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Federal reserve Bank of Dallas DALLAS, TEXAS 75222 C i r c u l a r No. 7 8-6 4 M ay 23, 1978 A M E N D M E N T T O R EG ULATIO N Q— IN T E R E S T ON DEPOSITS Automatic T r a n s f e r of Funds From S avin g s to C h eck in g Accounts TO A L L MEMBER BANKS A N D OTHERS CONCERNED IN TH E E LEVEN TH FED ER A L RESERVE D IS T R IC T : T h e Board of G o ve rn o rs of the Federal R e s e r v e System has a p p ro v e d a plan that w i ll p e r m it in d iv id u a l custom ers of m ember banks to t r a n s f e r funds autom atically from t h e ir sa vin g s to t h e ir c h e c k in g accounts. M em ber banks may o ffer the new s e r v ic e b e g in n in g N ovem ber 1, 1978. It w i ll in crease the convenience an d effic ien cy of s avings accounts and can be used to co ver ch e ck in g o v e r d ra fts o r to m aintain a minimum level of funds in a checking a c c o u n t. T h e Board said that it w i l l clo sely m onitor the flow of funds to t h r i f t in s t i tutions and to banks a fte r automatic t r a n s f e r becomes effective to d e te rm in e w h a t changes, if a n y , take place as a r e s u lt of the a c t i o n . Automatic tra n s fe r s w ill o n ly be possible if a rra n g e m e n ts are made in a d vance by the ban k an d the c u s to m e r. Use of the s e rv ic e w i ll be e n t i r e ly v o lu n t a r y on the p a r t of th e c u sto m er. Banks w i ll be p e r m it t e d , b u t not r e q u i r e d , to o ffer the s e r v ic e . T h e Board acted a fte r e x te n s iv e r e v ie w of a re co rd n u m b e r of responses — 1 ,3 8 0 — to its proposal o f the automatic t r a n s f e r plan issued in e a r l y F e b r u a r y . A m a jo rity of 721 (52 p e rc e n t) of the in d i v i d u a ls , g r o u p s , g o v ern m e n ta l a g e n c ie s , and in stitu tio n s re s p o n d in g fav o red the p ro p o sa l. Customers m aking automatic t r a n s f e r a r ra n g e m e n ts w ith t h e ir banks can avoid th e substantial fees banks u s u a lly c h a rg e fo r o v e r d r a f t c h e c k s . S i m i l a r l y , c u s tomers using the s e rv ic e w i l l be a b le to keep ch e c k in g accounts at a p re d e te rm in e d le v e l, to av o id c h ec k s e rv ic e c h a r g e s . P a rtic ip a tin g d e p o s ito rs , as w ell as merchants and others to whom o v e r d r a f t checks a re w r i t t e n , can av o id the e m b a rras sm e n t of h a v in g such checks r e t u r n e d . Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1 -8 00 -492 -440 3 (intrastate) and 1 -8 00 -527 -497 0 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - The automatic transfer service will be an alternative for depositors in member banks to two services already permitted u nder Board rules: tra n sfe rs from savings by telephone and preauthorized bill payment. It will also be an alternative to plans u n d e r which banks automatically make loans to cover customer's checks. The principal features of the automatic tra n sfe r service plan adopted by the Board are: 1. Customers of banks offering arrangements for the automatic transfer of funds from savings to checking accounts may make an agreement with their bank for the transfer of funds to cover their checks, or to maintain a predetermined amount in their checking account. This means that without fu rth er instructions funds may be withdrawn from savings accounts and transferred to checking accounts to pay for checks for which there are insufficient funds in the customer's checking account. 2. No penalty—such as a forfeiture of interest or a service c h a rg e —will be required for automatic tra n s fe rs, at least initially. The Board said, however, that competitive and other developments will remain u nder continuing review and will be considered again by the Board no later than November 1, 1979—one year after the ef fective date. 3. The service will be available only to individuals. 4. Automatic transfer service may be offered beginning November 1, 1978. Banks will therefore have a reasonable period to evaluate the costs and benefits of the automatic transfer service and to p re p a re for an orderly introduction of the service, including possible service c h arg es . 5. The service will be entirely voluntary, both on the part of the bank and of the customer and may be cancelled in accordance with the terms of the automatic tran sfer agreement between the bank and the customer. No transfers may be made without the customer's consent. 6. Participating banks a re re q u ired to disclose prominently, and to call to the attention of depositors, the fact that the bank—as in the past—reserves the right in an automatic tra n sfe r plan to re q u ire not less than 30 days' notice of withdrawal from savings accounts. 