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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 ]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102