Skip to main content

Board Rulings and Staff Opinions Interpreting Regulation D

2-310

AFFECTED INSTITUTIONS—Building and Loan Association

A building and loan association chartered under a state law considering it to be a savings and loan association appears to be eligible to make application for federal deposit insurance even though it is open only one day a week. Section 103 of the Monetary Control Act defines a “depository institution” as any institution that is eligible to make application for federal deposit insurance. Therefore, such an association is subject to federal reserve requirements under Regulation D; however, Regulation D exempts smaller institutions from some (or all) reporting and reserve maintenance requirements. STAFF OP. of Nov. 3, 1980.
Authority: FRA § 19(b), 12 USC 461(b); National Housing Act § 403, 12 USC 1726; 12 CFR 204.1(c)(1)(V) and 561.1.

2-310.1

AFFECTED INSTITUTIONS—Nebraska Cooperative Credit Associations

Since the National Credit Union Administration has stated that Nebraska “cooperative credit associations” are not eligible to apply for federal deposit insurance even though they resemble credit unions, the associations are not depository institutions for purposes of Regulation D. Section 103 of the Monetary Control Act defines a “depository institution” as any institution that is eligible to make application for federal deposit insurance. STAFF OP. of Feb. 10, 1981.
Authority: FRA § 19(b), 12 USC 461(b); Federal Credit Union Act § 101, 12 USC 1752; 12 CFR 204.1(c).

2-310.11

AFFECTED INSTITUTIONS— Institution Outside United States

Regulation D does not apply to a depository institution located outside the United States; thus, such an institution is not required to report deposits to or maintain reserves with the Federal Reserve. STAFF OP. of July 17, 1981.
Authority: 12 CFR 204.1.

2-310.12

AFFECTED INSTITUTIONS—Member Deposits with Nonmember Institutions

Before the passage of the Monetary Control Act, a member bank could not deposit more than 10 percent of its capital and surplus in a nonmember depository institution. Section 105(e) of the Monetary Control Act amended section 19(e) of the Federal Reserve Act to provide that a member bank could not deposit more than 10 percent of its capital and surplus in any depository institution that is not authorized to have access to Federal Reserve advances under section 10(b) of the Federal Reserve Act (12 USC 347b). Section 103 of the Monetary Control Act amended the Federal Reserve Act to provide in section 19(b)(7) that “[a]ny depository institution in which transaction accounts or nonpersonal time deposits are held shall be entitled to the same discount and borrowing privileges as member banks.” This provision is regarded as providing nonmember depository institutions that possess reservable transaction accounts and nonpersonal time deposits with access to the Federal Reserve discount window. Indeed, the sole purpose of the amendment to section 19(e) was to enable member banks to keep on deposit with nonmembers that have access to the Federal Reserve’s discount window any amount so desired. Consequently, a member bank may maintain more than 10 percent of its capital and surplus in a nonmember institution that has reservable transaction accounts or nonpersonal time deposits. STAFF OP. of Aug. 6, 1981.
Authority: FRA §§ 19(b)(7) and 19(e), 12 USC 461(b)(7) and 463.

2-310.13

AFFECTED INSTITUTIONS— Cooperative Insurance Corporation

A credit union, operated as a cooperative insurance corporation under state law, that insures state-chartered credit unions is exempt from reporting and maintenance requirements of Regulation D because it is ineligible to apply for federal insurance. If a credit union of such standing acquires federal share insurance, it must comply with the reporting and maintenance requirements of Regulation D. STAFF OP. of Dec. 22, 1981.
Authority: FRA § 19(b)(1)(A)(iv), 12 USC 461(b)(1)(A)(iv); 12 CFR 204.1(c)(iii).

2-310.14

AFFECTED INSTITUTIONS—Rhode Island Loan and Investment Banks

In 1981, the Rhode Island legislature amended its law to classify loan and investment companies chartered under Rhode Island law as loan and investment banks. As a result, the FDIC has concluded that a loan and investment bank in Rhode Island is eligible to apply to the FDIC to become an insured bank under section 5 of the Federal Deposit Insurance Act. Section 103(b)(1)(A)(i) of the Monetary Control Act of 1980 defines “depository institution” to mean a bank that is eligible to apply to become an insured bank under section 5 of the Federal Deposit Insurance Act. Section 103(b)(2) of the Monetary Control Act requires every depository institution to maintain reserves against its transaction accounts and nonpersonal time deposits in accordance with the Board’s regulations. Since the FDIC now regards loan and investment banks in Rhode Island as eligible to apply for federal deposit insurance, such institutions are depository institutions under the Monetary Control Act and are now required to file reports and maintain reserves in accordance with the Monetary Control Act and Regulation D. STAFF OP. of Jan. 18, 1982.
Authority: Monetary Control Act § 103(b)(2) and (b)(1)(A)(i), 12 USC 461(b)(2) and (b)(1)(A)(i); FDIA § 5, 12 USC 1815; 12 CFR 204.

2-315

“CASH ITEMS IN PROCESS OF COLLECTION”—Instruments Presented by Payable-Through Banks

Payment instruments that are similar to traveler’s checks and are presented for payment by one or several payable-through banks, rather than being presented directly to the issuers for payment, qualify for treatment as cash items in process of collection for purposes of Regulation D. STAFF OP. of Sept. 25, 1980.
Authority: 12 CFR 204.2(i)(1)(iii) and 210.2(i).

2-315.1

“CASH ITEMS IN PROCESS OF COLLECTION”—Items on Hand vs. Immediately Payable Items

The question was raised whether items in the process of collection pursuant to section 204.2(i)(1)(iii) of Regulation D qualify for the cash items in the process of collection (CIPC) deduction in the same manner that items defined under section 204.2(i)(1)(i) qualify. Under clause (i), a check on hand that will be presented for payment or forwarded for collection on the next following business day by the depository institution is considered to be in the process of collection. Clause (iii) does not contain an elaboration of the concept of “in the process of collection.” However, in its opinion at 2-307.1, in which it said that savings bonds cannot be counted as vault cash, the staff stated that “[R]edeemed savings bonds give rise to a ‘cash item in process of collection’ deduction while in the collection process if shipped for collection on the next business day.”
The staff believes that the concept of in the process of collection, as articulated in section 204.2(i)(1)(i), includes items that will be presented for payment or forwarded for collection on the following business day and also applies to items described in clause (iii). Treating these items as in the process of collection is permitted only if they are being redeemed.
Checks or items specified in clause (iii) that are on hand and that will be presented for payment or forwarded for collection on the following business day may be treated as CIPC, regardless of when the depository institution actually receives funds for those items. Such items qualify as CIPC regardless of the fact that the presenting or forwarding bank may receive deferred credit for the items. However, the CIPC deduction is not available until the depository institution books the item as a deposit. STAFF OP. of Sept. 3, 1986.
Authority: 12 CFR 204.2(i)(1)(i) and (iii).

2-320

COMPUTATION AND MAINTENANCE—Reports

Under Regulation D, depository institutions are required to submit information regarding time deposits on Form FR 2900. If an institution posts its general ledger daily or generates a daily balance sheet, then all amounts reported for reserve requirement purposes on the FR 2900 are required to be updated daily. Weekly updating of balances is permissible only if it is the accepted accounting standard and practice for a particular segment of the industry to post the general ledger less frequently than daily. STAFF OP. of Jan. 9, 1981.
Authority: 12 CFR 204.3.

2-320.1

COMPUTATION AND MAINTENANCE—Cash Management Plans

A cash management plan can be regarded as bona fide when an institution and a depositor have agreed that the institution may use the balance in one account to offset the overdrafts in another account of the same or a related depositor, even though such an agreement is not incorporated in writing, and where some bona fide cash management purpose is served. While a written agreement is not required, there should be some indicia of this purpose that can be referred to in order to demonstrate the bona fide nature of the arrangement. Staff does not believe that a bona fide cash management purpose is served when an institution nets a depositor’s multiple accounts after an overdraft occurs in one of those accounts merely to reduce its net transactions accounts. Of course, it should be recognized that, depending on the nature and extent of any cash management plan, sound banking practice may require that the institution’s authority and responsibility be documented. This is especially true when overdrafts occur through a prearranged credit authorization and are not covered by positive balances on hand. STAFF OP. of April 1, 1981.
Authority: 12 CFR 204.3(e).
See also “Preparation of the Report of Transaction Accounts, Other Deposits and Vault Cash” (FR 2900).

2-320.11

COMPUTATION AND MAINTENANCE—Instruments Drawn Against Correspondent Bank

A question has arisen regarding the applicability of Regulation D to instruments issued by savings and loan associations but drawn against a servicing bank. The payment instruments serve purposes similar to officers’ or cashiers’ checks, but they are drawn on a bank other than the selling institution, which remits proceeds of the sales periodically to the drawee bank. Depository institutions have been advised that when an institution issues checks or drafts drawn on an account at a correspondent bank and remits funds either periodically or when advised that the checks have been presented, the amount of the checks represent an amount due to another depository institution (see 2-306.7). Although section 204.2(b)(2) of Regulation D provides that a check or draft drawn by a depository institution on another depository institution is not a demand deposit of the drawer, that rule applies only when the check or draft is drawn against a positive balance at another institution, since such a draft would properly represent a reduction in an asset account. However, in arrangements such as that described, a depository institution is regarded as having issued a reservable liability until it reimburses its correspondent.
The Board’s Instructions for Preparation of the Report of Transaction Accounts, Other Deposits and Vault Cash (Reporting Form FR 2900) for savings and loan associations requires that the amount of such outstanding instruments be reported in item 3, Other Demand Deposits. STAFF OP. of Dec. 2, 1981.
Authority: 12 CFR 204.2(b)(2).

2-320.12

COMPUTATION AND MAINTENANCE—Vault Cash and Reserve Balances

Carryover deficiencies of reserves in a depository institution cannot be met by the use of excess vault cash. Section 204.3(c) and (h) of Regulation D reveal the Board’s intent to distinguish between vault cash and reserve balances maintained by the institution at the Reserve Bank. In addition, vault cash does not constitute a reserve balance within the meaning of Regulation D, and the 2 percent carry over provision does not apply to excess vault cash.
Such use of vault cash could have adverse effects on the estimation of monetary aggregates because of the need for recalculation of required reserve balances. STAFF OP. of Dec. 22, 1981.
Authority: 12 CFR 204.3(b), (c), and (h).

2-320.13

COMPUTATION AND MAINTENANCE—Pass-Through Correspondent

Two reserve maintenance options exist for a correspondent passing through required reserve balances of respondents whose main offices are located in the same Federal Reserve territory as its own main office. A correspondent may maintain such balances, along with its own required reserve balances, in a single commingled account at the Federal Reserve Bank office in the territory where its main office is located, or it may maintain in a separate commingled account the required reserve balances passed through for respondents whose main offices are located in the same Federal Reserve territory as the correspondent’s main office.
The question was raised whether a pass-through correspondent for other institutions may pass its own reserve balances through another correspondent. The limitations in Regulation D concerning the maintenance of pass-through accounts were intended primarily to prevent tiering of reserve accounts (the passing of reserve balances through multiple levels of correspondents). The arrangement in question does not result in the tiering of reserve balances, since the correspondent maintains the reserve balance of its respondents directly with the Reserve Bank; therefore, the correspondent may pass its own required reserve balances through another correspondent. STAFF OP. of June 24, 1983.
Authority: 12 CFR 204.3(i)(3).

2-320.14

COMPUTATION AND MAINTENANCE—Interbank Borrowing and Low Reserve Tranches

A bank holding company established an interbank funds-management arrangement for its subsidiary banks under which banks with net transaction-account balances in excess of $41.5 million, which is currently the cutoff for the low reserve tranche, “transferred” funds in excess of that amount to affiliate banks with net transaction account balances of less than $41.5 million. The transfers were accomplished through federal-funds sales to the smaller institutions. The large banks received compensation for funds transferred to the smaller banks at what the holding company determined was the market rate of interest paid by the smaller banks on the funds received. The transferring banks then treated the amounts due from the transferee banks as balances subject to immediate withdrawal due from other depository institutions and deducted them from their gross transaction accounts. The purpose of these transactions was to reduce the overall reserve requirements for the holding company’s subsidiary banks.
This arrangement amounts to evasion of reserve requirements, and, depending on the form of the transactions, compensation provided under the arrangement may violate the prohibition against payment of interest on demand deposits.
In 1989, depository institutions had to maintain 3 percent reserves on their net transaction accounts up to $41.5 million (the low reserve tranche) and 12 percent reserves on amounts in excess of $41.5 million. The cutoff level is increased annually by 80 percent of the annual percentage increase in aggregate net transaction accounts for all depository institutions.
A depository institution may deduct cash items in process of collection and “balances subject to immediate withdrawal due from other depository institutions” from its gross transaction accounts when computing reserves on net transaction accounts (§ 204.3(f)(1)). Under the instructions for item B.1 of Form FR 2900 (Report of Transaction Accounts, Other Deposits and Vault Cash), the due-from deduction includes all balances that are booked in the form of deposits, are subject to immediate withdrawal, and are due from other depository institutions. The due-from deduction is intended, in part, to prevent double reserving of deposits. The institution having the use of the funds is maintaining transaction-account reserves on them (because they are deposits immediately due on demand); so the institution lending them is excused from doing so.
The instructions for Form FR 2900 explicitly direct the reporting institution to exclude primary obligations not booked as deposits when calculating the amount due from other institutions. For example, section 204.2(a)(1)(vii) excludes certain primary obligations of a depository institution that are not booked as deposits, such as federal-funds transfers (i.e., obligations issued or undertaken and held for the account of an office of another depository institution), from the definition of “deposit.” Thus, a depository institution cannot deduct federal funds “sold” to (and therefore due from) another institution from its gross transaction accounts when computing reserves under section 204.3(f)(1).
The transfers between the larger banks and smaller banks in this case may not be treated as federal-funds transactions if the due-from deduction is to be taken. If these transfers were booked as deposits and subject to immediate withdrawal, they would meet the literal requirements for the deduction; however, this practice amounts to an evasion of reserve requirements. The purpose of the low reserve tranche is to lessen the burden on smaller depository institutions of offering demand deposits and interest-bearing checking accounts; this practice allows larger institutions to enjoy a benefit Congress intended for smaller ones. It also understates the amount of transaction accounts subject to 12 percent reserves and results in a lower reserve base than anticipated.
Finally, if these transactions are booked by a transferee member bank as deposits subject to immediate withdrawal, payments of compensation for the balances would violate the prohibition against the payment of interest on demand deposits. Consequently, if the due-from deduction is used, charging the smaller banks for use of the transferred funds is a violation of this prohibition because that deduction is available only if the funds are booked as deposits and are payable immediately upon demand. If liabilities booked as term deposits were used, (i.e., if they were not subject to immediate withdrawal), the due-from deduction could not be used, although interest could be paid.
Because this shift of funds serves no business purpose other than reserve avoidance, the Reserve Bank could use its discretion in determining whether to assess reserve-deficiency penalties for past practices. Future practices, however, probably should be subject to appropriate penalties. STAFF OP. of Oct. 10, 1989.
Authority: 12 CFR 204.3(a), 204.7, and 204.9(a).

