The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FED ER A L RESERVE BANK OF NEW YORK No. 8227n [ Circular November 30, 1977 J AMENDMENTS TO REGULATION Q Reduction of Minimum Rate of Interest on Loans Secured by Time and Savings Deposits To A ll Member Banks, and Others Concerned, in the Second Federal Reserve District: The following statement was issued by the Board of Governors of the Federal Reserve Sys tem in connection with amending its Regulation Q, “ Interest on Deposits” : The Board of Governors of the Federal Reserve System today announced that it has lowered the mini mum rate of interest that must be paid on a loan secured by a depositor’s time or savings deposit at a member bank. The Regulation Q rule for such loans has required that the interest rate on loans using as collateral a time deposit, or a savings deposit for which prior notice of withdrawal is required, may not be less than 2 per cent above the rate being paid on the deposit. Effective immediately [November 23, 1977], Regulation Q has been amended to provide that the mini mum rate such borrowers must pay is 1 per cent above the rate being paid on the deposit. A minimum borrowing rate is set on such loans to avoid the use of loans to in effect withdraw time de posits before maturity without incurring the penalty for early withdrawal (loss of 90 days’ interest and reduc tion of interest on the amount withdrawn to the passbook rate— 5 per cent at commercial banks— for the period the amount was held in the time deposit). The reduced minimum applies to future interest payments on outstanding loans, as well as to new loans. It is anticipated that the Federal Deposit Insurance Corporation will take similar action in the near future with respect to financial institutions the Corporation supervises. /> Enclosed is a copy of the amendments. Questions thereon may be directed to our Consumer Affairs Division (Tel. No. 212-791-5919). P a u l A. V olcker , President. Board of Governors of the Federal Reserve System INTEREST ON DEPOSITS A M E N D M E N T S TO R E G U L A T IO N Q A G E N C Y : Board of Governors of the Fed eral Reserve System. A C T IO N : Final rule. S U M M A R Y : This rule amends the provi sions contained in sections 217.4(f) and 217.5(b) of Regulation Q (12 CFR 217) con cerning loans upon the security of a depositor’s time and savings deposits. Sections 217.4(f) and 217.5(b) of the Board’s Regulation Q cur rently provide that a member bank may make a loan to a depositor upon the security of the de positor’s time or savings deposit maintained in that member bank provided that the rate of interest on such loan is not less than 2 percent per annum in excess of the rate of interest on the deposit. In the case of loans secured by sav ings deposits, the 2 percent differential require ment applies only if it is the practice of the member bank to require prior notice of with drawal of savings deposits. Under the regula tion as amended, member banks will be per mitted to make loans to depositors secured by depositors’ time or savings deposits maintained in that member bank at a rate of interest not less than i percent per annum in excess of the rate of interest on the time or savings deposits. E FF E C T IV E D A T E : November 23, 1977. FOR FURTHER IN FORM ATION , C O N T A C T : Anthony F. Cole, Attorney, Legal Division, Board of Governors of the Federal Reserve System, Room M-3421, Washington, D.C. 20551 (202-452-3711). SU PPLEM ENTARY I NFORMATI ON: Section 217.4(f) of Regulation Q (12 CFR 217) currently permits a member bank to make a loan to a depositor on the security of the de positor’s time deposit only when the interest rate charged for the loan is at least 2 percent higher than the rate of interest paid on the de positor’s time deposit. Section 217.5(b) of Regulation Q contains a similar provision ap plicable to loans secured by savings deposits with respect to which it is the practice of the member bank to require prior notice of with drawal. (It should be noted that this require ment does not apply when a member bank ex tends a loan to a person secured by the person’s time or savings deposit in another institution.) For depositors faced with a need for time de posit funds, a loan secured by the depositor’s time deposit is generally a less expensive alter native than a premature withdrawal subject to the interest forfeiture penalty contained in sec tion 217.4(d) of Regulation Q. The purpose of the current 2 percent dif ferential requirement is to ensure compliance with statutory prohibitions contained in section 19 of the Federal Reserve Act (12 U.S.C. §§ 371a and 371b) against the payment of in terest on demand deposits and the payment of time deposits before maturity except upon such conditions and in accordance with such rules and regulations as the Board may prescribe. The 2 percent differential requirement assists in preventing evasions of the above statutory provisions since a loan extended at the same rate being paid on the time or savings deposit would be tantamount to payment of the time or savings deposit before maturity or prior to the expiration of a required notice period. In this connection, the Board believes that a 1 percent loan differential requirement is sufficient to en sure compliance with the underlying statutory provisions and, accordingly, has amended sec tions 217.4(f) and 217.5(b) to reduce the cur rent 2 percent loan differential requirement to 1 percent. These amendments apply to outstand ing loans made by member banks that are se cured by a depositor’s time or savings deposits. ( over) For this Regulation to be complete, retain: 1) Regulation Q pamphlet, effective December 4, 1975. 2 ) Amendments effective March 1, 1976, July 26, 1976, November March 24, 1977, July 6 , 1977, and December 1, 1977. 3 ) Supplement effective December 4 , 1975. 4 ) This slip sheet. [Enc. Cir. No. 8227] P R IN T E D I N N E W YORK 8, 1976 The Board notes that these amendments gen erally conform the Board’s rules to the rules applicable to Federally insured savings and loan associations promulgated by the Federal Home Loan Bank Board. In view of the substantial public benefits that will immediately result from adoption of these amendments which reduce the minimum rate of interest that a member bank must charge on loans to depositors secured by time and savings deposits, and, in view of the fact that these amendments relieve existing regulatory restric tions, the Board has determined that the notice and public participation requirements of 5 U.S.C. § 553 are unnecessary and contrary to the public interest and that the deferred effec tiveness provisions of that section are inapplic able. Therefore, pursuant to sections 19(i) and 19(j ) of the Federal Reserve Act (12 U.S.C. §§ 371a and 371b), section 217.4(f) and the second sentence of section 217.5(b) of Regula tion Q, effective November 23, 1977, are amended to read as follow s: SECTION 217.4— P A Y M E N T OF TIM E D EPO SITS BEFORE M A T U R IT Y ♦ * * Loans upon security of time deposits. (f) A m e m b e r b a n k m a y m a k e a lo a n to th e d ep o sito r u p o n th e secu rity o f his tim e d ep o sit p ro v id e d th at th e rate o f interest on such lo a n sh a ll b e n o t less th a n 1 p e r cen t p er a n n u m in excess o f th e rate o f interest on th e tim e d ep o sit. SECTION 217.5— W IT H D R A W A L OF SAVIN G S D E PO SITS * * * Loans on security of savings deposits. (b ) * * * I f it is th e p ra ctice o f a m e m b e r b a n k to re q u ir e n o tice o f w ith d ra w a l o f a sav ings d ep o sit, su ch h a n k m a y m a k e loa n s to a d ep o sito r u p o n th e secu rity o f such d e p o sit, b u t th e rate o f in terest o n such loan s sh a ll b e n o t less th a n 1 p erce n t p e r a n n u m in excess o f th e rate o f in terest p a id on su ch d ep o sit.
@FedFRASER