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federal reserve

Ba n k

DALLAS, TEXAS

of

Dallas

75222

Circular No. 80-98
M a y 20, 1980

TITLE 12 - CHAPTER XII - INTEREST ON DEPOSITS
Proposed Prohibition of Premiums on Deposits;
Penalty-free Withdrawal of Interest Earned During a Preceding
Maturity; Payment of Interest on Funds Withdrawn Not
More Than Seven Days After a Maturity Date

TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Depository Institutions Deregulation Committee, created by the
Depository Institutions Deregulation and Monetary Control Act of 1980, has the
authority to make rules and set interest rate ceilings on deposits of commercial
banks, mutual savings banks, and savings and loan associations. In its first action,
the Committee issued a proposal to prohibit any premiums or gifts given by an
institution for opening a new account or adding to an existing account. The
Committee proposed to limit any finder's fees to third parties to cash payments
and to regard any such fee as interest to the depositor. Interested parties are
invited to submit comments by June 16, 1980, to Norman R. V. Bernard,
Executive Secretary, Depository Institutions Deregulation Committee, Federal
Reserve Building, 20th Street and Constitution Avenue, N. W., Washington, D.C.
20551.
In other actions, the com m ittee adopted the following two rules,
effective May 6, 1980:
1.

If a time deposit is renewed automatically on the same term s
(including at the same ra te of interest), interest earned during
the preceding term or term s as well as interest being earned
during the new m aturity period may be paid at any time during
the new m aturity period without penalty, unless an agreement
provides otherwise.

2.

Depository institutions now may provide in their time deposit
contracts for the payment of interest on funds withdrawn not
more than seven days after a m aturity date.
Payment of
interest on the funds withdrawn may be a t the originally
specified contract rate, or at a lower specified contract ra te as
long as the rate specified is not less than the authorized savings
deposit rate for that institution.

Banks and others are encouraged to use the following incoming W ATS 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)

Enclosed are copies of a press release and Federal Register notice
regarding the composition of the Deregulation Committee and the actions taken.
Member banks should keep a copy of this circular and place it with the
Regulation Q section of their Regulations Binders.
Questions concerning the action taken should be directed to the
Consumer Affairs Section of the Bank Supervision and Regulations Department,
Ext. 6171.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosures

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PRESS RELEASE
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION FEDERAL HOME LOAN BANK BOARD
FEDERAL RESERVE BOARD_____________ NATIONAL CREDIT UNION ADMINISTRATION_____________ TREASURY DEPARTMENT

For immediate release

May 7, 1980

The Depository Institutions Deregulation Committee today announced
that at its first meeting it elected Paul A. Volcker, Chairman of the Federal
Reserve Board, as its Chairman.

Irvine H. Sprague, Chairman of the Federal

Deposit Insurance Corporation, was named Vice Chairman.
The Committee was created by the Depository Institutions Deregulation
and Monetary Control Act of 1980, signed on March 31.

Title II of that Act

transferred to the newly formed Committee the authority to set interest rate
ceilings on deposits of commercial banks, mutual savings banks and savings and
loan associations.

The Committee's assignment under the Act is to provide for

the orderly phase-out of interest rate ceilings over a six-year period and
eventually to provide depositors with a market rate of return on their savings.
Members of the Comnittee are the Secretary of the Treasury and the
chairmen of the Federal Reserve Board, Federal Deposit Insurance Corporation,
Federal Home Loan Bank Board and the National Credit Union Administration Board.
The Comptroller of the Currency serves as a nonvoting member.
In its first substantive action, the Committee requested comment by
June 16 on a proposal to prohibit any premiums or gifts given by an institution
upon the opening of a new account or an addition to an existing account.

Premiums

are now limited to $5 (at wholesale, exclusive of packaging and shipping costs)
for deposits of less than $5,000 and to $10 for deposits of $5,000 or more.
In addition, the Committee proposed to limit any finder's fees to third
parties to cash payments and to regard any finder’s fees as interest to the
depositor.

Comment was requested on this proposal, also by June 16.

In other actions, the Committee:
1.

Adopted a final rule, effective May 6, that permits a depositor

to withdraw at any time without penalty all interest earned on a time deposit
that was renewed automatically on the same terms as the original deposit.