2-324

“DEPOSIT”—Interbank Borrowing

A bank’s liability to another bank may be classified as “other borrowings” rather than “deposits” for the purposes of Regulation D, unless such liabilities are recognized by the parties as “deposits.” STAFF OP. of Oct. 15, 1969.
Authority: 12 CFR 204.2(a)(1)(vii).

2-324.1

“DEPOSIT”—Participations and Repurchase Agreements*

A participation in a pool of assets does not constitute a deposit as long as the purchaser relies on the underlying assets within the pool for payments of interest and principal. However, if the bank has the primary legal obligation to pay either the interest or principal out of its own funds, the participation is a deposit. A participation is usually a deposit liability if the purchaser, by having placed funds with the bank either for a specified time or for an indefinite time to be determined by the purchaser, has the right to require the bank to repurchase the participation. The bank’s obligation to repay the customer a sum certain at the maturity date is the type of obligation contemplated by the terms “promissory note” and “acknowledgment of advance,” which are included in the definition of “deposit.” If the bank’s reservation of the right to repurchase serves the same binding function and is being so used, Regulation D would apply. STAFF OP. of May 27, 1971.
Authority: 12 CFR 204.2(a)(1)(vii).

2-324.2

“DEPOSIT”—Obligations of Bank Acting as Trustee*

The term “federal funds” is used generally to refer to obligations of a member bank that are exempt from Regulation D reserve requirements. Such obligations are exempt if issued to or undertaken with respect to, and held for the account of, a bank or a domestic banking office of a bank. A member bank may not purchase federal funds from a trust company engaged solely in trust business, since the obligation would not be held for the account of a bank or domestic banking office of another bank. Rather, the obligation would be held for the beneficiaries of the trust accounts, who are generally individuals and corporations. Accordingly, obligations of a member bank issued to a second bank are not exempt from reserve requirements if the second bank is acting as a trustee for various trust accounts and the funds used represent funds of these trust accounts. STAFF OP. of Feb 17, 1976.
Authority: 12 CFR 204.2(a)(1)(vii).

*
This opinion should be read with section 204.2(a)(1)(vii) and (a)(2)(ix) of Regulation D. This opinion may also be affected by the Board’s pending rule-making regarding the treatment of the proceeds of certain asset sales under Regulation D.
2-324.3

“DEPOSIT”—Mortgage-Backed Securities*

Mortgage-backed securities do not give rise to a deposit liability if a bank’s exposure to loss is limited to no more than 10 percent of a pool of high-quality, conventional, one- to four-family mortgages and the bank maintains an adequate reserve for losses. A bank’s commitment to advance funds, which is intended to maintain a regular flow of scheduled payments to certificate holders rather than to insure against losses, does not entail a greater risk of loss than is permissible. In order to give investors an explicit understanding of a bank’s liability associated with the securities, the certificate should prominently disclose (1) that the securities are not liabilities of, nor guaranteed by, the bank or a subsidiary mortgage service company; (2) that the securities are not deposits and are not insured by the FDIC or any government agency; and (3) that the bank’s liability for the full timely payment of interest and principal is limited by the terms of the agreement to advance funds, which terms should be clearly set forth. STAFF OP. of Dec. 4, 1979.
Authority: 12 CFR 204.2(a)(1)(ix).

2-324.4

“DEPOSIT”—Conditional Liability of Indorser*

A depository institution proposes to enter into an arrangement in which an underwriter will either purchase industrial development revenue bonds in the depository institution’s possession and sell them to third parties as underwriter or market the bonds as agent of the institution. The selling institution will also arrange for an insurance policy for the bonds sold which provides that the insurance company will guarantee, in full, payment of principal and interest to the purchasers; the depository institution will pay the policy premium and will indemnify the insurance company for any payments made under the policy. The purchasers will be unaware of the fact that the bonds were previously part of the depository institution’s portfolio and will not have rights against the depository institution if the insurer does not make the necessary payments. The nature of this transaction is substantially identical to that of an indorser or guarantor and, thus, is a conditional liability that need not be classified as a deposit for purposes of Regulations D and Q. STAFF OP. of Oct. 28, 1980.
Authority 12 CFR 204.2(a)(2)(ii).

2-325

“DEPOSIT”—Exemption for Dollar Exchange Acceptances

The exemption from reserve requirements for eligible acceptances under section 204.2(a)(1)(vii)(E) of Regulation D also should be regarded as applicable to dollar exchange acceptances described in paragraph 12 of section 13 of the Federal Reserve Act. STAFF OP. of Jan. 15, 1981.
Authority: FRA § 13 ¶¶ 7 and 13, 12 USC 372; 12 CFR 204.2(a)(1)(vii)(E) and 204.1(f).

2-325.01

“DEPOSIT”—Repurchase Agreements*

Under section 204.2(a)(1) of Regulation D, an obligation issued by a member bank that evidences an indebtedness arising from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States or any agency thereof that the bank is obligated to repurchase, is in certain cases excluded from the definition of “deposit.” Such obligations (usually called repurchase agreements, or RPs) are not deposits. Therefore, RPs meeting these criteria are not subject to the provisions of Regulation D.
The phrase “direct obligations of . . . the United States or any agency thereof” does not mean that a liability issued by a member bank under an RP must run “directly” from the United States to the bank’s customer. When a bank transfers assets to its customers in connection with an RP, each such transfer evidences an indebtedness arising out of the transfer of an obligation running directly from the United States to the bank. In other words, the “direct obligation” language refers to the obligation underlying the RP, running from the United States to the bank, and not to the liabilities the bank subsequently creates, running from the bank to its customers. Of course, an RP also may be based on obligations “fully guaranteed as to principal and interest by the United States. . . .” STAFF OP. of June 26, 1981.
Authority: 12 CFR 204.2(a)(1)(vii)(B).

*
This opinion should be read with section 204.2(a)(1)(vii) and (a)(2)(ix) of Regulation D. This opinion may also be affected by the Board’s pending rulemaking regarding the treatment of the proceeds of certain asset sales under Regulation D.
2-325.1

“DEPOSIT”—Note Issued by Nonbank Affiliate

When proceeds from a promissory note issued by the nonbank affiliate of the commercial bank are used by the affiliate to repay its outstanding loan with the bank, those funds are not regarded as funds being supplied by the affiliate to the bank for the purpose of being used in the banking business (i.e., lending and investment activities) or to maintain the availability of such funds for that purpose. Thus, these proceeds would not be regarded as deposits under section 204.2(a)(1)(v) of Regulation D.
It should be noted that, if the liability to the affiliate arose in connection with a sale of assets by the bank to the affiliate, the issuance of an obligation by the affiliate and the sale of assets would be viewed as a single transaction. In such a situation, the obligation issued by the affiliate would be regarded as a deposit. No opinion is expressed with regard to the applicability of section 23A of the Federal Reserve Act (12 USC 371c) to the advances made by the bank to its nonbank affiliate. STAFF OP. of June 26, 1981.
Authority: 12 CFR 204.2(a)(1)(v) and 204.3.

2-325.11

“DEPOSIT”—Banker’s Acceptances

Banker’s acceptances issued to finance domestic storage of diesel engines and parts do not meet specifications regarding eligibility for discounts by Federal Reserve Banks. The creation, discount, and sale of such acceptances would produce an obligation that would be a deposit for purposes of the reserve requirement of Regulation D. STAFF OP. of Dec. 18, 1981.
Authority: FRA § 13 ¶ 7, 12 USC 372; 12 CFR 204.2(a)(1)(vii)(E).

2-325.12

“DEPOSIT”—Banker’s Acceptances

A U.S. bank proposed that its foreign branch aggregate individual banker’s-acceptance transactions and issue a draft in its own name on behalf of the foreign branch’s customers. The draft would be accepted and discounted by the U.S. bank. The fact that the U.S. bank and the foreign branch are part of the same entity does not change the economic reality of the transaction. In addition, the character of the underlying acceptances aggregated by the foreign branch involving the importation or exportation of goods should carry through to the acceptance issued by the U.S. bank. STAFF OP. of Jan. 27, 1983.
Authority: FRA § 13 ¶ 7, 12 USC 372; 12 CFR 204.2(a)(1)(vii).

2-325.13

“DEPOSIT”—Overnight Loan by Holding Company to Bank Subsidiary

Overnight unsecured loans by a bank holding company to its subsidiary banks to help the banks adjust their reserve positions are deposits under Regulation D. Included within the definition of “deposit” is “any liability of a depository institution on any promissory note, acknowledgment of advance, banker’s acceptance, or similar obligation (written or oral), including mortgage-backed bonds, that is issued or undertaken by a depository institution as a means of obtaining funds.” The Board also regards funds supplied from nondepository affiliates to depository institutions, even if not in the form of a direct obligation, as deposits. Accordingly, overnight loans by a bank holding company to its bank subsidiary are deposits and, given their maturity of less than 14 days, subject to transaction-account reserve requirements. STAFF OP. of May 4, 1983.
Authority: 12 CFR 204.2(a)(1)(vii).

2-325.14

“DEPOSIT”—Sale of Assets Guaranteed by Bank

The question has arisen whether certain tax-exempt bonds sold by a member bank and held in its investment and loan portfolio are reservable deposits when the assets are guaranteed in some manner by the bank. The bank proposes in some of these sale transactions to issue a letter of credit that the purchaser may draw upon if the bond issuer defaults. In certain other cases, the bank proposes to sell the bonds subject to a put option that would permit the purchaser to put the bond back to the bank at a stated price on a specified date or dates.
Assets sold by a member bank subject to such a standby letter of credit or put option are regarded as deposits under Regulation D. The amount of reserves that must be held will depend on the maturity of the bank’s obligation to provide funds to the holder of the put option or standby letter of credit, not on the maturity of the assets sold. In the case of an asset sold subject to a put option exercisable on a specific date or after a period of notice, the original maturity is measured by the exercise date of the option or length of the notice period. If there are several dates on which the option may be exercised, the original maturity is based on the first exercise date, and subsequent maturities are based on the length of time between options. In the case of a standby letter of credit that can be drawn on immediately upon default, the purchaser may, in effect, collect upon demand. Thus, the transaction would be a demand deposit. However, if the purchaser must give at least 14 days’ notice before drawing on the letter of credit, the obligation would be reservable as a time deposit. STAFF OP. of June 23, 1983.
Authority: 12 CFR 204.2(a)(1)(vii).

2-325.15

“DEPOSIT”—Banker’s Acceptances

A domestic bank proposes to create a banker’s acceptance on behalf of a U.S. branch or agency of a foreign bank that would cover a trade transaction involving the shipment of goods from one foreign country to another. Reserve requirements do not apply to banker’s acceptances of the type described in section 13, paragraph 7 of the Federal Reserve Act, which includes as eligible those banker’s acceptances that “grow out of transactions involving the importation or exportation of goods” and have a maturity of not more than six months’ sight to run. The Board has determined that, for purposes of determining eligibility, acceptances arising from transactions involving shipments between two foreign countries grow out of transactions involving the importation or exportation of goods (1916 Fed. Res. Bull. 532).
The proposed banker’s acceptance may qualify as eligible provided it otherwise meets the eligibility requirements. There are no collateral or security-interest requirements for eligible acceptances that grow out of a trade transaction. STAFF OP. of Oct. 6, 1983.
Authority: FRA § 13 ¶ 7, 12 USC 372; 12 CFR 204.2(a)(1)(viii)(E).

