account.

* Example 4: The toaster promotion is so well received that the bank decides to offer a new promotion. Any customer who opens a new 24-month certificate with a minimum deposit of $10,000 will receive a $20 gift certificate to be used at a local video store. This is a bonus, because the customer must open a certificate of deposit account to obtain the gift, which has a value greater than $10.

* Example 5: With the success of both the toaster and video gift certificate programs, your bank decides to link several new promotions. The bank begins a yearlong advertising campaign for its money market savings account. Customers who open new money market accounts with minimum deposits of $1,000 or who add $1,000 to existing money market accounts will receive a slow cooker worth $9.95. If a customer adds another $1,000 to the money market account within three months, the customer will receive a weather radio worth $19.95. And if the customer adds a third $1,000 to the money market account within the next six months, the customer will receive a set of bath towels worth $24.95.

In this case, because each item is part of a single ongoing promotion, you must aggregate the value of all three gifts. The total value of $54.85 is greater than $10 and the gifts are given in exchange for opening or increasing the balance on an account. You have a bonus.

* Example 6: This is the example from the beginning of this article. The bank offers to pay for the customer's first order of preprinted checks to anyone opening a negotiable order of withdrawal (NOW) account with a $300 minimum deposit during a special promotion period. The value of the checks is $12.50. The bank will also deposit $5 to the new account just to "get the customer started." The total value to the customer is $17.50--but there is no bonus in this case. The $12.50 cost of the preprinted checks is not a bonus--it is simply a cost the bank absorbs. And the $5 deposit does not meet the minimum $10 value needed to constitute a bonus.

Disclosing a bonus

You should have a pretty good idea at this point how to determine whether you have a bonus. But what happens if you conclude that you have a bonus? For purposes of Truth in Savings, you simply have to disclose--at account opening and in your advertisements-details of the bonus. Specifically, in your account opening disclosures you must:

* Describe the bonus--the amount or type of gift.

* Explain when the bonus will be given.

* List any minimum balance needed to receive the bonus.

by Jennifer McCollough, CRCM, and Cheryl Riedlinger

* Describe any minimum time requirement that must be met to receive the bonus.

Let's apply the disclosure rules to Example 5, the yearlong money market account promotion with a bonus worth $54.85. Because this promotion is a bonus, you must include in your account opening disclosures for the money market account a statement such as "You will receive a $20 gift certificate to DVD Great Store at the time you open your certificate." The minimum balance needed to open the certificate and the term of the account can also be disclosed here but very likely will already have been provided elsewhere in your disclosures. Just be sure you have all four required pieces of information.

And if you are promoting your money market account and the associated giveaways in the local newspaper, you will need to beef up your advertisement to include:

* The annual percentage yield (be sure to use this terminology) plus all disclosures triggered as a result of listing the APY.

* Any time requirement that must be met to obtain the bonus.

* Any minimum balance needed to obtain the bonus.

* Any minimum deposit that must be made (if this deposit is greater than the ongoing minimum balance requirement).

* When the bonus will be provided.

Regulation Q packs a punch

Truth in Savings and Regulation DD were relatively painless. Regulation Q will not be much of a burden for you either--as long as you understand how the rule works.

You may have noticed as you read through the examples that in each case the giveaway was attached to an interest-bearing account--a savings account, a money market account, a NOW (interest-bearing checking) account. But what if you want to give a bonus to a customer in exchange for opening a regular (noninterest-bearing) checking account?

Neither Truth in Savings nor its implementing Regulation DD addresses whether you are allowed to give a bonus, what or how much a bonus can be worth, or whether only certain accounts may have bonuses. You must look to a different regulation--Regulation Q. This regulation may be short but it packs a bit of a punch. Don't ignore what it has to say.

Regulation Q states that you cannot pay interest on a demand deposit (basically, your noninterest-bearing checking accounts) and goes on to explain that a "premium" (Regulation Q's term for "bonus"), whether given in the form of merchandise, cash or credit, will not be considered the payment of interest if:

* The premium/bonus is given only at the time of opening an account or adding to an existing account.

