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F ederal Reserve Bank DALLAS, TEXAS of Da lla s 75222 C ir c u la r N o . 7 8-103 A u g u s t 1, 1978 PROPOSED A M E N D M E N T T O R E G U L A T IO N Q R e d u c tio n of P e n a lty R e q u ir e d fo r E a rly W ith d ra w a l O f C e r ta in T y p e s o f T im e D ep o s its TO A L L MEMBER BANKS A N D O T H E R S C O N C E R N E D IN T H E E L E V E N T H F E D E R A L RESERVE D IS T R IC T : F o l l o w i n g is t h e t e x t o f a s t a t e m e n t i s s u e d b y t h e B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e rv e S ystem : T h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m t o d a y ( J u l y 14) p r o p o s e d to l i g h t e n t h e p e n a l t y r e q u i r e d f o r e a r l y w i t h d r a w a l o f c e r t a i n ty p e s o f tim e d e p o s its a t m e m b e r b a n k s . T h e B o a r d s a id t h a t its p r o p o s a l is e x p e c t e d to b e n e f i t p a r t i c u l a r l y t i m e d e p o s i t s in l o n g - t e r m I n d i v i d u a l R e t i r e m e n t A c c o u n t s ( I R A s ) a n d K e o g h P l a n r e t i r e m e n t a c c o u n t s , t h u s f u r t h e r i n g t h e C o n g r e s s i o n a l a im o f p ro m o tin g r e tir e m e n t s a v in g s . T h e B o ard a s k e d fo r com m ent b y A u g u s t 30, 1978. T h e p r o p o s e d c h a n g e in t h e e a r l y w i t h d r a w a l p e n a l t y r u l e s u n d e r R e g u l a t i o n Q ( I n t e r e s t s o n D e p o s i t s ) w o u l d a f f e c t t w o t y p e s o f t im e d e p o s its : — T i m e D e p o s i t O p e n A c c o u n t ( T D O A ) , w h i c h is a t y p e o f d e p o s i t t h a t m a y p r o v i d e f o r s u b s e q u e n t d e p o s i t s to t h e a c c o u n t th a t m a y b e v ie w e d e it h e r as (1) r e s e ttin g th e m a t u r i t y of th e e n t i r e a m o u n t on d e p o s it , o r (2) as h a v in g a s e p a r a t e a n d d i s t i n c t m a t u r i t y ( e q u a l to t h e s a m e m a t u r i t y as t h e o r i g i n a l d e p o s i t ) . — N o tic e A c c o u n t s , a c c o u n ts th a t do not h a v e a s p e c ifie d m a t u r i t y b u t r e q u i r e t h e d e p o s i t o r to g i v e n o t i c e ( f o r i n s t a n c e , 90 d a y s ) o f i n t e n t to w i t h d r a w a l l o r p a r t o f t h e acc o u n t. 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 - T h e B o a r d is a w a r e t h a t m a n y m e m b e r b a n k s h a v e e s t a b l i s h e d I R A a n d K eo g h P la n r e t i r e m e n t s a v in g s a c c o u n ts as T D O A o r n o tic e a c c o u n ts . T h e s e a r e s p e c i a l t i m e a c c o u n t s in w h i c h i n d e p e n d e n t l y e m p l o y e d i n d i v i d u als (K e o g h P lan ) o r p e r s o n s w o r k in g fo r c o m p a n ie s w ith o u t r e t i r e m e n t p la n s (IR A ) can s a v e fo r t h e ir r e tir e m e n t u n d e r sp e cia l ta x d e f e r r a l p r o v is io n s . T h e p e n a l t y f o r e a r l y w i t h d r a w a l o f a l l o r p a r t o f a t i m e a c c o u n t is r e d u c t i o n o f t h e i n t e r e s t p a i d on t h e a m o u n t w i t h d r a w n to t h e p a s s b o o k s a v i n g s r a t e ( 5 p e r c e n t a t c o m m e r c i a l b a n k s ) a n d f o r f e i t u r e o f 90 d a y s ' in te re s t a t th a t r a te . G e n e r a l l y , th e in t e r e s t f o r f e i t u r e p e n a lt y on the a m o u n t w i t h d r a w n f r o m a t i m e a c c o u n t a p p l i e s b a c k to t h e o r i g i n a l d a t e o f d e p o s i t o f f u n d s in t h e a c c o u n t . U n d e r t h e B o a r d ' s p r o p o s a l , in t h e c a s e o f e a r l y w i t h d r a w a l a t a m e m b e r b a n k fro m : — A n o tic e a c c o u n t , th e m in im u m p e n a lt y w o u ld a p p l y on the a m o u n t w i t h d r a w n to a p e r i o d o f t i m e n o g r e a t e r t h a n t h e r e q u ir e d n o tic e p e r io d . — T D O A , t h e p e n a l t y on t h e a m o u n t w i t h d r a w n w o u l d a p p l y o n l y to t h e l e n g t h o f t h e m a t u r i t y p e r i o d s p e c i f i e d f o r t h e o rig in a l d e p o s it. T h e o r ig in a l m a t u r i t y p e r io d f o r IR A a n d K e o g h a c c o u n ts m u s t b e a t le as t t h r e e y e a r s if m a x im u m i n t e r e s t is to b e p a i d on s u c h a c c o u n t s . P r i n t e d o n t h e f o l l o w i n g p a g e s is t h e t e x t o f t h e p r o p o s e d a m e n d m e n t as p u b l i s h e d in t h e F e d e r a l R e g i s t e r . C o m m e n t s s h o u l d b e s u b m i t t e d to t h e S e c r e t a r y , B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m , W a s h i n g t o n , D . C . 20551 b y A u g u s t 3 0 , 1978. A ll m a te ria l s u b m itte d s h o u ld in c lu d e D o c k e t N o . R -0 1 7 2 . Sincerely yo u rs, R o b e rt H . B o y k in F irs t Vice President E x t r a c t F rom Federal Register V O L . 43, N O . 143, T u e s d a y , J u l y 2 5 , 1978 p p . 