2-325.16

“DEPOSIT”—Loan Participations with Repurchase Agreements

A bank inquired whether two different loan participation sales subject to certain repurchase arrangements are deposits under Regulation D. Under the first arrangement, the bank would be unconditionally obligated to repurchase the loan participation on a designated date prior to the maturity of the loan. If the borrower defaulted during the term of the participation, the purchaser of the participation would bear the risk of loss on the portion of the loan conveyed through the participation.
Under the second arrangement, the bank would participate an interest in the loan on a nonrecourse basis for the entire period of the initial loan. However, the arrangement would contain a put option that provided that the bank is unconditionally obligated to repurchase the asset at various times prior to maturity, at the option of the purchaser.
The transactions involved under both arrangements are repurchase agreements, based on the provisions that obligate the original holder of the asset to take back the underlying asset at some time in the future. The fact that the participation agreements provide that in the first arrangement the bank is not obligated to take back the asset in the event of the obligor’s default on the underlying asset and that in the second arrangement it would be obligated only if the purchaser exercised its put option, does not vitiate the conclusion that the transaction involves a repurchase agreement and, as such, is a deposit subject to the reserve requirements of Regulation D. STAFF OP. of Nov. 16, 1983.
Authority: 12 CFR 204.2(a)(1)(vii).

2-325.17

“DEPOSIT”—Portions of Banker’s Acceptances

The question has arisen whether portions of a banker’s acceptance meet the eligibility criteria of section 13, paragraph 7 of the Federal Reserve Act if the entire acceptance meets the eligibility criteria. The transaction in question is as follows. Bank A creates, discounts, and resells an eligible acceptance to Bank B. Bank B then sells portions of the acceptance to Banks C and D and provides them with written confirmations of the sale. The confirmations specify the acceptance and the dollar amount of the portion being sold. The documentation is generally retained by Bank B or by another bank as safekeeping agent for Bank B. Generally, Bank B provides Banks C and D with a safekeeping receipt evidencing that Bank B is holding the acceptance as implied agent for Banks C and D.
The portions of eligible acceptances purchased by Banks C and D would meet the eligibility requirements of section 13, paragraph 7 of the Federal Reserve Act because the character of the transaction underlying the acceptance would carry through to each portion of the BA, notwithstanding the change in ownership of the acceptance. Staff stressed the importance of properly documenting the purchase of a portion of an acceptance. A depository institution purchasing a portion of an acceptance must identify the underlying transaction, the terms of the acceptance, and proper endorsements. In addition, copies of requisite documentation evidencing the eligibility of the acceptance must be maintained at each depository institution purchasing a portion of the acceptance. STAFF OP. of Feb. 3, 1984.
Authority: FRA § 13 ¶ 7, 12 USC 372; 12 CFR 204.2(a)(1)(vii)(E).

2-325.18

“DEPOSIT”—Repurchase Agreements*

Repurchase agreements involving municipal obligations that are secured by a pledge or escrow of U.S. government or agency securities do not meet the exemption from the definition of “deposit” under Regulation D since the underlying instrument remains that of the municipality or political subdivision in question. Further, the U.S. government has not undertaken to guarantee such obligations. Therefore, repurchase agreements of this type do not qualify as exempt obligations and would be subject to reserve requirements. STAFF OP. of April 20, 1982.
Authority: 12 CFR 204.2(a)(1)(vii)(B).

*
This opinion should be read with section 204.2(a)(1)(vii) and (a)(2)(ix) of Regulation D. This opinion may also be affected by the Board’s pending rulemaking regarding the treatment of the proceeds of certain asset sales under Regulation D.
2-325.19

“DEPOSIT”—Repurchase Agreements Involving Municipal Securities

Regulation D exempts from reserve requirements any deposit arising from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States or any agency thereof that the bank is obligated to repurchase. The Board requires that the obligation underlying the repurchase agreement by a U.S. government or agency security. Municipal obligations that are secured by a pledge or escrow of U.S. government or agency securities do not meet this criterion, because the underlying instrument remains that of the municipality or political subdivision in question. In addition, the U.S. government has not undertaken to guarantee such obligations. Therefore, repurchase agreements involving municipal obligations, even if secured by pledges of U.S. government securities, do not quality as exempt obligations under Regulation D, and they would be subject to reserve requirements. STAFF OP. of May 17, 1982.
Authority: 12 CFR 204.2(a)(1)(vii)(B).

2-325.2

“DEPOSIT”—Interbank Exemption

An obligation issued by a depository institution to entities within the Farm Credit Administration (Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives) is eligible for an exemption considered to be equivalent to the interbank exemption from reserve requirements. Although the Federal Land Bank, Federal Intermediate Credit Bank, and Bank for Cooperatives do not appear to be “depository institutions” as this term is defined in section 204.2(m)(1) of Regulation D, these entities are federally chartered instruments and therefore may be regarded as “the United States government or an agency thereof” for purposes of section 204.2(a)(1)(vii)(A)(2) of Regulation D. STAFF OP. of Nov. 12, 1982.
Authority: 12 CFR 204.2(a)(1)(vii)(A)(2).

2-325.21

“DEPOSIT”—Repurchase Agreements

The Federal National Mortgage Association (FNMA) offers a servicing arrangement in which the lender pays FNMA a 25-basis-point guaranty fee. Under this plan, the lender remains liable for losses on mortgage defaults and FNMA is liable if the lender defaults. A member bank that holds a FNMA participation certificate under such a servicing arrangement bears the risk of loss in connection with the pool of mortgages underlying the obligation because it would be required to absorb any losses resulting from defaults by mortgagers. Thus, the issue arises whether the bank’s risk of loss on the underlying mortgage is such that a repurchase agreement issued against such a security would be subject to reserve requirements.
The Board’s rules contemplate that a repurchase agreement will involve a “transfer” of U.S. government or agency securities. Such a transfer could involve either a change of ownership or the bank’s pledging such securities as collateral to the holder of a repurchase agreement. It is expected that such transactions result in the creation of a security or other interest in the U.S. government or agency securities running to the holder of the repurchase agreement. FNMA regards the guarantee issued in connection with these particular certificates as running to any third party holder of the securities, which includes the holder of a perfected security interest in FNMA certificates issued under the program. Thus, although the bank could incur a loss on the underlying mortgages, a repurchase-agreement holder that has a perfected security interest in the FNMA security would possess a full guaranty as to principal and interest by FNMA. A repurchase agreement on a FNMA certificate subject to such a servicing arrangement would therefore be exempt from Regulation D reserve requirements when it has been transferred to the repurchase-agreement holder, including the holder of a perfected security interest. STAFF OP. of Jan. 12, 1983.
Authority: 12 CFR 204.2(a)(1)(vii)(B).

2-325.22

“DEPOSIT”—Due Bills

When a depository institution issues a due bill with a maturity of less than three days and has no intention of collateralizing the due bill or of attempting to purchase the described security, the transactions cannot legitimately be regarded as due bills and should be regarded as deposits for purposes of Regulation D. Such transactions constitute devices to avoid reserve requirements. STAFF OP. of Jan. 14, 1983.
Authority: 12 CFR 204.2(a)(1)(iv).

2-325.23

“DEPOSIT”—Repurchase Agreements on U.S. Government Obligations

Any obligation of a depository institution arising from a transfer of direct U.S. government obligations or those fully guaranteed as to principal and interest by the U.S. government or its agencies, that the depository institution is obligated to repurchase, is not a deposit for purposes of Regulation D. A company asked whether certain obligations may be regarded as obligations of the United States, and thus whether repurchase agreements issued on them would be classified as deposits.
The company proposes to offer instruments that evidence ownership of future interest and principal payments of U.S. Treasury bonds that are held by a custodian pursuant to an agreement with the company for the benefit of the instruments’ owner. The instruments would be issued in serial and principal form. A serial instrument evidences ownership of one of the semiannual interest payments due on one or more bonds, has a separate maturity with respect to each semiannual interest payment on the bonds up to and including the date of maturity, is available only in registered form, and may be transferred upon the custodian’s register. A principal instrument evidences ownership of the principal of one or more of the bonds payable at maturity, is also available only in registered form, and may be transferred upon the custodian’s register. Payments consist of the principal payment due on the bonds to which the principal instrument relates. No payments will be made prior to maturity. The face amount of each principal instrument is the payment to be received thereon and represents the principal payment on a whole bond or integral multiples thereof. Certain series of instruments have included callable instruments, which evidence ownership of future interests and principal payments on U.S. Treasury bonds subject to redemption by the United States prior to their stated maturity. No payments are made on callable instruments until six months after the first optional redemption date of the bonds to which the callable instruments relate. Payments will consist of the last ten semiannual interest payments on, and the principal of, the bonds to which the callable instrument relates.
The company indicates that the owners of the proposed instruments would have all the rights and privileges of owners of the Treasury bonds except that, in the absence of the United States’ default on the bonds, the custodian is required to hold the bonds on behalf of the owners. Each instrument holder, as a real party in interest, has the right, upon default on the bonds, to proceed directly and individually against the United States. The custodian is not authorized to assert the rights and privileges of holders and has no duty to do so. Neither the custodian nor the company is responsible for payments due on instruments, although the custodian must apply all payments received on the bonds to the instrument to which they relate without making any deduction for its own fees or expenses. Furthermore, the bonds will be held in the name of the custodian in certificate form or book-entry form at the Federal Reserve Bank of New York (upon the request and at the expense of the instrument holder, the custodian will hold the bond or bonds relating to such instrument in certificate form).
It appears that the sole obligor on the bonds held in connection with the proposed instrument is the United States. The participation of the company and the custodian is similar to that of other custodians that hold U.S. government securities on behalf of customers and does not appear to give either party a credit obligation to the holders of the instrument. A failure to transmit payments when received would amount to a breach of the custodian’s duty arising from its role as a fiduciary or agent rather than a default on the underlying obligation. In addition, if the United States were to default on the underlying obligation, it appears that the custodian and the company would not have an obligation to make payments on either interest or principal of the instrument. Accordingly, the instruments may be regarded as obligations of the United States. Therefore, repurchase agreements issued on the instruments would not be classified as deposits for purposes of Regulation D. STAFF OP. of Feb. 27, 1984.
Authority: 12 CFR 204.2(a)(1)(vii)(B).

2-325.24

“DEPOSIT”—Interbank (Fed-Funds) Liabilities

The interbank exception of section 204.2 (a)(1)(vii)(A)(1) of Regulation D does not apply in the case of a certificate of deposit issued either to another U.S. depository institution or to the U.S. agency of a foreign bank located in the United States. Generally, exceptions specified in section 204.2(a)(1)(vii) apply only to the types of deposits covered by that subparagraph and not to other types of deposits that are specifically described in other subparagraphs of section 204.2(a)(1). A certificate of deposit, identified as such, and issued by one depository institution to another is specifically described in section 204.2(a)(1)(i). Consequently, a certificate of deposit is a deposit upon which reserves must be maintained and does not fall within the interbank exception specified in section 204.2(a)(1)(vii)(A)(1).
Interbank transactions (sometimes referred to as fed-funds purchases or sales), regardless of their maturity, may not be represented by a certificate of deposit or other instrument. If fed funds are purchased from either another U.S. depository institution or from an “office” of a foreign bank located in the United States under an agreement that is not represented by a certificate of deposit or other instrument, these funds fall within the section 204.2 (a)(1)(vii)(A)(1) exception. An agency of a foreign bank is an office within the meaning of this provision. As a result, fed funds purchased from an agency of a foreign bank located in the United States qualify for the interbank exception of section 204.2(a)(1) (vii)(A)(1) and are not deposits subject to reserve requirements. Because this exception makes no distinctions based on the maturity of interbank transactions, it applies to term as well as overnight transactions. STAFF OP. of Aug. 24, 1987.
Authority: 12 CFR 204.2(a)(1)(vii)(A)(1).

2-325.25

“DEPOSIT”—Repurchase Agreement

Any portion of a repurchase transaction that exceeds the market value of the securities at the time of the sale by the bank does not qualify as a repurchase transaction excepted from the definition of “deposit” under section 204.2(a)(1)(vii) of Regulation D. The repurchase exception is intended to apply only to bona fide transactions; otherwise, there would be nothing to prevent a bank from engaging in a $50 million “repurchase transaction” on the basis of a $1,000 security. That result was not contemplated in Regulation D. There is no bona fide transaction to the extent the market value of the securities transferred by the bank at the beginning of the transaction is less than the price the customer paid for the securities. For example, if a bank exchanges government securities that, for purposes of the transaction, are valued at $1 million even though their market value is only $800,000 (with a commitment to repurchase the securities for $1 million on the next day), then $800,000 would qualify for the repurchase exception, and $200,000 would be a deposit under Regulation D. STAFF OP. of December 13, 1991.
Authority: 12 CFR 204.2(a)(1)(vii).

2-329

DEPOSITS PAYABLE OUTSIDE THE UNITED STATES

A deposit in a foreign branch made by a foreign bank, payable as a matter of right only outside the United States, is exempt from Regulations D and Q whether the foreign bank is acting as undisclosed principal for a U.S. individual or corporation, for a controlled foreign subsidiary of a U.S. corporation, or for a foreign national. STAFF OP. of July 29, 1970.
Authority: 12 CFR 204.1(c)(5), 204.2(t), and 217.1(c)(2). *
At the time of this opinion, Federal Reserve policy discouraged U.S. banks from soliciting deposits in their foreign branches from U.S. residents unless the deposit was for an international purpose. The Board subsequently determined that the reasons for that policy are no longer valid and rescinded the portion of this opinion that referred to the policy (SR-94-49; September 2, 1994).

