Regulation DD and Paying a Bonus

Issue/Inquiry

The Bank is offering a bonus of over $10.00 in conjunction with a deposit account. The Bank will be adding the interest rate and annual percentage yield to the disclaimer on its advertisements and reporting the bonus as interest. Should anything else be added to the advertisement? Should the bonus be added to the account opening disclosure? Is the rate calculated using the bonus amount and the amount required to receive the bonus?

Response Summary

There are several items that must be added to advertisements in order to satisfy Truth in Savings (Regulation DD) requirements. The payment of a bonus should be disclosed in the advertisement, account opening disclosure, and periodic statement. For Regulation DD purposes, a bonus is not considered interest, and therefore would not be used in the interest calculation. For tax purposes, a bonus is considered to be interest and would be reported to the IRS using Form 1099-INT.

Response Detail

Under Regulation DD, a “bonus” is indicated as a premium, gift, award, or other consideration worth more than $10 (whether in the form of cash, credit, merchandise, or any equivalent) given or offered to a consumer during a year in exchange for opening, maintaining, renewing, or increasing an account balance. The term does not include interest, other considerations worth $10 or less given during a year, the waiver or reduction of a fee, or the absorption of expenses. 12 CFR 1030.2(f).

In contrast to a bonus, the term “interest” refers to any payment to a consumer or to an account for the use of funds in an account, calculated by the application of a periodic rate to the balance. It does not include the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, or the absorption of expenses. 12 CFR 1030.2(n).

This means that a bonus would not be factored into the calculation of interest. Under Regulation DD, interest is always an amount that is calculated using the time value of money (e.g., amount x time x rate). Since a bonus is an amount or a non-cash incentive that is given without respect to the time value of a deposit, it is not considered interest, and therefore the interest calculation formula would not be used.

If a bonus is stated in an advertisement, then the advertisement must also state the following, as appropriate:

• The “annual percentage rate” (using that term)
• The time requirement to obtain the bonus
• The minimum balance required to obtain the bonus
• The minimum balance required to open the account, if it is greater than the minimum balance necessary to obtain the bonus
• When the bonus will be provided. 12 CFR 1030.8(d)

Since the bonus requirements for advertisements require the annual percentage yield to be disclosed, the following disclosures triggered by a statement of the annual percentage yield must also be disclosed, as appropriate:

• For variable rate accounts, a statement that the rate may change
• The time period in which the annual percentage yield will be offered or a statement that the annual percentage yield is accurate as of a specific date
• The minimum balance required to obtain the annual percentage yield (for tiered-rate accounts, the minimum balance for each tier must be stated with the annual percentage yield)
• The minimum deposit required to open the account, if greater than the minimum balance required to obtain the annual percentage yield
• The statement that fees could reduce earnings
• For time accounts, the term of the account and a statement that a penalty may be imposed for early withdrawal. 12 CFR 1030.8(c)

When a consumer opens an account with a bonus, the account opening disclosure must state the following:

• The amount or type of any bonus
• When the bonus will be provided
• Any minimum balance and time requirements needed to obtain the bonus.12 CFR 1030.4(b)(7)

If the Bank provides periodic statements, the statement must include bonuses paid. Official Interpretations, 1030.6(a) – 3.iii.

While a bonus is not interest for the purposes of Regulation DD, for tax purposes, a bonus is considered to be interest by the IRS. As such, the IRS requires the Bank to file a 1099-INT for each consumer who is paid $10 or more of reportable interest during the year. The $10 level is determined by the consumer, rather than the account.

Form 1099-INT is only used when the interest has been credited to the account. For accounts with a term of more than a year, if interest is accrued but not credited to the account, it is reported on Form 1099-OID instead.

 

This entry was posted on Monday, August 5th, 2019 at 6:00 am.