This

will bring rules of the FDIC and the Federal Reserve into conformity with those
of the Federal Home Loan Bank Board.
2.

Adopted a final rule, also effective May 6, authorizing institutions

to pay interest on certificates of deposit for up to seven days after the maturity
date.

At present, the Federal Home Loan Bank Board permits savings and loan

associations to pay interest for up to 10 days after a certificate matures (7 days
for the 26-week money market certificate).

The FDIC and Federal Reserve have no

parallel ruling.
The National Credit Union Administration is expected to take actions
similar to the final rules adopted by the Committee.
In other organizational matters, the Committee selected the following
members of its permanent staff:
As general counsel, Neal L. Petersen, general counsel of the Federal
Reserve Board; as Executive Secretary, Normand R. V. Bernard, Special Assistant
to the Federal Reserve Board; and as Policy Director, Edward C. Ettin, Deputy
Staff Director in the Office of Staff Director for Monetary and Financial Policy
at the Federal Reserve.
Federal Reserve Board.

The permanent offices of the Committee will be at the

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 CFR Part 1204]
(Docket No. D-0004)
Notice of Proposed Rulemaking
Premiums# Finders Fees, and the Payment of Interest in Merchandise

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Proposed rules.

SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
proposes to adopt a rule concerning the offering of premiums or gifts
by depository institutions. Under the proposed rule, the giving to
a depositor of a premium or gift (whether in the form of cash or merchandise)
by an institution associated directly with the receipt of a deposit
would be prohibited.
In addition, finders fees paid to third parties
would be regarded as the payment of interest to the depositor and would
be required to be paid only in cash. The Committee also is considering
adoption of a proposed rule that would require that all interest paid
on a deposit be paid only in the form of cash or a credit to a deposit
account.
This rule would have the effect of eliminating programs, currently
authorized under Federal Reserve and FDIC rules, in which interest is
prepaid in the form of merchandise.
DATES:

Comments must be received by June 16, 1980.

ADDRESS:
Interested parties are invited to submit written data, views
or arguments regarding the proposed rules to Normand R. V. Bernard,
Executive Secretary, Depository Institutions Deregulation Committee,
Federal Reserve Building, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551.
FOR FURTHER INFORMATION CONTACT: F. Douglas Birdzell, Senior Attorney,
Federal Deposit Insurance Corporation (202/389-4324), Anthony F. Cole,
Senior Attorney, Board of Governors of the Federal Reserve System (202/452­
3612), P. Allan Schott, Attorney, Treasury Department (202/566-6798) ,
John Hall, Attorney, Federal Heme Loan Bank Board (202/377-6466), or
Debra Chong, Attorney, Office of the Comptroller of the Currency (202/447­
1633) .
SUPPLEMENTARY INFORMATION: Under the current rules of the Board of
Governors of the Federal Reserve System ("Federal Reserve"), the Federal
Deposit Insurance Corporation ("FDIC"), and the Federal Heme Loan Bank
Board ("FHLBB"), a premium given to a depositor upon the opening of
a new account or an addition to an existing account is not regarded
as the payment of interest if the cost of the premium (excluding shipping
and packaging costs) does not exceed $5 for deposits of less than $5,000
and $10 for deposits of $5,000 or more, and the premium is not given
on a recurring basis to the same individual.

-2-

In recent months, the attention of the Federal financial institutions
regulatory agencies has beeln directed to possible circumvention of interest
rate limitations through the use of premiums to induce deposits and
finders fees paid to a person who introduces a depositor to an institution.
Such programs require a substantial amount of examiner time investigating
complaints and reviewing compliance.
The current premium rule was adopted
by the agencies in 1970 in order to establish what constituted a de minimis
gift that would not be regarded as the payment of interest.
It was
intended that the rule would clarify this matter and reduce time spent
by the agencies in reviewing individual programs.
However, in practice
the rule is difficult to enforce because it can be circumvented by attributing
an inflated portion of the total cost of the premium to shipping and
packaging, rather than to the direct wholesale cost of the premium.