32140 - 32142 [ 6210 - 01 ] FEDERAL RESERVE SYSTEM [1 2 CFR Part 2 1 7 ] [Docket No. R-0172; Reg. Q1 INTEREST ON DEPOSITS P e n a lty far Early W ith draw als AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed rule. SUMMARY: The Board of Governors of the Federal Reserve System pro poses to amend the penalty required to be imposed upon the withdrawal of funds from time deposits prior to ma turity under certain limited circum stances. This amendment is being pro posed because certain applications of the penalty provision in the current regulation could have a potentially severe impact on the interest earned on long-term time deposits. The amendment would modify the early withdrawal penalty as applied to Indi vidual Retirement Account (IRA) time deposits or other time deposit agree ments that provide that if additional funds are deposited to the account, such deposits extend the maturity of the existing funds on deposit. The amendment would also apply to time deposits that may not be withdrawn prior to the expiration of a certain specified period of notice (notice ac counts). Under the proposed amend ment, the minimum early withdrawal penalty would be reduced from the current requirement to no more than the maturity or notice period specified for the deposit. Under the Board’s cur rent regulations, in the event of a withdrawal of funds prior to maturity from time deposit agreements provid ing that subsequent deposits to the ac count extend the term or notice provi sion of all of the funds on deposit, or in the event of a withdrawal from a notice account prior to the expiration of the required notice period, a member bank is required to impose an interest forfeiture on the funds with drawn back to their original date of deposit. DATE: Comments must be received by August 30, 1978. ADDRESS: Secretary, Board of Gov ernors of the Federal Reserve System, Washington, D.C. 20551. All material submitted should include the Docket Number R-0172. FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Senior Attor ney (202-452-3623) or Anthony P . Cole, Attorney (202-452-3711), Legal Division, Board of Governors of the Federal Reserve System, Washing ton, D.C. 20551. SUPPLEMENTARY INFORMATION: Section 217.4(d) of the Board’s Regu lation Q (12 CFR 217.4(d)) provides that where a member bank agrees to pay a time deposit prior to maturity, the bank must impose an interest for feiture penalty on the funds with drawn equal to a reduction in the rate of interest paid to a rate not to exceed the rate currently prescribed for a sav ings deposit plus a forfeiture of three months interest at such rate. Pursuant to this provision, where additional de posits to a time deposit account are viewed under the deposit contract as resetting or extending the maturity of all previous deposits to the account, in the event of a withdrawal of funds from such account prior to maturity, a member bank is required to impose an interest forfeiture on the funds w ith drawn back to the original date of de posit of those funds regardless of how long the funds have remained on de posit. (In the event the funds in such an account had matured and had been renewed prior to a subsequent deposit which reset their maturity, the penal ty need only be assessed back to the date of renewal.) Similarly, if a deposi tor withdraws funds from a time de posit that is payable only after expira tion of a required period of notice without giving such notice, or w ith draws the funds prior to the expira tion of such notice period, a member bank is required to impose the interest forfeiture penalty on the funds with drawn back to the original date of de posit of those funds. The Board believes that application of the penalty provision in the above described manner could have a poten tially severe impact on the interest earned on time deposits held in long term Individual Retirement Accounts (IRAs) and Keogh (H.R. 10) Plan ac counts. In this connection, the Board is aware that many member banks have established such accounts in the form of time deposit, open accounts (TDOAs). The TDOA form has the ad vantage of providing for subsequent or additional deposits to the account without the necessity of issuing a new instrument. As defined in § 217.1(d) of the Board’s Regulation Q (12 CFR 217.1(d)), a TDOA is a deposit with re spect to which "there is in force a writ ten contract providing that neither the whole nor any part of such deposit may be withdrawn prior to maturity or prior to expiration of a period of notice given by the depositor to the bank in writing. Consistent with the deposit agreement, a subsequent de posit made to a TDOA may be viewed as either resetting the maturity of the entire amount on deposit or as having a separate and distinct maturity sub ject to the same time requirement as the original deposit. In this connection, if the TDOA con tract provides that subsequent depos its reset th e maturity of all funds on deposit, the period during which the penalty for premature withdrawal of the funds must be assessed is length ened. For example, a depositor estab lishes an IRA in the form of a TDOA with an original maturity of three years, and th e deposit agreement pro vides th at subsequent deposits reset the maturity of all funds on deposit for an additional three years from the date of subsequent deposits. The de positor then deposits $1,000 per year into the account for 10 years. Since each subsequent deposit resets the ma turity of all previous deposits for an additional 3 years, none of the individ ual deposits to the account matures. If the depositor closes the account at the end of the eleventh year and w ith draws all of the funds, a member bank, under the Board’s current regulations, is required to impose the interest for feiture penalty back to the date of original deposit of each component of the account. In the case of the initial $1,000 deposited