*
This reference to 12 CFR 217 refers to the Board’s Regulation Q: Prohibition Against Payment of Interest on Demand Deposits, repealed effective July 21, 2011 (76 FR 42015, July 18, 2011).
2-330

DEPOSITS PAYABLE OUTSIDE THE UNITED STATES—Funds Deposited by U.S. Parent’s Trust Department

The trust department of a bank places trust cash in a non-interest-bearing time deposit at the bank’s Nassau branch. Funds placed in the Nassau branch are not subject to reserve requirements and create a greater credit for the trust department than funds deposited with the bank’s U.S. offices, which are subject to reserves. There is no written agreement between the Nassau branch and the trust department for this arrangement, and funds deposited have a one-day maturity.
The practice described does not violate Regulation D, which generally does not limit the ability of a foreign branch of a depository institution to accept deposits of $100,000 or more from U.S. residents, including cash balances of the bank’s own trust department accounts. However, if the deposits at foreign branches are not payable only outside the United States, then such deposits would be subject to Regulation D reserve requirements. STAFF OP. of Feb. 23, 1982.
Authority: 12 CFR 204.2(t).

2-330.01

DEPOSITS PAYABLE OUTSIDE THE UNITED STATES—CD Issued in the United States

A bank proposed to issue, in New York City, certificates of deposit that would be payable at a branch of the bank outside of the United States. No provision in Regulation D or Q requires that a certificate of deposit be physically issued outside of the United States in order to qualify for the exemption from the reserve requirements and interest limitations. The only requirement is that the deposit be payable only at an office outside the United States, as defined in section 204.2(t). STAFF OP. of March 21, 1983.
Authority: 12 CFR 204.1(c)(5) and 204.2(t).

2-330.1

DEPOSITS PAYABLE OUTSIDE THE UNITED STATES—Guarantee by U.S. Bank

Reserve requirements do not apply to an obligation that is payable only at an office located outside the United States. This exemption is intended principally to enable foreign branches of U.S. banks to compete on a more equal basis with other banks in foreign countries in accordance with the laws and regulations of those countries. A customer who makes a deposit that is payable solely at a foreign office assumes the risk that the foreign country might impose restrictions on withdrawals. A U.S. bank inquires whether a certificate of deposit issued by a foreign subsidiary but guaranteed by the U.S. bank to be payable in the United States is a reservable obligation of the U.S. bank even though the U.S. bank does not receive any funds for use in its banking business.
When payment of a deposit in a foreign office is guaranteed by a promise of payment at an office in the United States in the event the deposit is not paid at the foreign office, the depositor does not assume the same risk assumed by local depositors but enjoys substantially the same rights as if the deposit had been made in a U.S. office of the bank. The fact that the proceeds are not used by the guarantor is irrelevant to the issue of the reservability of deposits guaranteed by the U.S. office. To ensure the effectiveness of, and to prevent evasions of, Regulation D, such guaranteed foreign deposit must be subject to the reserve requirements of the guarantor U.S. bank. STAFF OP. of July 29, 1983.
Authority: 12 CFR 204.1(c)(5).

2-330.2

DEPOSITS PAYABLE OUTSIDE THE UNITED STATES—Domestic Collection Agent

A foreign branch of a domestic depository institution proposes to have its foreign branch issue time deposits for which a U.S.-based collection agent would be appointed and asks whether the deposit is exempt from reserves.
A domestic collection agent would collect matured time deposits on behalf of the owners. The collection agent may be an independent entity or an affiliate of the foreign branch issuer. It appears that the collection agent would be under contract to the domestic depository institution or its foreign branch to provide collection services for owners of the time deposits.
The appointment of a domestic collection agent would not necessarily result in the time deposit’s being deemed not payable only outside the United States. So long as a deposit is payable only outside the United States, it is exempt from reserve requirements regardless of where it was physically issued. Regulation D does not require that the deposit also be issued only outside the United States.
The applicability of the exemption is limited to deposits that the depositor is entitled to demand payment of only outside of the United States, regardless of the circumstances involved. The purpose of this exemption was to permit foreign branches of U.S. banks to compete on a more equal basis with other banks in foreign countries in accordance with the laws and regulations of those countries. A customer who makes a deposit payable solely at a foreign office assumes whatever risk may exist that the foreign country might impose restrictions on withdrawals. When payment of a deposit in a foreign office is guaranteed by a promise of payment at the U.S. office, the depositor does not assume the same risk assumed by local depositors, but enjoys substantially the same rights as if the deposit had been made in a U.S. office of the bank. Consequently, if a domestic office of a bank expressly promises to pay a deposit of a foreign branch, that deposit is not deemed payable only outside the U.S.
A promise to pay such a deposit may be manifested by a course of dealing as well as contract. Consequently, when, as a matter of practice, the holders of time deposits payable outside the United States in fact receive the proceeds of the time deposits on presentment at a domestic office of the bank or at an agent for the bank, a question would exist whether there is a promise to pay the deposit within the United States.
Regulation D does not prohibit banks from paying such deposits at domestic offices, but it does not permit a bank to promise to do so and still take advantage of the exception. STAFF OP. of July 7, 1986.
Authority: 12 CFR 204.2(t).

2-333

EUROCURRENCY LIABILITIES—U.S. Company Providing Funding to Foreign Company

Outstanding extensions of credit from non-U.S. offices of U.S. depository institutions or Edge or agreement corporations to U.S. residents are regarded as Eurocurrency liabilities subject to a 3 percent reserve requirement. An exemption from reserve requirements on Eurocurrency liabilities is requested for a transaction that involves loans by foreign branches of U.S. banks to a U.S. company that in turn, under a credit agreement, lends the proceeds of the loans to a foreign company with operations solely outside the United States. The sole business of the borrower is to provide funding to the foreign company through remitting either the proceeds of such loans or the proceeds of commercial paper issued in the United States. The transaction allows the foreign company to obtain a more favorable interest rate on commercial paper borrowings from U.S. sources.
These outstanding extensions of credit are regarded as Eurocurrency liabilities. The U.S. company is clearly a “U.S. resident” as that term is used in the definition of “Eurocurrency liabilities.” When the Board established the Eurocurrency reserve requirement on loans to U.S. residents by foreign branches of U.S. banks, it was concerned that a test for application of these requirements that turned on tracing the use of the loan would be difficult to administer and ineffective in achieving the desired result. Consequently, the test for loans to U.S. residents is based strictly on the address of the borrower. Exempting the transaction from the definition of “Eurocurrency liabilities” would result in the foreign company’s obtaining U.S.-based financing on a reserve-free basis and lower-cost commercial paper from the U.S. market. STAFF OP. of Aug. 22, 1983.
Authority: 12 CFR 204.2(h)(1)(iii).

2-335

INTERNATIONAL BANKING FACILITIES—Time Deposit Held by Non-U.S. Resident

An IBF time deposit held by a non-U.S. resident may consist of funds used only to support the depositor’s operations outside the United States. A depositor’s personal investment activities could be regarded as operations under these provisions. Thus, an IBF could offer an IBF time deposit to an individual who is not a U.S. resident if the account represents funds that will be used solely to support personal investment activities outside the United States. STAFF OP. of Nov. 19, 1981.
Authority: 12 CFR 204.8(a)(2)(ii)(B).

2-335.1

INTERNATIONAL BANKING FACILITIES—Participation Arrangement

Under a proposed arrangement, the Cayman Islands branch (“branch”) of a bank intends to transfer to the bank’s IBF a 100 percent participation in each of certain advances and commitments termed “identified credits.” The IBF would credit an account of, or otherwise pay to, the branch an amount equal to the aggregate outstanding principal balance of the identified credits that had been advanced and would agree to make available to the branch for disbursement to the borrowers all amounts required to be advanced pursuant to commitments to make loans. The branch would pay over to the IBF all amounts received from each borrower in connection with the identified credits (except for interest accrued to the date of the participations) but would have no obligation to the IBF should any borrower default. In addition, the letter states that “borrowers will not be notified that such participations have been made.”
The use of this type of participation arrangement would not in and of itself prevent the identified credits referred to from being considered IBF extensions of credit or IBF loans. If the identified credits were to meet the requirements contained in section 204.8(a)(3) of Regulation D, the Board would consider those assets IBF extensions of credit or IBF loans, regardless of the participation arrangement through which the transfer is effected. However, if the branch would transfer any such credits after the first four reserve computation periods after the bank has established its IBF, the IBF would be expected to provide any written notice required under section 204.8(b) to the customers to whom the branch had extended such credits. STAFF OP. of Feb. 9, 1982.
Authority: 12 CFR 204.8(a)(3) and (b).

2-335.11

INTERNATIONAL BANKING FACILITIES—Settlement Account

Under the IBF regulation (12 CFR 204.8), a non-New York IBF could receive loan payments through a New York banking office by having an account with its establishing entity for settlement purposes and having the syndicated loan made through an account maintained by the establishing entity at a New York banking office such as an affiliated Edge corporation. Current rules would prohibit non-New York IBFs from maintaining a settlement account with a New York IBF (such as the IBF of the establishing entity’s New York Edge corporation), because IBFs are not permitted to offer demand deposit accounts. However, the Legal Division believes the following procedure is consistent with the regulations for IBFs and operationally would facilitate loan syndications of IBFs.
It is permissible for an IBF of a depository institution or of a U.S. branch or agency of a foreign bank to maintain an account at an Edge or agreement corporation that is owned by the entity establishing the IBF or its foreign bank (in the case of a U.S. branch or agency) provided that (1) the account is to used only for loan settlement purposes, and (2) the account is cleared daily (that is, the account must show a zero balance at the end of each day). Similarly, such accounts subject to the same conditions could be maintained by an IBF of an Edge or agreement corporation at a U.S. office of the entity that owns it. This procedure is permissible because an IBF would not have an extension of credit in the form of a deposit outstanding to a U.S. resident or a balance due from a U.S. resident at the close of business each day. STAFF OP. of March 5, 1982.
Authority: 12 CFR 204.8.

2-338

IRA/KEOGH—Withdrawal by Depositor Age 59½ or Disabled

As long as the bank fully discloses the fact that it is not guaranteeing the interest rate on IRA deposits once a depositor reaches age 59½, and the depositor agrees to the terms, the bank may change the interest rate on IRA deposits at any time, so long as the change is consistent with the deposit agreement. The exception from the imposition of the early withdrawal penalty is permissive. Since a member bank is not compelled to pay IRA funds prior to maturity, it need not necessarily consider the funds to be immediately available to the depositor. Consequently, a bank may impose restrictions on the manner in which IRA funds are withdrawn by the depositor who reaches age 59½ or becomes disabled. From an operational standpoint the bank may maintain IRA deposits in any form it wishes as long as the funds are properly reported on all the bank’s financial and reporting statements as time deposits with a specified maturity and as long as the bank continues to observe the terms of the IRA deposits agreement (e.g., annuity-like payments). STAFF OP. of March 9, 1977.
Authority: 12 CFR 204.2(c)(1).

2-338.1

IRA/KEOGH—Withdrawal When Funds Are Rolled Over

It is not appropriate to permit penalty-free withdrawals when IRA funds are being rolled over in accordance with IRS provisions, because such withdrawals could cause destabilizing shifts of funds among financial institutions. Since, under IRS regulations, a person may have more than one IRA as long as the total annual contribution does not exceed the statutory limit, the above policy should not hamper individuals. An individual who intends to move to a different geographical location or join another qualified pension plan may leave existing IRA funds with the first institution and transfer them upon maturity. STAFF OP. of March 10, 1977.
Authority: 12 CFR 204.2(c).

2-338.11

IRA/KEOGH—Terminated Program

If a bank, in accordance with the deposit agreement, wants to terminate its IRA program for administrative reasons, application of the early withdrawal penalty is not required. Since it is likely that IRA participants would roll their deposits over to another depository institution in view of the substantial tax penalty that would be imposed for a premature distribution, depositors would not be receiving funds for a general use. STAFF OP. of Feb. 23, 1979.
Authority: 12 CFR 204.2(c).

2-338.12

IRA/KEOGH—Computation of Early Withdrawal Penalty

Computation of the actual penalty for early withdrawal of an IRA or Keogh time deposit depends initially on whether each deposit in the account resets the maturity of the entire account or whether each deposit has a separate maturity. Assuming that each deposit resets the maturity of the account, all interest earned by and credited to the account could be paid without the imposition of a penalty for early withdrawal. If each deposit has a separate maturity under the terms of the account, the bank could pay penalty-free interest earned on each deposit for the specific maturity period. If the maturity period for the deposit has lapsed and either the interest rate on or maturity period of the renewal term is different, interest on the deposit may not be paid penalty-free, since it would be included as part of the principal in the account.
The amount of the minimum penalty required to be imposed from withdrawal of the principal balance of the account varies depending on whether the bank uses a LIFO (last in, first out) or FIFO (first in, first out) method to pay withdrawals. Under the LIFO method, the funds needed to pay the withdrawal are treated as coming from those deposits most recently made, proceeding back in time until the amount needed to pay the requested withdrawal is accumulated. Under the FIFO method, the withdrawal is paid from the funds first deposited to the account, with the amount needed to pay the withdrawal aggregated. After the source of funds being used to pay the withdrawal has been identified, the minimum penalty required will be at least seven days of interest that has been or could have been earned on the amount withdrawn at the nominal (simple interest) rate being paid on the deposit for withdrawals within six days of any partial withdrawal. For withdrawals within six days of establishing the IRA, the forfeiture is all interest actually earned. Funds deposited in IRAs are primarily for retirement and thus do not seem to be subject to many withdrawals. The penalty for early withdrawals, moreover, serves as an incentive to holders of IRAs to keep their funds on deposit in one particular financial institution, thereby decreasing the potential for destabilizing shifts of funds. STAFF OP. of May 22, 1979.
Authority: 12 CFR 204.2(c).

