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F ederal Reserve Ban k of Dallas DALLAS, TE X A S 75222 C i r c u l a r No. 78-43 April 13, 1978 REGULATION Q— INTEREST ON DEPOSITS P r e p a y m e n t of I n te re s t on Deposits in th e Form of M erch a n d ise TO ALL MEMBER BANKS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: Attached is an opinion letter from the staff of the Board of G o v e rn o rs of the Federal R e s e r v e Syste m c o n c e r n i n g the q u e stio n of p r e p a y ment of i n t e r e s t to d e p o s i t o r s in the form of m e r c h a n d i s e . T h e letter tre a ts the p aym ent of su ch m e r c h a n d i s e as i n t e r e s t a n d sets g u id e lin e s for limitations on same u n d e r Regulation Q. You a r e also r e f e r r e d to P a r a g r a p h 3190 of the P u b li s h e d I n t e r p r e tations of the Board of G o v e rn o rs of the Federal R e s e rv e Syste m which sta te s th a t s u c h m e r c h a n d i s e is not c o n s i d e r e d pa y m e n t of i n t e r e s t if (1) it is g iv e n to a d e p o s it o r only a t the time of the opening of a new a c c o u n t o r an a d dition to an e x istin g a c c o u n t, (2) it is not g iv e n to a n y d e p o s it o r on a r e c u r r i n g b a s i s , a n d (3) th e v a lu e of th e m e r c h a n d i s e ( m e a s u r e d by th e w h o le sa le cost e x c lu d in g s h ip p in g a n d p a c k a g in g costs ) does not e xceed $5, e x ce p t th a t the v a lu e or w h o lesale cost may be not more th a n $10 if the am ount of the d e p o s it is $5,000 o r more . Any q u e s ti o n s on this m a tte r should be d i r e c t e d to the Bank S u p e r vision a n d Regulations D e p artm en t, C o n su m e r Affairs Section, a t Ext. 6171 o r 6181. S in c e r e ly y o u r s , R obert H . Boykin F i r s t Vice P r e s i d e n t Attachment 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 00-527-4970 (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) BDARD DF GOVERNORS □ F THE FEDERAL RESERVE SYSTEM W ASHINGTON, D. C. 20551 AD D R ESS OFFICIAL TO THE C O R R E S P O N D E N C E BOARD Dear The Board of Governors has considered your request concerning the prepayment of interest on deposits. Your letter indicates that your bank has sponsored deposit programs in which the bank prepays interest to the depositor in the form of merchandise. In determining the maximum amount of interest that may be prepaid, the bank wishes to calculate the amount that may be paid without discounting the interest to its present value. You request the Board's permission to compute interest in this manner. This request is based, in part, on the inability of a depositor to readily sell the merchandise received in order to reinvest the proceeds. After consideration of the views expressed in your letter, the Board remains of the opinion that under Regulation Q (12 CFR 217), a member bank is required to discount the amount of interest it may pay to its present value regardless of whether the amount is prepaid in the form of merchandise or cash. The Board also has determined that reasonable expenses associated with shipping costs and sales tax generally need not be taken into consideration in determining the maximum amount of interest that may be paid under Regulation Q. Paragraph 3365 of the Board's Published Interpretations (12 CFR 217.149) provides that the maximum amount of interest that may be prepaid by a member bank cannot exceed the aggregate amount of interest that could have been paid on the deposit at maturity computed at the applicable maximum rate. The interpretation indicates that the amount the depositor receives at maturity of the time deposit may not exceed the amount actually placed with the bank (the face amount less the amount of prepaid interest) plus interest at the applicable maximum rate for the life of the deposit. The Board is of the view that this principle should apply regardless of whether interest is prepaid in the form of cash or merchandise. To permit a member bank to pay interest in an amount th at exceeds the present value of the future interest would result in the bank paying interest in excess of the maximum permitted by Regulation Q since the depositor would be receiving the same amount of interest at the time the deposit is made as he would have earned if interest had been paid at maturity. The Board sees no valid basis for distinguishing between interest prepaid in the form of merchandise or cash. If such a distinction were authorized, a member bank that prepays interest in the form of merchandise could have a substantial competitive advantage over a financial institution that prepays interest in the form of cash since the member bank could provide merchandise that has a higher cash value than the interest that is actually prepaid in cash. Accordingly, the Board finds no reasonable basis for permitting such a special exception for merchandise programs. As a result, in the future all programs conducted by your bank th at involve the prepayment of interest in the form of merchandise should provide for discounting of interest payable to its present value. In order to promote a uniform position for all commercial banks, we are informing the Federal Deposit Insurance Corporation and the Comptroller of the Currency of this determination. Very truly yours, (signed) Griffith L. Garwood Griffith L. Garwood Deputy Secretary of the Board
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