In a d d i t i o n , sane i n s t i t u t i o n s may have been b i l l e d a t an average c o s t
fo r a group o f d i f f e r e n t it e m s , th u s e n a b lin g th e i n s t i t u t i o n s t o p r o v id e
premiums th a t would o t h e r w is e e x c e e d th e l i m i t a t i o n s . C o n seq u en tly ,
th e e x i s t i n g r u l e does n o t appear t o have s e r v e d i t s o r i g i n a l p u rp ose.
Finders fees, whether in the form of cash or merchandise,
are fees paid to a person who introduces a depositor to an institution.
The finders fee is typically related to the size of the deposit received
by the institution. Under the current rules of the FHLBB, the cost
of any premiums given to a depositor and finders fees given to a third
party are regarded as the payment of interest if in excess of $5 for
deposits of less than $5,000 and $10 for deposits of $5,000 or more.
The rules of the FDIC and Federal Reserve do not restrict the use of
finders fees paid to third parties.
However, if any portion of the
fee is passed on to the depositor or a member of the depositor's household,
it is regarded as additional interest on the deposit.
Recently banks have increased use of finders fees to attract
deposits.
There are indications that finders fees are being employed
to avoid current premium limitations and that seme or all of such fees
may go to the depositor.
To the extent that such a practice occurs,
it results in a circumvention of interest rate ceilings.
In view of these considerations, the Committee is considering
adoption of a rule that would prohibit the giving to a depositor of
a premium or gift (whether in the form of cash or merchandise) upon
the opening of a new account or an addition to an existing account.
The Canmittee also is considering adoption of a rule that would require
that all finders fees be paid only in cash and that would regard such
fees as the payment of interest to the depositor for the purpose of
deposit rate ceilings. With reference to finders fees, comment specifically
is requested on the extent to which such fees are passed on to or shared
with depositors and procedures utilized to ensure that such fees are
not passed on to depositors.

-3-

Comment also is requested on alternatives to prohibiting
the use of premiums.
The Committee also is considering adoption of a rule that
would require that all interest paid on a deposit be paid only in the
form of cash or a credit to a deposit account.
The Committee believes
that this rule would benefit consumers by making the amount of interest
paid on a deposit explicit, thus facilitating comparisons by depositors
and reducing potential customer confusion as to the actual return earned
on a deposit.
This rule would have the effect of eliminating programs,
currently authorized under FDIC and Federal Reserve rules, in which
interest is prepaid in the form of merchandise. Comment also is requested
on whether the prepayment of interest in cash should be prohibited.
All comments and information on these proposals should be
submitted to the Executive Secretary, Depository Institutions Deregulation
Committee, Federal Reserve Building, 20th Street and Constitution Avenue,
N.W., Washington, D.C. 20551, to be received by June 16, 1980. Material
submitted will be made available for inspection and copying upon request
except as provided in section 1202.5 of the Committee's Rules Regarding
Availability of Information (12 CFR 1202.5).
By order of the Committee, May 6, 1980.

(signed) Normand R. V. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]

TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D-0005]
PART 1204— INTEREST ON DEPOSITS

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Final rule.

SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has adopted a final rule concerning the treatment of interest earned
on time deposit funds for purposes of the early withdrawal penalty.
The rule applies to all commercial banks, mutual savings banks, and
savings and loan associations subject to the authorities conferred by
section 1 9 (j) of the Federal Reserve Act, section 18(g) of the Federal
Deposit Insurance Act and section 5B(a) of the Federal Home Loan Bank
Act. Under previously adopted rules of the Board of Governors of the
Federal Reserve System ("Federal Reserve"), the Federal Deposit Insur­
ance Corporation ("FDIC"), and the Federal Home Loan Bank Board ("FHLBB"),
such institutions may permit a depositor to withdraw interest earned
on a time certificate of deposit or account at any time before maturity
without imposition of an early withdrawal penalty.
In addition, how­
ever, the FHLBB procedures provides that if the time certificate of
deposit or account is automatically renewed on the same terms and con­
ditions, an institution may pay the interest earned during the preceding
term as well as during the renewal term without imposition of an early
withdrawal penalty.
The rule adopted by the Committee conforms the
previously adopted rules of the Federal Reserve and the FDIC to that
of the FHLBB.
EFFECTIVE DATE:

May 6, 1980.