7. Arrangements may be made between thrift institutions (such as savings and loan associations) and member banks for the automatic tran sfer of funds from the thrift institution to checking accounts in the commercial bank. In addition to the expected benefits to individuals, there will be a saving benefiting the public at large through lower operational costs of the Federal Reserve System due to a reduction in the number of checks written on accounts with insuffi cient funds. Such checks must be returned to the bank on which they a re written, and they involve costly hand processing and multiple handling. - 3 - Approval of the automatic tra n sfe r service announced amends Regulation Q— payments of interest on deposits. The Board has had the new service under considera tion since it was first proposed in March 1976. The proposal was revised and issued for fu rth er comment in February of this y e ar. The proposal in February would have imposed on automatic tran sfers from savings a minimum forfeiture of interest equal to the amount of interest earned in the last 30 days on the sum tr a n s fe rre d . Instead, the plan adopted by the Board imposes no penalty, a t least initially. A 52.2 percent majority of responses received was favorable to the Board's plan. Individuals (424) overwhelmingly favored the i d e a . Some elderly respondents noted it would be p articularly helpful to them because they found visits to the bank difficult. All savings and loan associations responding (370) were opposed. The large majority of commercial banks and bank holding companies who offered comments were in favor (254 out of 382) . Comments were received from 45 members of Congress of whom 42 were opposed. Members of the Congress in favor included the majority and minority leadership of the Senate Banking Committee. Of 24 trade groups resp on d ing, 16 were opposed. There were 7 responses from government agencies, of which 6 were favorable. Favorable responses were made by the Department of Justice, the Comptroller of the C u rre n c y , the Federal Council on Wage and Price Stability, and the Office of Consumer Affairs of the Health, Education, and Welfare Department. The Pennsylvania Department of Banking also supported the proposal. The proposal was opposed by the Federal Home Loan Bank Board—which regulates savings and loan associations—on g rounds that it would amount to authorizing the payment of interest on demand deposits in violation of the spirit, if not the letter, of Federal law. The principal objections of those who did not favor the automatic tran sfer service were that it would be a violation of the prohibition against paying interest on demand deposits, is a matter best left to the C ongress, or that it tends to give commer cial banks a competitive edge over thrift institutions. In giving its approval to the automatic transfer plan, the Board said that, in its view, the service does not violate the prohibition against payment of interest on demand deposits since the key distinction between demand and savings deposits is p r e s e rv e d . This distinction, drawn in the Board's regulation, is that a bank must r e s erv e the rig h t to at least 30 days' notice p rio r to withdrawal of a savings deposit. Banks offering automatic tran sfer service a r e re q uired to continue to re serv e this rig h t. F urther, the Board said that it has given serious consideration to competi tive aspects, and concluded that the automatic tra n sfe r service will not seriously af fect the flow of funds to thrift institutions since it is likely to affect most the division of commercial bank deposits among savings and demand deposits and is similar to preauthorized bill payment and telephone withdrawal services that both banks and savings and loan associations a re presently permitted to offer. - 4 - E n c lo s e d is a c o p y of the a m e n d m e n t to R e g u la t i o n Q f o r in s e r t i o n in y o u r R e g u la t i o n s B i n d e r . In a d d i t i o n , e n c lo s e d is a c o p y of t h e B o a r d ' s o r d e r as it a p p e a r e d in t h e F E D E R A L R E G I S T E R on M a y 10, 1978. A n y q u e s tio n s m a y be d i r e c t e d to the B a n k S u p e r v i s i o n a n d R e g u la t i o n s D e p a r t m e n t , C o n s u m e r A f f a i r s S e c t io n , a t E x t . 6171 o r E x t . 6 18 1. A d d i t i o n a l c o p ie s of th e a m e n d m e n t w i l l be f u r n i s h e d upon r e q u e s t to the S e c r e ta r y 's O ffice, E x t. 6267. S in c e re ly y o u rs , R o b e r t H . B o y k in F ir s t V ic e P res id e n t E n c lo s u r e s • Extract From FEDERAL REGISTER, VOL. 43, NO. 91, Wednesday, May 10, 1978 pp. 20001 - 20003 [6210-01] Title 12—Banks and Banking CHAPTER II—FEDERAL RESERVE SYSTEM SUBCHAPTM A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [R eg. Q; D o c k e t No. R -0027] PART 217—INTEREST ON DEPOSITS Withdrawals from Saving* Deposit* AGENCY: Board of Governors of the Federal Reserve System. ACTION: Pinal rule. SUMMARY: On February 2, 1978, the Board of Governors of the Federal Re serve System invited public comment on a revised proposed amendment to Regulation Q (Interest on Deposits) that would permit banks that are members of the Federal Reserve System to arrange with their deposi tors for the automatic transfer of funds from depositors' savings ac counts to demand deposit (checking) and other accounts to cover checks drawn by depositors or to replenish or maintain a minimum balance in such accounts (43 FR 5008). The period for receipt of public comment on the pro posed amendment