* No more than two premiums are given within a 12-month period.

* The value of the premium (including taxes, shipping, warehousing, packaging and handling costs) is no more than $10 for deposits of less than $5,000 or $20 for deposits of $5,000 or more.

Let's reconsider the six examples, but attach the bonus to a regular checking account in each instance. Here's what Regulation Q would allow:

* Example 1: Your 39-cent pens are not a premium under Regulation Q any more than they are a bonus under Regulation DD because they are not connected to any account. Anyone who comes into the bank can have a pen.

* Example 2: Your yardsticks and flyswatters are also not premiums under Regulation Q.

* Example 3: Any customer who deposits $5,000 or more in a new checking account will receive a $9.95 toaster. With sales tax alone, the value of the toaster increases to more than $10. But the toaster still does not constitute a premium under Regulation Q because it is given only in connection with a $5,000 deposit. The value of the toaster could be as high as $20 and not be a premium. But a word of caution: Do not give the toaster to any customer who opens a regular checking account with less than $5,000 (such as the customer who has $4,500 today and who will add $500 on payday just two days from now). If you do, you will be in violation of Regulation Q.

* Example 4: The $20 DVD gift certificate given to customers opening checking accounts with minimum deposits of $10,000 is not a premium (assuming there are no taxes or other costs on a gift certificate).

* Example 5: This yearlong promotion is going to run afoul of Regulation Q in several ways. For starters, this is an ongoing promotion that calls for three different giveaways. You could not have such a promotion for a regular checking account because you can give no more than two premiums in a 12-month period. Even if you dropped the third giveaway (the $24.95 bath towels), you still couldn't go forward with the other two giveaways because the weather radio alone is valued at more than $20 when taxes and other costs are added in. And if you decided to go forward with just one giveaway--the slow cooker--you would still have a premium because the $9.95 plus taxes and other costs will be over the $10 limit allowed on deposits of less than $5,000. (Remember, the customer needs a total of just $3,000 in deposits to receive the gifts.) You will not be able to go forward with this promotion as it is designed.

* Example 6: Absorbing a fee (the preprinted checks) has been determined not to be a premium under Regulation Q just as it is not a bonus under Regulation DD. So, the free order of checks plus a $5 that the bank is giving new customers is allowed in connection with a regular checking account.

"I" before "e," except after "c"

With all good rules, there has to be an exception, and Regulation Q has one. Regulation Q states that any premium that is (1) not dependent on the checking account balance and (2) does not require that the funds remain on deposit for a specified length of time is not considered the payment of interest. In other words, a bank can offer a giveaway in connection with its regular checking account that is worth more than $20 if both conditions are met. For example, your bank could give a customer a $50 bill as an incentive to open a regular checking account. But you can't require the customer to deposit, say, $5,000 to open the account; you can't require the customer to deposit $1 or even a penny, to open the account. Nor can you require the customer to maintain a balance of any amount. Likewise, you cannot require the customer to leave the funds on deposit for any length of time (such as six months or one day or even one hour).

All things considered, you probably don't want to offer $50 to someone to open an account with a zero deposit, especially knowing that the customer could close the account right after opening it (and collecting the $50), not to mention the fact that your safety and soundness examiners would not likely be happy about such a promotion.

The key to correctly disclosing bonuses is to thoroughly review the rules and document your decisions before you begin a promotion.

For Truth in Savings purposes, check the proposed gift against the definition of "bonus." If the gift, cash or award meets the conditions of a bonus, make the necessary disclosures.

Next month: What the Internal Revenue Code says about giveaways.

Jennifer McCollough, CRCM, is president of Compliance Services Group, Ltd., Prior Lake, Minn., where she works primarily with small- and medium-sized community banks helping them to develop and manage their compliance programs.

Cheryl S. Riedlinger, is an attorney concentrating in the taxation of financial institutions. She produced The Information Reporting Bulletin newsletter and Fast Facts Quick Reference Guides. She also is the author of A Guide to IRS Information Reporting for Financial Institutions. Visit www.taxreportinggrogp.com for more information.