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F ederal R eserve Ban k o f D allas D ALLAS. TE X A S 75222 Circular No. 82-143 N ovem ber 3, 1982 REGULATION Q INTEREST ON DEPOSITS Interp retatio n TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has issued an interpretation, effectiv e O ctober 18, 1982, of Regulation Q concerning the term s under which a member bank may make a loan upon the security of a tim e deposit. Under the in terpretation, a member bank must charge an in terest ra te on the loan of a t least one percentage point above the annual e ffectiv e ra te being paid on the tim e deposit. A ttached are copies of the Board's press release and the m aterial as subm itted for publication in the Federal R eg ister. Questions regarding the m aterial contained in this circular should be directed to this Bank's Legal D epartm ent, Extension 6171. Additional copies of this circular will be furnished upon request to the D epartm ent of Communications, Financial and Community A ffairs, Extension 6289. Sincerely yours, William H. Wallace First Vice President Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (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) FEDERAL RESERVE press release For immediate release October 20, 1982 The Federal Reserve Board today announced an interpretation of its Regulation Q — Interest on Deposits — stating that loans made upon the security of a time deposit must be made at an interest rate at least one percentage point higher than the effective interest rate being paid upon the time deposit. This means that the effect of compounding on the rate of interest paid on the time deposit must be taken into account in determining the minimum rate that must be charged for a loan for which the time deposit is security. The interpretation is applicable to loans secured by a time deposit that are made, extended or renewed on or after October 18, 1982, or agreements for such loans entered into on or after October 18, 1982. Attachment FEDERAL RESERVE SYSTEM REGULATION Q [12 CFR Part 217] [Docket No. R-0425] INTEREST ON DEPOSITS Loan Upon the Security of a Time Deposit AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final interpretation. SUMMARY: The Board of Governors has adopted an interpretation of Regula tion Q— Interest on Deposits (12 CFR Part 217) concerning the terms under which a member bank may make a loan upon the security of a time deposit. Under the interpretation, a member bank, in making a loan to a depositor upon the security of his or her time deposit, must charge an interest rate on the loan of at least 1 percentage point above the annual effective rate being paid on the time deposit. EFFECTIVE DATE: October 18, 1982. FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Associate General Counsel (202/452-3625), Paul S. Pilecki, Senior Attorney (202/452-3281), or Beverly A. Belcamino, Legal Assistant (202/452-3623), Legal Division, Board of Governors of the Federal Reserve System, Washington, D. C. List of Subjects in 12 CFR Part 217 Advertising; Bank, banking; Federal Reserve System; Foreign banking. SUPPLEMENTARY INFORMATION: Effective October 18, 1982, pursuant to its authority under section 19 of the Federal Reserve Act (12 U.S.C. §§ 371a, 371b, 461(a)), the Board amends Regulation Q (12 CFR Part 217) by adding a new section 217.160 as follows: § 217.160— Loan Upon the Security of a Time Deposit (a) Section 217.4(f) of Regulation Q (12 CFR § 217.4(f)) provides that a member bank may make a loan to a depositor upon the security of his or her time deposit as long as the rate of interest on the loan is at least 1 percentage point above the rate being paid on the deposit. The purpose of this provision is to ensure that the rules regarding the maintenance of interest rate ceilings are not violated, including rules that require penalties for early withdrawals of time deposits. - 2 - (b) Effective October 5, 1982, the Board amended Regulation D— Re serve Requirements of Depository Institutions (12 CFR Part 204) to define as transaction accounts, time deposits issued in connection with an arrangement that permits the depositor to obtain credit, directly or indirectly, through the drawing of a check, draft or similar device that can be used for the purpose of making payments or transfers to third persons or others. (47 Federal Register 44992) In considering this amendment, the Board concluded that some of these arrangements are structured using a loan secured by a time deposit with terms pro viding for interest on the loan to be charged at 1 percentage point over the annual simple rate being paid on the deposit when the effective rate on the deposit is higher due to the effects of compounding. For example, after daily compounding on a 365/360 basis, a 12 per cent annual simple rate being paid on a deposit results in an annual effective rate of 12.935 per cent. This result has the effect of minimizing the impact of the required 1 percentage point differential. In order to preserve the effectiveness of § 217.4(f) of Regulation Q, the Board believes the interest rate charged (on an annual basis) on a loan secured by a time deposit must be at least 1 percentage point above the annual effective rate paid on the time deposit, taking into account the effects of compounding of the interest on the deposit. Thus, in the example, provided above, the minimum annual rate that may be charged on a loan secured by the time deposit would be 13.935 per cent, which is 1 per centage point above the 12.935 annual effective rate being paid on the deposit. The Board has been advised that a similar position has been adopted by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board. (c) In order not to disadvantage depositors who currently have such loans outstanding or agreements for such loans, this interpre tation is applicable to loans secured by a time deposit that are made, extended or renewed on or after October 18, 1982, or agreements for such loans entered into on or after October 18, 1982. By order of the Board of Governors, October 18, 1982. tsigned) William W. Wiles William W. Wiles Secretary of the Board [SEAL]
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