2-338.13

IRA/KEOGH—Early Withdrawal of Excess Contributions

The early withdrawal penalty should be imposed upon premature withdrawal of excess contributions to IRAs. To permit an exception to section 204.2(c) might encourage individuals to overcontribute to an IRA with the knowledge that they would be permitted to withdraw any excess contribution without penalty. A member bank may, however, agree to transfer funds held pursuant to, or overcontributed to, another account of the depositor, so long as the maturity of the deposits in the second account is the same as, or longer than, the maturity of the original deposit. No opinion is expressed on whether such transfers are permissible under applicable IRA laws and regulations, which may impose other, unrelated penalties. STAFF OP. of Jan. 21, 1980.
Authority: 12 CFR 204.2(c).

2-338.14

IRA/KEOGH—Early Withdrawal by Depositor Age 59½ or Disabled

A member bank may pay all or a portion of IRA time deposit funds before maturity without penalty when the participant attains age 59½ or is disabled. The regulation does not require that the withdrawal constitute a “distribution” under the IRC and IRS regulations. While some sophisticated IRA participants may be able to use the early withdrawal exception to obtain higher interest rates, such a practice is not widespread nor otherwise a threat to the competitive balance between depository institutions. In any event, the member bank always has the right to structure the terms of the IRA agreement to be more restrictive than Board regulations. STAFF OP. of Feb. 7, 1980.
Authority: 12 CFR 204.2(c).

2-338.15

IRA/KEOGH—Early Withdrawal Penalty

A member bank is not required to impose an early withdrawal penalty for premature withdrawals from an IRA account after the depositor reaches the age of 59½. Withdrawal may be in the form of a lump sum payment or periodic annuity-like payments to the depositor. However, if the money withdrawn is reinvested in a non-IRA time deposit, a member bank must impose the appropriate penalty if the reinvested money is withdrawn prior to maturity. STAFF OP. of Dec. 22, 1981.
Authority: 12 CFR 204.2(c).

2-338.16

IRA/KEOGH—Early Withdrawal of Excess Contributions

The question was raised whether a bank may waive the penalty for early withdrawals of excess contributions to an IRA when the depositor is 59½ years of age or older or is disabled. Depository institutions may waive the early withdrawal penalty with regard to an IRA or a Keogh plan when the depositor attains age 59½ or is disabled. Although excess contributions to an IRA are not considered part of the IRA for tax-deduction purposes, the depository institution may nevertheless waive the early withdrawal penalty for excess contributions if the depositor is 59½ years of age or older or is disabled. Insofar as depository institutions are concerned, the balance of an IRA deposit are “funds contributed to an individual retirement account.” Further, in view of the substantial deregulation of interest rate ceilings in the past year, it is unlikely that depositors would regularly make excess contributions to IRAs in an attempt to circumvent interest rate ceilings or avoid possible early withdrawal penalties. In addition, requiring the imposition of an early withdrawal penalty on excess contributions could affect the asset flexibility of IRA participants and have an adverse effect upon the objective of encouraging individuals to save for their retirement. Consequently, little purpose would be served in requiring that withdrawals of excess contributions to an IRA be treated differently than withdrawals of regular contributions to an IRA. STAFF OP. of June 15, 1984.
Authority: 12 CFR 204.2(c)(1).

2-340

NONPERSONAL TIME DEPOSITS—Deposits of Governmental Units

Deposits of governmental units such as states and political subdivisions are considered nonpersonal time deposits subject to reserve requirements under Regulation D because the beneficial interest of public funds is not held solely by natural persons. STAFF OP. of Sept. 26, 1980.
Authority: 12 CFR 204.2(g), 204.8, and 204.2(f)(1).

2-340.1

NONPERSONAL TIME DEPOSITS—Capital Equivalency Deposit Agreement

Deposits held under a capital equivalency deposit agreement established pursuant to section 4(g) of the International Banking Act are not personal time deposits and are subject to federal reserve requirements. STAFF OP. of Oct. 7, 1980.
Authority: IBA § 4(g), 12 USC 3102(g); FRA § 19, 12 USC 371; 12 CFR 204.2(a)(1)(ii).

2-340.11

NONPERSONAL TIME DEPOSITS—Annuity Contracts

A depository institution proposes to make an annuity program available to its customers. Under the program, an insurance company will issue annuity contracts to owners of deposit instruments issued by the institution. The deposit instruments will fund the annuity contract and will be re-registered in the name of the insurance company in an account at the institution. The records will reflect the beneficial interest of the annuitant, and a contract owner has rights only with respect to the assets allocated to his or her contract. The deposit accounts underlying the annuity contracts could be regarded as time deposits in which the entire beneficial interest is held by natural persons. STAFF OP. of Nov. 19, 1980.
Authority: 12 CFR 204.2(c)(1), (e), and (f)(1).

2-340.12

NONPERSONAL TIME DEPOSITS—Funds of Indian Tribes

Staff has reviewed the status of funds of Indian tribes as nonpersonal time deposits under Regulation D. Funds held in a fiduciary capacity for the sole benefit of one or more individuals may qualify as personal time deposits under section 204.2(g) of Regulation D if the specific individuals’ interests in the funds are clearly identifiable; however, funds held in trust for various Indian tribes are not funds of individuals but rather are equivalent to funds of governmental units. In this connection, the Supreme Court has ruled that “Indian tribes are ‘distinct independent political communities, retaining their original natural rights’ in matters of local self-government.”1 As an analogy, it can be argued that funds of state and local governmental units are held for the “sole benefit of natural persons” in that the purpose of any governmental unit is to provide services and benefits for all the persons residing therein; however, such persons do not have any specific, identifiable interest in the governmental funds that they shall be entitled to claim at some future time. Similarly, based on general information about the nature of tribal trust funds, it does not appear that individual members of any given tribe have identifiable interests in funds held in trust by the Bureau of Indian Affairs.2 Rather, individual Indians have what might be described as an inchoate interest in tribal funds. Consequently, funds held in trust by the Bureau of Indian Affairs for various Indian tribes must be treated as nonpersonal time deposits for purposes of Regulation D. STAFF OP. of Oct. 30, 1981.
Authority: 25 USC 162a; 12 CFR 204.2(g) and 204.2(f)(1).

1
Santa Clara Pueblo, et al. v. Martinez, et al., 436 U.S. 49 (1977), citing Worcester v. Georgia, 6 Pet. 515, 559 (1932). See also United States v. Mazurie, 419 U.S. 544, 557 (1975) and F. Cohen, ed., Handbook of Federal Indian Law (New York: AMS Press, 1945), pp. 122-123.
2
See “Indian Tribal Trust Funds,” Hastings Law Journal, vol. 27 (1975), p. 519.
2-341

NOW ACCOUNT ELIGIBILITY— Individuals Operating Business

A husband and wife operating a profit-making business as individuals, but not as a partnership or other financial business organization, may maintain a NOW account at a member bank, since it is impracticable to distinguish between funds that are used in their business and other funds of those individuals. STAFF OP. of Jan. 23, 1979.
Authority: 12 CFR 204.130.

2-341.1

NOW ACCOUNT ELIGIBILITY— International Organizations and Foreign Governmental Units

Agencies of a foreign government may not maintain NOW accounts, because the beneficial interest in their funds remains with the foreign government, which is organized primarily for foreign government purposes. A consulate or embassy of a foreign government may not maintain NOW accounts, because the beneficial interest in the funds deposited by such consulates is with the government it represents. Federal law (12 USC 1832(a)) provides that only domestic governmental units are eligible to maintain NOW accounts. Similarly, U.N. officers (embassy staff) may not maintain NOW accounts if the funds deposited are funds of the United Nations or funds in which any beneficial interest is held by the United Nations, because the primary purpose of the organization is not charitable, fraternal, or educational (even though an element of a fraternal purpose is evidenced by the charter). STAFF OP. of March 5, 1979.
Authority: 12 CFR 204.130.
\

2-341.11

NOW ACCOUNT ELIGIBILITY— Professionals

Professionals operating on an unassociated basis are among the class of depositors eligible to maintain NOW accounts, since it is impracticable to distinguish between funds used in their individual and business capacity. Professionals operating as partnerships or corporations, however, are not eligible, since Congress intended that NOW accounts be made available only to individuals, and funds of such business organizations would always be used for business purposes. STAFF OP. of May 1, 1979.
Authority: 12 CFR 204.130.

2-341.12

NOW ACCOUNT ELIGIBILITY— Beneficiary of Attorney Trust Fund

The question has been raised whether attorney trust funds may be deposited in interest-bearing NOW accounts at member banks when the funds are maintained under the interest on lawyer trust account (IOLTA).
Section 303 of the Consumer Checking Account Equity Act of 1980 (title III of Pub. L. 96-221) provides the following test of eligibility for NOW accounts: (1) the account must consist solely of funds in which the entire beneficial interest is held by one or more individuals, by a governmental unit, or by an organization operated primarily for religious, philanthropic, charitable, educational, or other similar purposes and (2) the organization must not be operated for profit (12 USC 1832(a)). The Board regards this provision as including organizations not operated for profit that are described in section 501(c)(3) of the Internal Revenue Code.
In determining whether client funds may be deposited in NOW accounts under IOLTA programs, the Board has required (1) evidence that the organization administering the program is either a governmental unit, or a nonprofit organization operated for “religious, philanthropic, charitable, educational, or other similar purposes” eligible for tax-exempt status under section 501(c)(3) of the Internal Revenue Code and (2) an opinion from the appropriate state attorney general that the organization involved holds the beneficial interest in the accounts because it has the exclusive right to the interest on the funds maintained in the program. STAFF OP. of Nov. 5, 1984.
Authority: Consumer Checking Account Equity Act § 303, 12 USC 1832; IRC § 501(c)(3), 26 USC 501(c)(3).

2-341.13

NOW ACCOUNT ELIGIBILITY— Husband-and-Wife Partnership

A husband and wife partnership is not eligible to maintain a NOW account at a member bank. Eligibility for NOW accounts is established by 12 USC 1832(a), which authorizes institutions to offer NOW accounts. Paragraph (2) of that section specifically excludes for-profit partnerships. Although a husband-and-wife for-profit partnership cannot maintain a NOW account, a husband and wife are permitted to maintain a joint NOW account for their nonpartnership purposes. STAFF OP. of Oct. 16, 1986.
Authority: Consumer Checking Account Equity Act § 303(a), 12 USC 1832(a); 12 CFR 204.130.

2-341.14

NOW ACCOUNT ELIGIBILITY—U.S. Embassies of Foreign Governments

Embassies of foreign governments are not eligible to maintain NOW accounts at member banks under Board interpretation 12 CFR 204.130 (at 2-275). That interpretation states that governmental units are generally eligible to maintain NOW accounts at member banks and is based on the statute authorizing depository institutions to offer NOW accounts (12 USC 1832(a)).
The Garn-St Germain Depository Institutions Act of 1982 amended 12 USC 1832(a) to extend eligibility to certain governmental units. The statutory language clearly extends eligibility for NOW accounts only to deposits of public funds of listed entities. Further, the legislative history confirms that the amendment was intended to extend eligibility only to domestic, Commonwealth, and territorial governmental units (see Conf. Rep. (S. Rep.) No. 641, 97th Cong., 2d Sess. (1982), at 92; S. Rep. No. 536, 97th Cong., 2d Sess., (1982), at 44). NOW account eligibility cannot be extended to governmental units other than those listed in this interpretation. STAFF OP. of Aug. 19, 1987.
Authority: Consumer Checking Account Equity Act § 303(a), 12 USC 1832(a); 12 CFR 204.130.

2-341.15

NOW ACCOUNT ELIGIBILITY— Attorney Trust Accounts Other than IOLTA

A question was raised about the legality of a depository institution’s establishing a NOW account to hold trust funds for a law firm other than under the programs known as interest on lawyer trust accounts (IOLTAs) described in 2-341.12. This proposed account would be established in the name of the law firm that is a partnership composed of professional associations. The law firm would have an interest in approximately 35 percent of the deposited funds, but interest earned on the funds would inure to the benefit of clients of the firm, and these clients would all be natural persons.
In the situation described, the law firm would have an interest in the deposited funds even though it would not have an interest in the interest earned on the funds. Because the law firm is a partnership, the account would not consist “solely of funds in which the entire beneficial interest is held by one or more individuals.” Therefore, the account would not qualify as a NOW account. STAFF OP. of July 25, 1988.
Authority: Consumer Checking Account Equity Act § 303(a), 12 USC 1832(a); 12 CFR 204.130.