FOR FURTHER INFORMATION CONTACT: Anthony F. Cole, Senior Attorney,
Federal Reserve (202/452-3612), F. Douglas Birdzell, Senior Attorney,
FDIC (202/389-4324), P. Allan Schott, Attorney, Treasury Department
(202/566-6798), John Hall, Attorney, FHLBB (202/377-6466), or Debra
Chong, Attorney, Office of the Comptroller of the Currency (202/447­
1633) .
SUPPLEMENTARY INFORMATION:
Under the rules and regulations of the
Federal Reserve and the FDIC, federally insured commercial banks and
mutual savings banks are permitted to pay the interest earned on a time
deposit at any time during the initial term of the deposit, irrespective
of the method used to compound or credit (post) interest to the depositor's
account.
However, where a time deposit is renewed upon maturity, the

-2-

interest earned to the date of renewal, unless withdrawn, is regarded
as principal and is thereafter subject to early withdrawal restrictions,
including the interest forfeiture penalty imposed upon the premature
withdrawal of time deposit funds, specified in 12 C.F.R. §§ 217.4 and
329.4. Under FHLBB procedures there is a similar provision that in­
terest earned on a certificate account may be paid at any time without
penalty.
The FHLBB's procedures, however, also provide that where a
certificate account is automatically renewed on the same terms and conditions
(including at the same rate of interest), the interest earned during
the first maturity period does not merge with the principal, unless
the deposit contract specifies otherwise. Consequently, where a certificate
account is automatically renewed on the same terms and conditions, a
savings and loan association subject to the jurisdiction of the FHLBB
may pay the interest earned during the preceding term as well as during
the renewal term without imposition of the early withdrawal penalty
specified in 12 C.F.R. § 526.7(a).
The Committee believes that in the interests of competitive
equality, the rules regarding penalty-free withdrawal of interest should
be uniform for all depository institutions.
In this regard, the Com­
mittee has determined to adopt the current position of the FHLBB.
In
view of the fact that depositors at commercial banks are being disad­
vantaged by the current rules and in view of the need to facilitate
the equitable administration of currently prescribed deposit interest
rate regulations as soon as possible, the Committee finds that appli­
cation of the notice and public participation provisions of 5 U.S.C.
§ 553 to this action would be contrary to the public interest and that
good cause exists for making this action effective immediately.
Pursuant to its authority under section 203(a) of the
Depository Institutions Deregulation and Monetary Control Act of 1980
(Public Law 96-221), to prescribe rules governing the payment of in­
terest and dividends on deposits of federally insured commercial banks,
savings and loan associations and mutual savings banks, effective May 6,
1980, the Committee adopts a final rule as follows:
SECTION 1204 - INTEREST ON DEPOSITS
§ 1204.101— Withdrawal of Interest
A depository institution subject to the authorities conferred
by section 19(j ) of the Federal Reserve Act (12 U.S.C. 371b), section 18(g)
of the Federal Deposit Insurance Act (12 U.S.C. 1828(g), or section 5B(a)
of the Federal Home Loan Bank Act (12 U.S.C. 1425b(a)) may permit a
depositor to withdraw interest credited to a time certificate of deposit
or account during any term at any time during such term without penalty.
If the deposit or account is renewed automatically on the same terms
(including at the same rate of interest), interest during the preceding
term or terms as well as the renewal term may be paid at any time during

-3-

the renewal term without penalty, unless the deposit agreement specif­
ically provides otherwise.
If the rate of interest paid during the
renewal term or the maturity period of the renewal term is different,
interest in the account at the commencement of the renewal term shall
be treated as principal and only interest for the renewal term may be
paid at any time without penalty during such term.
By order of the Committee, May 6, 1980.

(Signed)

Normand R. V. Bernard

Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]

TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D-0006]
PART 1204— INTEREST ON DEPOSITS

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Final rule.

SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has adopted a final rule concerning the payment of interest on time
certificates of deposit.
The rule applies to all commercial banks,
mutual savings banks, and savings and loan associations subject to the
authorities conferred by section 1 9 (j) of the Federal Reserve Act, sec­
tion 18(g) of the Federal Deposit Insurance Act, and section 5B(a) of
the Federal Home Loan Bank Act.
The rule permits such institutions
to continue to pay interest on time deposits funds at the originally
agreed upon contract rate for up to seven days after a maturity date.
EFFECTIVE DATE:

May 6, 1980.