expired on March 20, 1978. After consideration of the comments submitted and the views ex pressed therein, the Board has deter mined to adopt the proposed amend ment with modifications, effective No vember 1, 1978. The amendment adopted differs slightly from the pro posal in that it does not require the imposition of an interest forfeiture. However, the Board encourages member banks to develop charges for automatic transfers to reflect the costs of providing the service to depositors. The Board will monitor the develop ment of this new service, Including its competitive effects among various types of banks and nonbank deposi tory institutions, and will review the appropriateness of making any modifi cations on or before the first anniver sary of the effective date of this amendment. As adopted, the transfer service is entirely voluntary, and automatic transfers may not be made unless pre viously authorized in writing by the depositor. In addition, the automatic transfer service will be available only to Individuals and not to business and other organizations or governmental units. For purposes of this provision, a partnership is considered to be a busi ness or other organization. The auto matic transfer service will provide de positors with an alternative to existing arrangements, such as automatic over draft loans, when there are insuffi cient funds in depositors’ checking ac counts. The service should also in crease the efficiency of the Federal Reserve’s check clearing operations by reducing the number of return items processed by the System. EFFECTIVE DATE: November 1, 1978. FOR FURTHER INFORMATION CONTACT: Allen L. Raiken, Associate General Counsel, 202-452-3625 or Gilbert T. Schwartz, Senior Attorney, 202-452 3623 Legal Division, Board of Gover nors of the Federal Reserve System, Washington, D.C. 20551. SUPPLEMENTARY INFORMATION: In response to notice published in the F e d e r a l R e g i s t e r (43 FR 5008), the Board has received and carefully re viewed almost 1,400 comments on the proposed amendment. A majority of those responding (52.2 percent) fa vored adoption of the proposal. Of the 382 commercial banks commenting, 254 (66.5 percent) favored adoption of the proposed amendment; 517 individ uals responded, with 424 (82 percent) in favor of adoption; 370 savings and loan associations (100 per cent of those responding) opposed adoption of the proposal. Those responding in favor generally commented that the proposal represents a convenience and benefit to consumers and that it would save overdraft charges that would be assessed if the service were not availa ble. Those opposed to the proposal principally commented that the pro posal would authorize the payment of interest on demand deposits in viola tion of law (12 U.S.C. 371a) and that it would pre-empt Congressional action by creating nationwide negotiable order of withdrawal (NOW) accounts. Others commented that the proposal would give commercial banks an unfair competitive advantage over sav ings and loan associations and other thrift institutions. (A detailed sum mary of comments received is availa ble upon request from the Board’s Office of Public Affairs, telephone 202-452-3204; 3215. After consideration of the issues pre sented, the Board finds that this amendment would provide significant benefits to the public in the form of an additional convenient savings de posit withdrawal service. The amend ment should also increase the efficien cy of the Federal Reserve’s check clearing operations by reducing the number of return items processed by the System. Consequently, the Board has determined to adopt the proposal, effective November 1, 1978. The Board believes that the auto matic transfer service does not violate the prohibition against the payment of interest on demand deposits. Sec tion 19(a) of the Federal Reserve Act (12 U.S.C. 461) authorizes the Board to define the terms “savings deposit" and “demand deposit.” Pursuant to section 19, the distinction drawn in the Board’s regulations between sav ings and demand deposits is that a bank must reserve the right to require at least 30 days notice prior to with drawal from a savings deposit, while demand deposits are available on demand. The amendment does not alter this basic distinction, and member banks will continue to be re quired to reserve the right to impose at least a 30-day notice period on in tended withdrawals of savings deposits as presently required in section 217.1(e) of Regulation Q (12 CFR Part 217). Further, it is the Board’s view that the amendment does not authorize member banks to establish NOW ac counts, which involve the use of nego tiable orders of withdrawal to effect transfers of funds directly from sav ings accounts for payments to third parties. Section 1832(a) of Title 12 of the United States Code prohibits the drawing of negotiable or transferable instruments for the purpose of making transfers to third parties against a de posit or account on which interest or dividends are paid except in the six New England States. The Board’s amendment does not authorize member banks to permit depositors to draw negotiable or transferable instru ments against interest bearing