2-341.16

NOW ACCOUNT ELIGIBILITY— Student Loan Accounts

Department of Education regulations concerning student loan programs require participating institutions to set up a Perkins Loan Fund containing student loan monies, which must be maintained in interest-bearing accounts. The participating institution does not have the right to receive any of the income generated by assets in the account, which remain the property of the loan fund. Income from the account is considered to be held in trust for the Department of Education, and the account holder is not taxed on that income.
In general, interest may not be paid on demand deposits except for NOW accounts, which may be held only by individuals, certain not-for-profit organizations, or governmental units. Schools which operate on a for-profit basis are not eligible for NOW accounts. In the past, ineligible persons or entities have been permitted to deposit funds into NOW accounts in connection with interest on lawyer trust account (IOLTA) programs. Student loan program accounts are eligible for similar treatment. In determining whether to issue a favorable opinion letter to an IOLTA program, the staff has used the following criteria: (1) evidence that the beneficiary of the interest from the NOW accounts is either a 501(c)(3) organization under the Internal Revenue Code or is a governmental unit and (2) an attorney general’s opinion that the organization or unit holds the entire beneficial interest in the account because it has the exclusive right to the interest earned on the account, or a similar statutory provision. In this case the beneficial interest in the funds would be considered to be held by individuals or by the United States government, either of which would be eligible to hold a NOW account. STAFF OP. of Feb. 28, 1989.
Authority: 20 USC 1087cc(a)(3); FRA § 19(i), 12 USC 371a; Consumer Checking Account Equity Act § 303, 12 USC 1832.

2-341.17

NOW ACCOUNT ELIGIBILITY—Single-Member Limited Liability Companies

A question was raised about the eligibility of single-member limited liability companies (SMLLCs) to maintain a NOW account. Section 1832 of title 12 of the U.S. Code authorizes depository institutions (as defined in that section) “to permit the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instruments for the purpose of making transfers to third parties” (12 USC 1832(a)). This authorization extends, however, only to certain accounts or deposits, namely those “which consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit, and with respect to deposits of public funds by an officer, employee, or agent of the United States, any State, county, municipality, or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, American Samoa, Guam, any territory or possession of the United States, or any political subdivision thereof” (12 USC 1832(b)). In summary, section 1832 authorizes depository institutions to offer interest-bearing checking accounts to individuals, certain nonprofit organizations, and domestic governmental units.
According to the National Conference of Commissioners on Uniform State Laws (NCCUSL), which promulgated a Uniform Limited Liability Company Act (ULLCA) in 1994, a limited liability company “is a single business entity which provides limited liability protection for the partners, as well as providing all the owners of the business with federal partnership taxation.”1 The Tennessee Limited Liability Company Act was enacted in 1994, with the Tennessee Revised Limited Liability Company Act being enacted in 1995 and effective as of January 1, 2006 (Tenn. Code Ann. §§ 48-201-101 et seq. (1994); Tenn. Code Ann. §§ 48-249-101 et seq. (2005)).
The Board has long held that for-profit entities are prohibited by statute from maintaining NOW accounts.2 The only business-related entities that have been permitted to maintain NOW accounts are sole proprietorships and individuals operating unincorporated businesses, “because the funds of the business are the funds of the individual and are not the funds of a separate legal entity such as a corporation or partnership. Additionally, it could prove to be burdensome to separate the funds of a sole proprietorship into those that are used for personal expenses and those that are used for business purposes.”3 Accordingly, Board staff has opined that a “one-man corporation” may not maintain a NOW account because “[e]ven though a corporation may be owned by one person, a corporate entity does not qualify as an ’individual’ under the statute (12 USC 1832(a)).”4 Board staff similarly opined that subchapter S corporations may not maintain NOW accounts: “[a]lthough some subchapter S corporations may have only one shareholder, and thus may be taxed as a sole proprietorship, they are legally incorporated organizations under state law and have an existence independent of the individual shareholder . . . . Therefore, the mere fact that a subchapter S corporation may be in the same position as sole proprietorships with regard to taxes does not blur the clear legal distinctions between the two types of entities.”5
Board staff believes that an SMLLC is in the same position as a “one-man corporation” or a subchapter S corporation with a single shareholder for purposes of determining NOW account eligibility. The SMLLC has a legal existence independent of its individual shareholder. It is not only possible therefore to distinguish between funds of the individual in his individual capacity and the funds of the SMLLC, but one of the purposes of establishing such an entity is to distinguish legally between the individual and the SMLLC. Accordingly, Board staff believes that unless an SMLLC is “operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and . . . is not operated for profit,” the SMLLC is not eligible to maintain a NOW account. STAFF OP. of Aug. 23, 2006.
Authority: 12 USC 1832.

1
See http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ullca.asp.
2
See, for example, Board letter dated July 2, 1981, page 1: “Profit-making entities such as corporations are not permitted by statute to maintain NOW accounts. Since partnerships are regarded as separate legal entities, the Board and the other Federal agencies have long held that they should be treated in a manner similar to that accorded corporations. Consequently, partnerships organized for profit are not permitted to maintain NOW accounts.”
3
Board letter dated July 2, 1981, page 2. Recognizing that this interpretation created disparate treatment of businesses operated as sole proprietorships and businesses operated as closely held corporations, the Board in 1981 proposed categorizing sole proprietorships as ineligible to maintain NOW accounts. Cf. Board press release of April 14, 1981. The Board did not adopt the proposal, in light of negative comments received.
4
Board staff opinion dated April 27, 1981.
5
Board staff opinion dated February 23, 1981.

NOW ACCOUNT ELIGIBILITY— Escrow Account for Taxes and Insurance Premiums

See 2-343.1.

2-342

SAVINGS DEPOSITS—Totten Trust

A savings account is often used as a vehicle for a Totten trust, a tentative, revocable trust that is created by the deposit of one’s own money as a trustee for another with a presumption that title passes on the death of the trustee. The question has arisen whether the money market deposit account (MMDA) is suitable for use as a Totten trust in the same manner as a regular savings account. Regulation D treats an MMDA as a type of savings account, and Board staff is aware of no federal law that would prohibit the use of an MMDA as a vehicle for a Totten trust. However, private counsel should be consulted to determine whether, under state law, an MMDA is an appropriate vehicle by which to establish a Totten trust. STAFF OP. of April 7, 1983.
Authority: 12 CFR 204.2(d)(2)(ii).

2-342.1

SAVINGS DEPOSITS—Preauthorized Transfers from MMDA

The question has arisen whether an arrangement whereby a depository institution sends an employee to a customer’s place of business to receive authorization to make a transfer from the MMDA to another account of the depositor at the same institution would be regarded as a transfer subject to the limit of six preauthorized or automatic transfers per month. Such transfers are regarded as preauthorized transfers and therefore subject to the six-per-month limitation. STAFF OP. of June 27, 1983.
Authority: 12 CFR 204.2(d)(2).

2-342.12

SAVINGS DEPOSITS—Withdrawals by Messenger

A bank offers an account arrangement in which a corporation opens a zero-balance checking account and a money market deposit account (MMDA). At the same time, the corporation enters into a messenger agreement and authorization with a messenger service and the bank. The messenger service is not owned or controlled by, or otherwise affiliated with, the bank. Under the messenger agreement, the corporation authorizes the messenger to deliver to the bank instructions to make transfers from the corporation’s MMDA to its checking account. The authorization also indicates that the messenger is authorized to receive information confirming transactions from the bank and transmit it to the customer. The bank absorbs the expense associated with the messenger service.
A customer is permitted to write checks on its zero-balance checking account. At the beginning of the day, the bank determines the amount of checks that had been presented to it for payment the previous day. The messenger calls the bank daily and is told the amount that must be transferred from the customer’s MMDA to its checking account to cover the checks presented. The messenger service then prepares a transfer instruction and delivers it to the bank. Upon receipt of the instruction, the bank makes the transfer. The bank is unaware of whether the messenger service consults with the customer before the instruction is initiated; however, such a consultation is not required. Interest is paid by the bank on the balance maintained in the MMDA on a sliding scale, depending on the level of balances maintained. A 3 percent reserve is maintained against the balances in the MMDA.
The purpose of the exception for withdrawals or transfers by messenger in the MMDA rules was to recognize that a depositor could appear in person or through an agent to effect the transactions. This exception was adopted after the Board balanced the hardships and burdens that could result if such withdrawals were limited against the potential risk that such transactions would be used to evade the six-preauthorized-withdrawal limitation. The Board believed that depositors who made withdrawals in person or through a messenger ordinarily would not use the arrangement to avoid the six-withdrawal limitation because the depositor would be required either to appear physically at the bank or establish an arrangement with a messenger. It was never contemplated that the bank itself would be involved in establishing and maintaining the arrangement. Further, it was understood that the depositor would be involved in the initiation of each transfer instruction, as is ordinarily the case.
The arrangement is inconsistent with the language and intent of the Board’s regulations relating to the operation of MMDAs and is contrary to federal law and regulation for several reasons. First, the arrangement appears to be a device to avoid the prohibition against payment of interest on demand deposits because it results in the payment of interest on demand balances maintained to cover checks drawn on a corporate customer’s checking account. Second, because of the bank’s involvement in establishing and maintaining the relationship with the messenger service, the arrangement violates the limitation of six preauthorized transfers contained in Regulations D and Q. The bank absorbs the cost of the messenger and, in making daily transfers, deals virtually exclusively with the messenger rather than with the customer of the bank. It is apparent that the messenger is more an agent of the bank than of the customer and that the messenger agreement serves no purpose other than to assist in evasion of the limitation of six preauthorized transfers per month. The transfers, therefore, appear to be automatic and prearranged, particularly since there is no apparent requirement for contact between the messenger and the customer for authorization of each transfer. Finally, there is no indication that the bank imposes any charges or interest on the overdraft in the demand deposit account to which transfers are made, as required by Board regulations.
It is apparent that the sole purpose of the arrangement is to enable businesses to earn interest on their checking account balances. The program therefore violates Regulations D and Q because it results in the payment of interest on demand deposits and because the bank does not maintain transaction account reserves against balances in the MMDA accounts. Consequently, the bank was advised to cease offering the program to new customers and to terminate the accounts it had already established as soon as possible. STAFF OP. of Nov. 16, 1984.
Authority: 12 CFR 204.2(d)(2)(i) and (ii), 204.2(b), and 217.2. *

*
This reference to 12 CFR 217 refers to the Board’s Regulation Q: Prohibition Against Payment of Interest on Demand Deposits, repealed effective July 21, 2011 (76 FR 42015, July 18, 2011).
2-342.13

SAVINGS DEPOSITS—MMDAs

A bank proposes to offer MMDAs and to provide overdraft protection on these accounts under an arrangement by which the bank will transfer funds into the accounts to cover debits against the accounts in excess of the account balances. Transfers out of each MMDA will be restricted to not more than six per month.
Because transfers from each MMDA will be limited to not more than six per month (no more than three of which will be by check, draft, or similar order), the status of the accounts as MMDAs will not be affected by overdraft protection. In the questions and answers to Regulation D, the staff has said that the status of a savings account is not affected by the nature of transfers made into the account (see 2-301.9). Because MMDAs are savings deposits, that principle applies to MMDAs.
In limiting transfers from MMDAs, section 204.2(d)(2)(ii) states that an account is not a transaction account by virtue of an arrangement that “permits transfers for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer).” When third-party transfers from each MMDA are limited to six per month, the satisfaction of the loans created as a result of overdraft protection constitutes the repayment of loans to the depository institution that originated the loans. Consequently, the repayment of those loans from MMDAs by means of preauthorized transfers will not count toward the six-transfer limit. STAFF OP. of Sept. 2, 1988.
Authority: 12 CFR 204.2(d)(2)(ii).

2-342.14

SAVINGS DEPOSITS—MMDAs on Escrow Accounts

Regulations of the Department of Transportation specify that a “depository agreement” must be executed among a bank, an air carrier, and a tour operator and must provide for the return of funds to charter-flight participants if certain conditions are not met. A bank proposes to place the escrowed funds attributable to each tour operator in one money market deposit account (MMDA) per operator. Each tour operator may have 20 to 30 charter trips scheduled over a given period and will need to make at least three withdrawals by telephone transfer or by check per trip. Several of the 20 to 30 charter trips will be scheduled to depart each month, thus necessitating more than six transfers from each MMDA monthly.
Section 204.2(d)(2)(ii) of Regulation D defines an MMDA as—
a deposit or an account. . .that otherwise meets the requirements of section 204.2(d)(1) and from which under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make no more than six transfers per calendar month or statement cycle. . . .
The number of permissible transfers is not affected by the number of beneficial holders of the account. Insofar as the transfer restrictions are concerned, the bank must look solely to the number of transfers permitted or authorized for the account. If that number exceeds six, the account does not qualify as an MMDA. In the arrangement described, the bank proposes to establish one MMDA for each tour operator and not one per individual. Because more than six transfers per month will be made from the account, it will not qualify as an MMDA.
The types of depository agreements described cannot qualify as interest-bearing transaction accounts such as NOW accounts because the accounts will be held by profit-making entities (i.e., the tour operators) and the air carriers are beneficiaries of the accounts. (By statute, beneficial ownership is relevant for determining eligibility for a NOW account (see 12 USC 1832(a)). These funds could be placed in demand deposit accounts. However, unlike MMDAs and NOW accounts, demand deposit accounts may not pay interest. STAFF OP. of Aug. 24, 1987.
Authority: 12 CFR 204.2(d)(2)(ii).