FOR FURTHER INFORMATION CONTACT: Anthony F. Cole, Senior Attorney,
Federal Reserve (202/452-3612), F. Douglas Birdzell, Senior Attorney,
FDIC (202/389-4324), P. Allan Schott, Attorney, Treasury Department
(202/566-6798), John Hall, Attorney, FHLBB (202/377-6466), or Debra
Chong, Attorney, Office of the Comptroller of the Currency (202/447­
1633) .
SUPPLEMENTARY INFORMATION: Under procedures previously adopted by the
Federal Home Loan Bank Board ("FHLBB"), a savings and loan association
whose accounts are insured by the FSLIC may provide in its time deposit
contracts that interest will be paid on funds withdrawn not more than
ten days after a maturity date.
If such a ten-day "grace" period is
included, interest must be paid on funds withdrawn during the ten-day
period at the originally specified contract rate or any other lower
rate specified in the contract.
However, in no event may the association
specify a rate less than the current rate paid on regular savings ac­
counts. With respect to 26-week money market certificates, a sevenday, rather than a ten-day period, may be included in the deposit con­
tract.
The "grace" period applies only to certificate accounts that
are automatically renewable, and inclusion of such a period in the de­
posit contract is at the option of the association.
No similar pro­
vision is contained in the rules of the Board of Governors of the Federal
Reserve System ("Federal Reserve") and the Federal Deposit Insurance

-2-

Corporation ("FDIC"). Under current Federal Reserve and FDIC regulations,
a withdrawal of funds from a time deposit within seven to ten days of
a renewal is regarded as an early withdrawal subject to the early withdrawal
penalty, and the depositor forfeits all interest earned on the funds
during that seven to ten day period.
The Committee believes that this discrepancy between the
regulatory restrictions applicable to banks and savings and loan as­
sociations disadvantages depositors at banks.
In this regard, the Committee
has determined to adopt a uniform rule for all depository institutions.
The rule provides that all depository institutions may provide in their
time deposit contracts for the payment of interest on funds withdrawn
not more than seven days after a maturity date.
If a depository institution
includes such a provision in its time deposit contract, the institution
must pay interest on the funds withdrawn during the seven-day period
at the originally specified contract rate. An institution may specify
in the time deposit contract that interest will be paid at any other
lower rate.
However, in n o ’event may the rate specified be less than
the current rate paid on regular savings accounts by the institution.
The rule applies to single maturity time deposits as well as to time
deposits that are automatically renewable.
In view of the fact that depositors at commercial banks are
being disadvantaged by the current rules and in view of the need to
facilitate the equitable administration of currently prescribed interest
rate regulations as soon as possible, the Committee finds that appli­
cation of the notice and public participation provisions of 5 U.S.C.
§ 553 to this action would be contrary to the public interest and that
good cause exists for making this action effective immediately.
Pursuant to authority under section 203(a) of the Depository
Institutions Deregulation and Monetary Control Act of 1980 (Public Law
96-221), to prescribe rules governing the payment of interest and div­
idends on deposits of federally insured commercial banks, savings and
loan associations and mutual savings banks, effective May 6, 1980, the
Committee adopts a final rule as follows:
SECTION 1204 - INTEREST ON DEPOSITS
§ 1204.102— Payment of Interest on Time Deposits.
A depository institution subject to the authorities conferred
by section 19(j ) of the Federal Reserve Act (12 U.S.C. 371b), section 18(g)
of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)), or section 5B(a)
of the Federal Home Loan Bank Act (12 U.S.C. 1425b(a)), may provide

in any time deposit contract that if the deposit or any portion thereof
is withdrawn not more than seven days after a maturity date, interest
will be paid thereon at the originally specified contract rate. An
institution may specify in the time deposit contract that interest will
be paid at any other lower rate. However, in no event may the rate
specified be less than the current rate paid on regular savings accounts
by the institution.
By order of the Committee, May 6, 1980.

(Signed)

Normand R. V. Bernard

Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]