to the account, the interest forfeiture penalty, thus, would be applied over an 11 year period despite the fact that these fluids, at the time of withdrawal, had been on deposit for 8 years in excess of the originally contracted maturity. However, if the deposit contract pro vides that subsequent deposits to the TDOA have a separate and distinct maturity equal to the same maturity requirement as the original deposit to the account, the impact of the early withdrawal penalty is substantially re duced. For example, assuming the same facts as in the above example, when the depositor closes the account hi the eleventh year and withdraws all of the funds, the penalty must be im posed on each component of the ac count that has already been on deposit for more than 3 years only back to the date of its most recent maturity or re newal in the account. A member bank is required to impose the penalty back to the original date of deposit only on those funds that have not already been on deposit for 3 years. Thus, in the case of the initial $1,000 deposited to the account and which amount had matured and rolled-over in the ac count in years 3, 6 and 9, the minimum interest forfeiture penalty need be ap plied only back to the most recent ma turity/renewal date (year 9), a period of 2 years, rather than back to the original date of deposit, a period of 11 years. The proposed amendment would equalize application of the early w ith drawal penalty rule with respect to those TDOA’s t h a t provide that subse quent deposits reset the maturity of all funds on deposit, with application of the penalty to TDOA’s in which subsequent deposits have a separate and distinct maturity. T he amend m ent would substantially conform ap plication of the Board’s early with drawal penalty provision with applica tion of the similar penalty required to be imposed on premature withdrawals from add-on certificates by savings and loan associations subject to the Federal Home Loan Bank Board’s reg ulations. The proposed amendments would establish a minimum penalty for early withdrawal, and member banks would be permitted to impose an additional penalty if so desired. The proposed amendment would similarly modify application of the penalty provision to time deposits that are payable only after expiration of a required notice period. Under the amendment, the minimum early w ith drawal penalty would be reduced from the current requirement to no more than the specified notice period. Under the Board’s current regulations, if a depositor withdraws funds from a 90-day notice account without giving the required 90-days notice, a member bank is required to impose an interest forfeiture on the funds withdrawn back to the date of original deposit even if the funds have been on deposit for a period in excess of 90 days. For example, if a depositor withdraws funds that have been on deposit for 5 years without giving the required 90days notice, the interest forfeiture is imposed over the entire 5 year period. Under the proposed amendment, the minimum required penalty would be the forfeiture of 90 days interest. After adoption of the amendment, ap plication of the Board’s early w ith drawal penalty provision with respect to premature withdrawals from notice accounts will substantially conform to the penalty required to be imposed by nonmember commercial banks on pre mature withdrawals from notice ac counts under regulations promulgated by the Federal Deposit Insurance Cor poration and the Federal Home Loan Bank Board. To aid in consideration of this matter by the Board, interested per sons are invited to submit relevant data, views or comments. Any such materials should be submitted in writ ing to the Secretary, Board of Gover nors of the Federal Reserve System, Washington, D.C. 20551, to be received by August 30, 1978. All material sub mitted should include the Docket Number R-0172. Such material will be made available for inspection and copying upon request except as pro vided in § 261.6(a) of the Board’s Rules Regarding Availability of Information (12 CFR 261.6(a)). Pursuant to its authority under 19 o f the Federal Reserve Act (12 U.S.C. 371b), the Board of Governors pro poses to amend § 217.4(d) of Regula tion Q (12 CFR 217.4(d)) by adding the. following sentence immediately following the third sentence of § 217.4(d) as follows: § 217.4 Payment of time deposits before maturity. (d) Penalty for early withdrawals. * * * With respect to a time deposit contract th at provides that subsequent deposits will extend the maturity of all of the funds on deposits for a period equal to the maturity of the original deposit, or a time deposit that is payable only after expiration of a period of notice which must be given by the depositor in writing not less than 30 days in advance of withdraw al, a member bank may regard funds that have remained on deposit for a period in excess of the maturity of the original deposit or notice period as having been deposited on the last ma turity date on which the funds could have been withdrawn if the maturity of such deposits had not been ex tended by subsequent deposits, or the last date on which notice, could have been given in order to withdraw the funds without penaly. * * * * * By order of the Board of Governors, July 12, 1978. T h e o d o re E . A llis o n , Secretary of the Board. [ F R D o c. 78-20488 F ile d 7 -24-78; 8:45 am ]
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