2-342.15

SAVINGS DEPOSITS—MMDAs; Monitoring of Transfers

A depository institution proposes to offer a money market deposit account (MMDA) monitored to discourage withdrawals or transfers in excess of those permissible for MMDAs. The monitoring system would look to consecutive months in which there were transfer violations. After the first month in which there were excess transfers, the institution would send a letter reminding the customer of the transfer limit and informing the customer that the limit was exceeded. If excess transfers were made during the next month, the institution would send a letter informing the customer of the violation and stating that continued violation would result in elimination of the transfer capacity or conversion of the account to a checking account. If the depositor exceeded the transfer limit for a third consecutive month, the institution would send a letter informing the customer that the account has been converted to a transaction account.
The proposed monitoring system would fail to ensure that there are no more than six transfers per month and also fail to ensure that there are no more than three transfers by check, draft, debit card, or similar order per month. A depositor could make unlimited transfers from the account for three consecutive months before the institution would close the account. For example, a customer could write 20 checks per week on its account in the first month. Only after the end of the month would the customer receive a reminder of the transfer limit. This transfer activity could continue through the second month, when the customer would receive another warning. Only after the third consecutive month of such activity would the account be changed to a transaction account.
If an account becomes a transaction account as defined in section 204.2(e) because of excess transfers, then Regulation CC, Availability of Funds and Collection of Checks (12 CFR 229), would also apply. STAFF OP. of Dec. 6, 1988.
Authority: 12 CFR 204.2(d)(1) and (2).

2-342.16

SAVINGS DEPOSITS—Terminals Authorizing Cash Disbursement by Retailer

The question was raised whether the use in retail outlets of electronic terminals that authorize transactions, including the disbursement of cash by the retail outlets, would result in withdrawals from an automated teller machine (ATM) rather than third-party transfers by debit card, particularly under section 204.2(d)(2) of Regulation D.
A depository institution proposes to locate an electronic terminal on the premises of a retail merchant. The depository institution’s customer would use this terminal to designate the account from which he or she wishes to withdraw funds, and the amount of the withdrawal. The terminal would authorize or reject the transaction, but would not disburse funds. Rather, the customer would take an authorization voucher produced by the terminal to a cashier’s window on the merchant’s premises, sign a receipt, and receive cash from the cashier. The customer would then be able to use the funds in any manner.
The term “savings deposit” includes deposits in savings accounts from which the depositor is permitted to make no more than three preauthorized or telephone (including computer) transfers per month. “Savings deposit” also includes accounts commonly known as money market deposit accounts (MMDAs), from which the depositor is permitted to make no more than six preauthorized or telephone (including computer) transfers per month and from which three of the six transfers may be accomplished by check, draft, or debit card. Such an account is not a “transaction ac count” by virtue of an arrangement that permits withdrawals (payments directly to the depositor) from the account when such transfers or withdrawals are made at an ATM, regardless of the number of such transfers or withdrawals.
If the arrangement results in third-party transfers by debit card, the depository institution may permit only three such transfers per month from an MMDA. However, if the arrangement is treated as resulting in withdrawals from an ATM, no limit is placed on the number of withdrawals.
In discussing why transfers initiated at an ATM from one of the customer’s accounts to another of the customer’s accounts at the same depository institution, or why withdrawals paid directly to the customer do not count toward the permissible number of transfers and withdrawals from an MMDA, the staff has previously advised that “it is the character of the underlying transfer (that is, whether the payment initiated by the customer is made directly to the customer or the customer’s account rather than to a third party or third party’s account) that determines whether the transfer counts in distinguishing between a savings and a transaction account” (see 2-345.17).
The arrangement described above may be treated as resulting in withdrawals from an ATM, provided that the money will be paid directly to the customer. The dispensing of cash by personnel of the retail establishment, as opposed to through the terminal, does not so distinguish these transactions from withdrawals at an ATM as to warrant different treatment. In effect, staff of the retail establishment would be substituted for the cash-dispensing mechanism of an ATM.
It is important that customers be able to use the funds in any manner they choose. The retail establishment may not restrict the use of funds withdrawn by use of the terminal. It may not require that the funds be used for the purchase of goods or services from the retail establishment or for any other purpose.
Each depository institution from which such withdrawals are made should have an effective means of monitoring and policing the practices of the retail establishments in which the terminals are located to ensure that the establishments do not restrict the use of the funds. Such use of the terminals affects the status of the depository institution’s deposit accounts, and improper practices on the part of a retail establishment could subject each depository institution not only to the reclassification of MMDAs or savings deposits to transaction or demand accounts under Regulation D, but also to penalties for violating Regulation Q if the accounts become demand deposits and interest is paid on them, and Regulation CC if appropriate disclosures and availability policies have not been followed.
This opinion addresses the Regulation D aspects of this program only and does not address other issues such as branch banking laws. STAFF OPs. of April 5, 1989, and Aug. 1, 1989.
Authority: 204.2(d)(2).

2-342.17

SAVINGS DEPOSITS—Monitoring Transfers from MMDAs

A bank proposes to compile monthly reports of customers who had excessive money market deposit account transactions the previous month, notify customers by letter regarding those excessive transfers, and close any account if the transfer limits were violated during four consecutive months.
These procedures would not result in compliance with the six-transfer limit on MMDAs. Footnote 5, referred to in footnote 6 of section 204.2(d)(2)(ii), requires institutions to monitor transfers and contact customers who exceed the limits more than occasionally.
Footnote 5 provides that the rule limiting transfers need not be applied mechanically, but it does not change the fundamental requirement that a depository institution may not permit or authorize more than six transfers from an MMDA per month. Thus, if the circumstances warrant, an institution may not be required to close or reclassify an MMDA in the event of an occasional excess transfer from the account. As the staff stated in its opinion at 2-342.15, enforcement procedures that focus on excess transfers in consecutive months and that ignore excess transfers in any particular month would not be sufficient to prevent excess transfers from MMDAs, and would therefore fail to meet the monitoring requirements of Regulation D.
Ideally, controls on excess transfers should be sufficiently flexible to address both excess transfers in nonconsecutive months as well as the level of excess transfers in a particular month. Such controls would help depository institutions distinguish inadvertent violations of the transfer limits from abuses of the transfer limits. Thus, when a customer ignores the transfer limits applicable to an MMDA, the depository institution should take steps to close the account more quickly than it would an account from which the depositor inadvertently, and occasionally, exceeds the transfer limits by a single transfer. Nevertheless, a monitoring system that would detect and prevent all excess transfers may be costly to administer. For this reason, the staff has applied a general rule that an institution may continue to consider an account an MMDA even if there are excess transfers so long as those excess transfers are not the result of an attempt to evade the transfer limits, and if the excess transfers occur in not more than three months during any 12-month period. This working rule is not absolute, however, and the facts and circumstances must be considered in each case.
The proposed standards for monitoring MMDAs would not adequately prevent excess transfers. They do not take into account the number of excess transfers in an MMDA in any one month; a large number may be evidence of an intent to evade the transfer limits. Further, the standards would permit excess transfers in four consecutive months. Therefore, the proposed standards could result in violations of the transfer restrictions on MMDAs. STAFF OP. of Feb. 15, 1990.
Authority: 12 CFR 204.2(d)(2).

2-342.18

SAVINGS DEPOSITS—MMDA Transfer by Facsimile Machine

A bank proposes to offer a money market deposit account (MMDA) arrangement in which deposits would be placed in the MMDA from various sources but daily transfers would be made to a commercial checking account of the customer. Instructions to make the transfer and instructions on third-party payments to be made from the checking account would be transmitted to the bank by facsimile machine.
The stated intention of the arrangement was to allow the payment of a high rate of interest on the funds with little administrative work by the bank. MMDAs have restrictions on the number of transactions by check, preauthorized agreement, or telephone, but no restrictions apply to withdrawals made by mail, by messenger, or in person. The bank views instructions received by facsimile machine as functionally the same as instructions received by mail.
In order for a deposit to be considered an MMDA for purposes of Regulation D, it must be limited to no more than six transfers per calendar month or statement cycle of at least four weeks. Section 204.2(d)(2)(ii) explicitly provides that transfers to another account of the depositor at the same institution or to a third party count toward the limitation when transfers are made by preauthorized or automatic transfer or telephonic agreement (including data transmission), order, or instruction. Therefore, the use of facsimile machines to transmit interaccount transfer instructions constitutes a data transmission order or instruction via telephone. STAFF OP. of January 30, 1991.
Authority: 12 CFR 204.2(d)(2)(ii).

2-342.19

SAVINGS DEPOSITS—Transfers for Overdraft Protection

The question has arisen whether transfers from a savings deposit to cover overdrafts on a checking account are subject to the three-check or six-transfer limit of Regulation D. If a deposit or account is maintained in connection with an overdraft arrangement under which transfers are made from a savings deposit to a transaction account to cover checks presented to the depository institution that exceed the balance in the account as those checks are presented, the transfers are subject to the six-transfer limit. On the other hand, if transfers are made from a savings deposit to repay prior credit that was extended by the bank to pay checks drawn on a transaction account, the transfers should be considered transfers to repay loans from the bank. In the former case, the use of the savings-deposit balance as a substitute for a transaction-account balance is effectively limited by the six-transfer limit. However, in the latter case, the savings-account balance could be a substitute for the transaction-account balance because the bank imposes no limit on the transfers to repay loans from the institution. Thus, overdraft-protection arrangements involving extensions of credit must be reviewed to determine whether the savings accounts should be considered transaction accounts.
The factors determining whether these arrangements result in transaction accounts include the rates of interest charged on the outstanding balances under the lines of credit, the interest earned on the time deposits, the balances ordinarily maintained in the transaction accounts, the activity in the transaction accounts, the frequency with which advances on the lines of credit are satisfied from transfers from the savings deposits rather than other funds of the customer, and the extent that the depository institution suggests, promotes, or otherwise furthers the establishment of the arrangements. STAFF OP. of January 31, 1992.
Authority: 12 CFR 204.2(d)(2) and (e)(5).
See also 2-342.13 and 2-345.23.

2-342.2

SAVINGS DEPOSITS—Monitoring of Transfers

A depository institution proposes the following system to monitor and enforce the transfer limits imposed on savings deposits. Whenever one to four transfers over the monthly maximum have occurred, a first notice would be sent to remind the customer of the prohibition against excess transfers or withdrawals. A second notice containing a strong message that excessive transfers or withdrawals will result in conversion of the account to a non-interest-bearing transaction account would be sent whenever any of the following occurred: five to fourteen transfers over the maximum in any month; three to four transfers over the monthly maximum in any two months out of the past 12 months; or three first notices in any 12-month period. Finally, if four first notices in any 12-month period or three second notices in a 12-month period have been sent, or if 15 or more transfers over the monthly maximum in any one month have been made, the depository institution would review the 12-month account history, including an averaging test, to determine whether there has been an attempt to evade the transfer limits. The depository institution would examine the average number of transfers per month to determine if the excess transfers result from the lack of customer control over the timing of negotiation of the checks or drafts (“bunching”). If the review does not reveal lack of intent to evade, or extenuating circumstances, then the depository institution would give third and final notice that the account had been converted to a non-interest-bearing transaction account.
The proposed monitoring system would not adequately ensure compliance with the transfer limits imposed in section 204.2(d)(2) of Regulation D. For example, a customer could have 14 transfers over the monthly maximum and receive only a second warning rather than have the account closed or reclassified. The customer could accrue three such second warnings before the account was closed or reclassified. This arrangement permits customers materially to exceed the transfer limits for savings deposits.
Footnote 5 to Regulation D requires depository institutions that do not prevent excess transfers to monitor transfers from savings deposits to ensure that customers do not use these accounts as substitutes for transaction accounts. Monitoring systems that do not strictly limit the number of transfers to the permissible levels should be designed to enable the institution to consider the probable causes of excess transfers so that it can take appropriate action. If an institution monitors a savings account during a month and notifies a customer of transfers in excess of the transfer limits promptly after the excess transfers are discovered, the customer may take appropriate steps to prevent additional excess transfers during the remainder of the month, and the institution may not need to close the account or take other remedial action. On the other hand, if monitoring is performed and notice is given only after the close of the month, the customer who has exceeded the transfer limits early in the statement cycle might have a significant number of additional transfers during the month that will far exceed the transfer limits.
The monitoring and notice provisions of footnote 5 are intended to be used by depository institutions to give customers an opportunity to revise their transfer practices before the institution must take remedial action. They are not intended to expand the number of transfers that could be made from a savings deposit. STAFF OP. of February 11, 1992.
Authority: 12 CFR 204.2(d)(2).

2-342.21

SAVINGS DEPOSITS—Six-Transfer Limit

The question has arisen whether a check that is deposited into a savings account and subsequently returned and charged back against the account must be considered one of the six transfers per month permitted under Regulation D.
When a check is returned unpaid to a depository institution that had received the check as a deposit to a savings account and had provided credit for the deposit to its customer, the depository institution may charge the check back to the customer’s account and that charge would not count as a transfer and therefore would not count toward the six-transfer limit applicable to savings accounts. STAFF OP. of July 29, 1992.
Authority: 12 CFR 204.2(d).

