Minimum Balance Requirement

A minimum balance requirement is a stated balance a depository institution requires in an account as a condition of something. Regulation DD, the federal deposit-disclosure rule, uses the term in the plural for good reason: at 12 CFR 1030.4(b)(3)(i)(A) it requires an institution to disclose "any minimum balance required to" do three distinct things, namely to open the account, to avoid the imposition of a fee, and to obtain the annual percentage yield disclosed. Those are three different numbers on the same account, and they are frequently three different amounts.

The provision has a second half that matters more than it looks. Under 1030.4(b)(3)(i)(B), except for the balance needed to open the account, "the disclosure shall state how the balance is determined for these purposes." So an institution may not simply publish a threshold. It has to say what it measures against that threshold, and as the sections below show, that choice is often worth more money than the threshold itself.

The two measurement rules, in the regulation's own model language. Appendix B to Regulation DD gives institutions model clauses to use, and it offers two shapes for a minimum balance fee. The first reads: "A minimum balance fee of $____ will be imposed every (time period) if the balance in the account falls below $____ any day of the (time period)." The second reads: "A minimum balance fee of $____ will be imposed every (time period) if the average daily balance for the (time period) falls below $____," and it goes on to define the average as "adding the principal in the account for each day of the period and dividing that figure by the number of days in the period." The dollar amounts are blanks in the model form; each institution fills them in. What is not a blank is the difference between the two clauses, which is the whole practical question: under the first, one low day in a month triggers the fee no matter how the rest of the month went, and under the second it usually does not.

The same account can measure the fee balance and the interest balance by different rules, lawfully. The official commentary is explicit: "Institutions may use different methods or periods to calculate minimum balances for purposes of imposing a fee (the daily balance for a calendar month, for example) and accruing interest (the average daily balance for a statement period, for example). Each method and corresponding period must be disclosed" (comment 4(b)(3)(ii)-1). One account, two measuring sticks, two different periods, and nothing improper about it as long as both appear in the disclosure.

On the interest side, the institution's freedom is limited. On the fee side it is not. For earning interest, 12 CFR 1030.7(a)(2) requires an institution to "use the same method to determine any minimum balance required to earn interest as it uses to determine the balance on which interest is calculated," and it may add a second method only where that method is "unequivocally beneficial to the consumer." Three commentary points fill that out. It may not require a consumer to satisfy both a minimum daily balance and a minimum average daily balance in order to earn interest (comment 7(a)(2)-3). It must pay interest on the whole qualifying balance rather than only the part above the minimum, and the commentary's own example is that where $300 is the minimum daily balance required to earn interest and a consumer deposits $500, interest is owed on the full $500 rather than on $200 (comment 7(a)(2)-4). And a negative balance is treated as zero for both purposes (comment 7(a)(2)-5). No parallel restraint applies to fees. Comment 7(a)(2)-7 says so in terms: institutions may use the daily balance, the average daily balance, "or any other computation method" to calculate minimum balance requirements not involving the payment of interest, "such as to compute minimum balances for assessing fees." So the measurement rule that protects the consumer exists only where interest is at stake.

Two boundary points that stop the term being misread. A minimum balance requirement is not the same thing as a tiered rate. The commentary states that "a requirement to maintain a minimum balance to earn interest does not make an account a tiered-rate account" (comment 2(t)-2), so a single rate with a floor under it is not the same product as a rate schedule that steps up with the balance. And a minimum balance requirement is a term disclosed under 12 CFR 1030.4(b), which puts it inside the change-in-terms rule at 1030.5(a)(1): where a change to such a term may reduce the annual percentage yield or otherwise adversely affect the consumer, the institution must mail or deliver notice at least 30 calendar days before the change takes effect. A threshold being raised is therefore something an account holder is entitled to hear about in advance, which makes the notice worth opening rather than filing.

The institution discloses the thresholds and the measurement method before the account is opened. Each period, it measures the account against the threshold using the disclosed method, and where the account falls short it imposes the fee the disclosure names. On the interest side it applies the method it uses to compute interest, and pays on the full qualifying balance.

A hypothetical illustration of how much the measurement rule is worth, using invented amounts. Two accounts each carry a $1,500 minimum balance to avoid a monthly fee, over a 30-day period. Renata's account holds $2,000 for 29 days and drops to $1,400 for one day, because an insurance premium posted the morning before her paycheck landed.

Under the first Appendix B shape, the fee is imposed if the balance falls below the threshold on any day of the period. It did, so the fee applies.

Under the second shape, the fee is imposed only if the average daily balance falls below the threshold. That average is ($2,000 times 29, plus $1,400) divided by 30, which is $59,400 divided by 30, or $1,980. That is above $1,500, so no fee applies.

Identical account behavior, opposite outcomes, and the only thing that differed was which sentence the institution put in its disclosure. This is why "what is the minimum balance" is half a question, and "measured how, and over what period" is the other half.

The forgone-earnings side is worth one calculation too, at a stipulated rate rather than a current one. If the same $1,500 held to satisfy a threshold on a non-interest-bearing account could instead sit in a deposit account at a stipulated 4 percent, the year costs $60 in interest not earned ($1,500 times 0.04) on top of nothing saved. Where the fee being avoided is smaller than that, the cheaper answer is usually a different account rather than a larger balance.

Pros

• The threshold, its purpose and the measurement method must all be disclosed before the account is opened, so the whole rule is knowable in advance.
• Meeting the threshold is often the simplest route to a fee-free account for someone who holds a stable balance anyway.
• On the interest side the consumer is protected twice: one measurement rule only, and interest on the full qualifying balance rather than the excess.
• Raising the threshold is a change in terms requiring at least 30 calendar days' advance notice where it adversely affects the consumer.

Cons

• Under the "any day" measurement a single low day costs a full period's fee, no matter how the rest of the period went.
• The fee side has no equivalent of the interest side's same-method rule, so the institution may measure the fee balance however it discloses.
• The fee balance and the interest balance can be measured by different methods over different periods on one account.
• Money held only to satisfy a threshold earns whatever the account pays, which on a checking account is often nothing, so a large minimum can cost more in forgone interest than the fee it avoids.
• Three separate thresholds on one account is genuinely confusing, and the one people remember is rarely the one that costs them.