savings accounts for the purpose of making transfers to third parties and does not affect the restriction that, outside of New England, member banks may permit depositors to draw negotiable instruments only against noninterest bearing demand deposit accounts. The amendment only permits member banks to arrange in advance with de positors to withdraw funds automati cally from a depositor’s savings ac count to be transferred to a noninter est bearing demand deposit account against which checks may be drawn or other accounts. The effect of the amendment, therefore, is to provide depositors with a withdrawal service that is identical in its essential ele ments to withdrawal services that banks already are authorized to offer to depositors such as withdrawals in person or via telephone. In adopting this amendment, the Board has given careful consideration to its potential effect on the competi tive balance among financial institu tions, and has determined that adop tion of the service will not seriously affect the flow of funds to thrift insti tutions under the existing ceiling rate structure. The amendment only en ables member banks to offer an addi tional deposit withdrawal and transfer service similar to the preauthorized bill payment and telephone withdraw al services that both banks and savings and loan associations are presently permitted to offer. Thus, this addi tional service is likely to affect mainly the composition of commercial bank deposit liabilities, as depositors use the added convenience to hold somewhat less funds in demand deposit accounts that bear no interest and somewhat more In savings accounts. The amendment, as adopted, is in es sentially the form proposed, but with one modification. As proposed, the amendment would have required a for feiture of interest in an amount no less than the amount of interest actu ally earned during the previous 30 days on the funds transferred from savings to checking accounts. As adopted, the amendment does not re quire the imposition of an interest for feiture. This modification was adopted after consideration of comments re ceived that indicated that the pro posed required forfeiture of interest would necessitate substantial and costly operational changes by banks offering the automatic transfer service and would significantly lessen the benefits to consumers of the automat ic transfer service. In order to maxi mize benefits to consumers, the Board has determined to adopt the amend ment without a required Interest for feiture. However, during the first year after the effective date, the Board will monitor the effects of the automatic transfer service, including its effect on the competitive structure among banks and thrift Institutions. The Board intends to work with the Feder al Home Loan Bank Board and the Federal Deposit Insurance Corpora tion to gather Information concerning the effects of the proposal on banks, savings and loan associations and other thrift institutions. Not later than one year after the effective date, the Board will review available data and will report its findings to the public. Although the amendment does not require the imposition of an interest forfeiture, on the basis of comments received, the Board expects that banks will impose service charges that re flect, among other factors, the costs of providing the service to depositors. The Board believes that such charges imposed by member banks are appro priate. Accordingly, the Board encour ages all member banks to evaluate their costs for providing the automatic transfer service and, in light of com petitive circumstances, to develop charges for the service. Member banks are urged to impose such charges in the form of an interest forfeiture to afford depositors the opportunity to report such amounts as interest for feited for income tax purposes to the extent permissible under Federal and State law. The amendment does not impose a minimum denomination requirement on the amount of savings funds that may be transferred automatically. However, member banks may, if so de sired, impose such a minimum denomi nation requirement. Member banks will continue to be re quired to reserve the right to impose at least a 30-day notice period on in tended automatic withdrawals of sav ings deposits as presently required in S 217.1(e) of Regulation Q (12 CFR Part 217). It is required that such res ervation specifically be called to the depositor’s attention and be stated prominently in written arrangements authorizing the transfer service en tered into by banks and their deposi tors. In addition, as in all advertise ments, announcements, and solicita tions, member banks are expected to describe accurately the terms and con ditions under which savings deposits may be automatically withdrawn and transferred pursuant to this rule. The amendment will not affect ar rangements whereby a thrift institu tion has agreed with its customer to transfer funds automatically or other wise to the customer’s demand deposit account at a member bank in accord ance with a preauthorized agreement. Similarly, the amendment does not affect the ability of a member bank to use a depositor’s savings deposit in sat isfaction of a debt where the bank is authorized to do so under local law. Under the terms of the proposal an nounced by the Board on February 2, member banks would be required to maintain data on funds transfers via the automatic transfer service in a w «nnw that would facilitate data col lection by the Board. In this connec tion, the Board has determined that member banks should maintain the following data on a monthly basis with regard to the automatic transfer serv ice: the total amount of savings depos its subject to automatic transfer, the total amount of savings funds actually transferred, the number of such auto matic transfers during the month, and the interest forfeiture or other charges imposed by the bank. In view of the comments received which indicated that a delayed effec tive date of 60 days, as proposed by the Board in its February 2 release, was not sufficient, the Board has de termined that the amendment will become effective on November 1, 1978. The Board believes that delaying the effective date of the amendment for approximately six months will provide sufficient time for member banks to effect the operational and marketing changes necessary to introduce the automatic transfer service in an order ly and beneficial fashion. Pursuant to its authority under sec tion 19 of the Federal Reserve Act (12 U.S.C. 461, 371b), effective November 1, 1978, the Board of Governors amends § 217.5(c) (2) and (3) of Regu lation Q (12 CFR 217.5(C) (2) and (3)) to read as follows: S 217.5 * W ith d ra w a l o f sa v in g s d ep o sits. * * * * (c) Manner of payment of savings de posits. • • • (2) Notwithstanding the provisions of subparagraph (1) of this paragraph, withdrawals may be permitted by a member bank to be made automatical ly or as a normal practice from a sav ings deposit that consists only of funds in which the entire beneficial in terest is held by one or more individ uals through payment to the bank Itself or through transfer of credit to a demand deposit or other account pur suant to a written authorization from the depositor to make such payments or transfers in order to cover checks or drafts drawn upon the bank or to maintain a specified balance in or to make periodic transfers to such ac counts. In accordance with S 217.1(e)(2), a member bank must re serve the right to require the deposi tor to give notice in writing of an in tended withdrawal not less than 30 days before such withdrawal is made. Such notice shall be prominently dis closed and specifically brought to the depositor’s attention at the time the automatic transfer service is author ized. A member bank may not require a depositor to authorize such automat ic transfers to be made from savings deposits. (3) A member bank may permit de positors to maintain deposits subject to negotiable orders of withdrawal where authorized by Federal law. By order of the Board of Governors, May 1, 1978. T h e o d o r e E. A l l i s o n , Secretary of the Board. [F R Doc. 78-12699 F ile d 5-9-78; 8:45 am] BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM INTEREST ON DEPOSITS AMENDMENT TO REGULATION Qf Effective November 1, 1978, Section 217.5(c)(2) and (3) is amended to read as follows: SECTION 217.5 — W ITHDRAW AL OF SAVINGS DEPOSITS * * * * * (c) Manner of payment of savings deposits.*** (2) Notwithstanding the provisions of subpara graph (1) of this paragraph, withdrawals may be permitted by a member bank to be made auto matically or as a normal practice from a savings deposit that consists only of funds in which the entire beneficial interest is held by one or more individuals through payment to the bank itself or through transfer of credit to a demand deposit or other account pursuant to a written authori zation from the depositor to make such payments or transfers in order to cover checks or drafts drawn upon the bank or to maintain a specified balance in or to make periodic transfers to such accounts. In accordance with §217.1(e) (2) of this Part, a member bank must reserve the right to require the depositor to give notice in writing of an intended withdrawal not less than 30 days be fore such withdrawal is made. Such notice shall be prominently disclosed asd specifically brought to the depositor’s attention at the time the auto matic transfer service is authorized. A member bank may not require a depositor to authorize such automatic transfers to be made from savings de posits. (3) A member bank may permit depositors to maintain deposits subject to negotiable orders of withdrawal where authorized by Federal law. * * * * * fF o r this Regulation to be complete as amended effective November ], 1978, retain: 1) Printed Regulation pamphlet as amended December 4, 1975; 2) Amendments effective M arch 1, 1976, to Sections 217.1 ( e ) ( 3 ) , 2 1 7 .5 (c )(3 ), and 217.6(i); 3) Am endm ent effective July 26, 1976, to Section 217.1 ( f ) ( 3 ) ( i ) ; 4) Amendments effective N ovem ber 23, 1977, Sections 217.4(f) and 217.5(b); 5) Am endm ent effective December 1, 1977, Section 217.4(d) and 2 1 7 .4 (d )(1 ); 6) Supplement effective June 1, 1978; 7) Am endm ent effective July 6, 1978; and 8) This slip sheet.
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