2-342.22

SAVINGS DEPOSITS—Transfer Restrictions

Several questions have arisen concerning the transfer limits on savings deposits in section 204.2(d)(2) of Regulation D. Although the questions refer to savings and money market accounts as separate types of accounts, Regulation D no longer makes this distinction. (See 56 Fed. Reg. 15493 at 15494, April 17, 1991.)
Question 1: A savings account is used for overdraft protection for checks drawn on a demand deposit account. Does the six-transfer limit apply to overdraft transfers? Are transfers to cover overdrafts created as a result of credit card, ATM, and ACH transactions subject to the six-transfer limit?
Regulation D defines “savings deposit” in 204.2(d)(2) and “transaction account” in section 204.2(e). Overdraft protection can be accomplished by directly transferring funds from a savings account to pay charges to the account or by posting those charges to a line of credit. In some cases, however, it is accomplished by a combination of these methods: a line of credit is extended to the customer and drawings on the line of credit are satisfied by preauthorized transfers from a savings account.
A transfer from a savings deposit to repay a bona fide loan from the bank resulting from overdraft protection does not count as a transfer subject to the transfer limit (see 2-342.13). Depending upon the facts and circumstances, section 204.2(e)(5) might apply to an arrangement under which a depository institution allows a customer to have draws on a line of credit to pay overdrafts on an account and then allows the customer to satisfy those draws by transfers from a savings deposit. If section 204.2(e)(5) applies, the savings deposit will be reclassified as a transaction account. (See 2-345.23.)
Generally, if by arrangement transfers are made from a savings account to a transaction account, each transfer to the transaction account counts toward the six-transfer limit in section 204.2(d)(2). In that case, the use of the savings-account balance as a substitute for a transaction-account balance is effectively limited by the six-transfer limit. However, if the transfers from the savings account are used to repay credit extended to the holder of the transaction account because of overdrafts, the arrangement must also be analyzed under section 204.2(e)(5) because the extension of credit, in conjunction with the transfers, may increase the depositor’s ability to substitute savings-account balances for transaction-account balances. In these cases, a savings account may be considered a transaction account even though fewer than six transfers per month are made from the savings account.
In determining whether a line-of-credit overdraft arrangement involving transfers from a savings account results in the savings account being considered a transaction account under section 204.2(e)(5), one must consider all the facts and circumstances, including the rates of interest charged on the outstanding balance under the line of credit; the interest rate earned on the savings account; the balance ordinarily maintained in the transaction account; the activity in the transaction account; the frequency with which advances on the line of credit are satisfied from transfers from the savings account rather than other funds from the customer; and the extent to which the depository institution suggests, promotes, or otherwise furthers the establishment of the arrangement.
The staff has also been asked whether transfers to cover overdrafts created as a result of credit card, ATM, and ACH transactions are subject to the six-transfer limit. A credit card transaction is a transaction by which credit is extended to the cardholder. Although credit extended by means of a credit card may be paid by means of a transfer from a savings account, the individual credit card transactions would not ordinarily count as transfers from the savings deposit. A debit card, however, does access an account directly, and debits from a savings account by means of a debit card are limited to three per month. ACH transactions on a savings account are subject to the six-transfer limit. ATM cash withdrawals or transfers from a savings deposit to another account of the depositor at the same depository institution are not subject to either the three- or six-transfer limit.
Question 2: If four checks are overdrawn against an overdraft-protected demand deposit account on the same day, should the system count one or four transfers if (1) the processing system used by the bank transfers funds for each check or (2) the system sums the four checks and makes one transfer to cover all four checks.
These transactions are governed by section 204.2(d)(2), which limits transfers from a savings account to another account of the depositor at the same institution to six per month. Generally, each separate transfer from a savings account to a transaction account should be counted against the transfer limit. If four checks are processed separately (for example, when each check is presented to the institution at a different time during the day for payment over the counter in cash) and the bank transfers funds from the customer’s savings account to the customer’s transaction account at the time each check is paid, then the savings account would be charged with four transfers. Likewise, if transfers from a checking account would result in overdrafts and a separate transfer from the savings account to the checking account would be made to cover each funds transfer, then each transfer from the savings account would count toward the six-transfer limit. The making of separate transfers to cover individual checks, even if the checks were presented together, ordinarily would result in separate transfers for purposes of the transfer limit, unless the depository institution could demonstrate that the separation of the transfers was wholly unrelated to the separate payment of checks. If, however, the checks that are presented on the transaction account are processed in a batch rather than individually, and only one transfer equal to the sum of the overdrafts is made from the savings account, then only one transfer from the savings deposit need be charged against the transfer limit.
If a transfer is made from a savings deposit to repay a prior extension of credit by the bank and the credit was extended to pay checks drawn on a transaction account, the transfer generally would be considered a transfer to repay the loan from the bank and usually would not count toward the six-transfer limit. In that case, however, the savings-account balance could be a substitute for the transaction-account balance, and the arrangement must be reviewed to determine whether the savings account should be considered to be a transaction account under section 204.2(e)(5).
Question 3: Do transfers from a savings account to another deposit at the institution count toward the six-transfer limit? Does it matter what type of account the funds are transferred to—such as to a demand deposit account or an individual retirement account? Does it matter whether the transfers are for a specific amount and occur on the same day each month—such as to pay rent?
Transfers from a savings account to another deposit account at the institution would count toward the six-transfer limit if they were made by telephone or by any other means listed in section 204.2(d)(2), regardless of whether the transfers are made on a particular day each month or whether the amount of the transfer varies or is constant from month to month and regardless of the type of account the funds are transferred to.
Question 4: Verify that the following list correctly categorizes the transactions that fall within each category:
  • Three-transaction limit. Point-of-sale transactions with either ATM or credit card company debit cards and withdrawals payable to third parties initiated by checks or drafts
  • Six-transaction limit. Preauthorized transfers through ACH or EFT; automatic transfers for overdraft protection; telephone, fax, and computer transactions to transfer funds to another account at the same institution; transfers between a parent’s account and his or her child’s account; and withdrawals initiated by telephone where the proceeds are paid to third parties
  • Unlimited. Transfers to pay loans at the same institution; withdrawals made (1) in person, (2) at an ATM, (3) by messenger, or (4) by mail (via a check sent to the depositor); telephone withdrawals where the withdrawn funds are mailed to the account holder; and transfers between accounts of the depositor at the same institution initiated (1) in person, (2) by mail, (3) by ATM, or (4) by messenger
The transfers listed under the three-transfer limit are subject to that limit. The transfers listed under the six-transfer limit are generally subject to that limit, and the transactions listed in the unlimited-transfer category generally are not subject to specific transfer limits. However, overdraft-protection arrangements and transfers to pay loans at the same institution could result in a savings account being classified as a transaction account under section 204.2(e)(5). STAFF OP. of July 13, 1992.
Authority: 12 CFR 204.2(d)(2) and (e)(5). See also 2-342.13, 2-345.23, and 2-345.25.

2-343

TIME DEPOSITS—Early Withdrawal; Greater-Than-Required Penalty

A bank is free to impose a greater penalty for the withdrawal of time deposits before maturity than that prescribed by Regulation D, as long as the actual penalty is clearly brought to the attention of the depositor upon creation of the deposit agreement. STAFF OP. of Jan. 27, 1975.
Authority: 12 CFR 204.2(c).

2-343.1

TIME DEPOSITS—Funds Held in Escrow

An escrow account for tax and insurance premiums in which the entire beneficial interest is held by one or more individual mortgagees who qualify in their own right to hold a NOW account or a personal time deposit may qualify as such an account or deposit. STAFF OP. of May 1, 1975.
Authority: 12 CFR 204.2(f) and 204.130.

2-343.11

TIME DEPOSITS—Early Withdrawal; Transfer of Bank Assets and Liabilities

If a member bank transfers the assets and liabilities (including its certificates of deposit) of one of its branches to a newly chartered banking institution, the transfer of deposits does not constitute an early withdrawal of time deposit funds, and no early withdrawal penalty should be imposed so long as new certificates are issued on the same terms and conditions as the original certificates (that is, at the same rate of interest and maturity). It is appropriate, however, for the member bank to inform the depositors affected that they are under no obligation to exchange their certificates for newly issued instruments. In addition, the depositors should be notified that the early withdrawal penalty would be applied if they were to redeem their deposits prior to maturity, since a new certificate would represent only a change in the obligor of the instrument, and not a change in any of the terms, including the maturity and interest rate payable. STAFF OP. of Dec. 14, 1978.
Authority: 12 CFR 204.2(c)(1).

2-343.12

TIME DEPOSITS—Early Withdrawal; Death of Owner

The beneficiary of a “Totten trust” does not qualify as an “owner” for the purposes of the death exception to the early withdrawal penalty rule. “Owner” is defined as any individual who at the time of his or her death has either full legal title or beneficial title to all or a portion of the funds and full power of disposition and alienation with respect thereto. Under a “totten trust,” the beneficiary acquires legal title to the deposit only upon the unequivocal act or declaration of the grantor during his or her lifetime. In the absence of either of these events, the trust is tentative since the grantor has the power to revoke the trust at will, and the beneficiary lacks full power of disposition and alienation with respect to any portion of the funds. STAFF OP. of Aug. 3, 1979.
Authority: 12 CFR 204.2(c).

2-343.13

TIME DEPOSITS—Early Withdrawal; Death of Owner

State law determines who is owner of time deposit funds, whether named or unnamed. Under the death exception to the early withdrawal penalty rule, a bank should require reasonable assurance that, at the time of his or her death, an individual qualified as an owner of the funds under state law, within the regulatory definition of the term “owner.” To facilitate determination of ownership, when the time deposit is established, the bank may wish to obtain from a depositor a statement concerning whether or not there are other owners. STAFF OP. of Dec. 9, 1977.
Authority: 12 CFR 204.2(c).

2-343.14

TIME DEPOSITS—Transferability

A time deposit would not be regarded as transferable if the depository institution added the name of another natural person to the deposit of a natural person in order to create joint ownership, as long as the transaction takes place on the books of the depository institution. STAFF OP. of Sept. 25, 1980.
Authority: 12 CFR 204.2(f)(1)(iv).

2-343.15

TIME DEPOSITS—Early Withdrawal; Death of Depositor

A member bank is not required to apply the early withdrawal penalty prescribed in section 204.2 of Regulation D if the time deposit has renewed automatically after the death of the original depositor and title to the time deposit had passed automatically to the depositor’s surviving spouse. However, if at the maturity of the deposit, the owner’s heir or representative has reinvested the funds in a deposit with a maturity that varies from the maturity of the original deposit, the heir or representative is no longer able to request a penalty-free early withdrawal, because he or she has consciously chosen to change the nature of the decedent’s interest, and the new time deposit can therefore no longer be regarded as that of the decedent. STAFF OP. of April 8, 1981.
Authority: 12 CFR 204.2(c).

2-343.16

TIME DEPOSITS—Early Withdrawal; Agreement to Pay Before Maturity

A member bank cannot agree in advance to pay a time deposit before maturity. STAFF OP. of Dec. 19, 1978.
Authority: 12 CFR 217.4(a) [since revised; now covered by 12 CFR 204.2(c)(1).]

2-343.17

TIME DEPOSITS—Early Withdrawal; Zero-Interest-Rate Deposit

Time deposits on which no interest is earned are not inappropriate per se. However, such time deposits should be carefully monitored in view of the opportunity for an institution to avoid or reduce required reserves by classifying funds otherwise subject to the higher reserve requirements of a demand deposit as a zero-interest-rate time deposit. A time deposit on which no interest is paid is subject to the provisions of Regulation D concerning payment before maturity. Since the early withdrawal penalty is a function of the interest rate being paid on the deposit, application of the early withdrawal penalty provides no disincentive to early withdrawal and, in fact, permits the time deposit to function as a demand deposit. Therefore, time deposits on which no interest is paid may not generally be paid before maturity unless one of the mandatory exceptions to the early withdrawal penalty is applicable. STAFF OP. of June 4, 1981.
Authority: 12 CFR 204.2.

2-343.19

TIME DEPOSITS—Early Withdrawal; Evasion of Reserve Requirements

The rule, formerly in section 217.4(f) of Regulation Q, requiring that the rate charged by a member bank on a loan to a depositor secured by the depositor’s time deposit must be no less than 1 percent in excess of the rate paid on the deposit, was rescinded by the Board effective April 1, 1986. Nevertheless, in certain circumstances, making a loan secured by a time deposit within six days after the date the deposit is opened, rather than assessing a penalty for an early withdrawal, might be considered an evasion of the reserve requirements of Regulation D—for example, if the depositor and the institution agree that the deposit will be withdrawn on the seventh day and used to pay off the loan. STAFF OP. of July 29, 1986.

2-343.2

TIME DEPOSITS—Early Withdrawal Penalty; Call Provisions

The presence of certain call provisions in a contract for a nonpersonal time deposit with a maturity of 18 months or more would not necessarily require the certificate of deposit to be classified as a nonpersonal time deposit with a maturity of less than 18 months.
Depository institutions propose to issue longer-term deposits that permit a call for redemption by the depository institution a specified period of time after issuance and would provide that redemption would occur upon the expiration of a specified time period after notice by the depository institution. For instance, a bank might issue time deposits and provide that it may, upon 30 days’ notice, call the obligations for redemption on any date after five years from the date of issuance of the deposits. The deposit contract would not allow a call by the issuer to be effective any earlier than one and one-half years after the date of issuance of the deposit.
It appears that no withdrawals could be made from the deposit account within the first one and one-half years after the date of the deposit and no withdrawal would occur on less than seven days’ notice. Such a deposit is properly classified as a deposit with a maturity of one and one-half years or greater.
The staff assumes that any call by the depository institution results in payment of the entire deposit. Consequently, this opinion does not address the issue of the status of any amounts remaining on deposit after a partial early withdrawal. STAFF OP. of July 23, 1987.
Authority: 12 CFR 204.2(d) and (f)(3).

2-343.21

TIME DEPOSITS—Early Withdrawal Penalty; Put Provisions

The presence of certain put provisions in a contract for a nonpersonal time deposit with a maturity of 18 months or more would not necessarily require the deposit to be classified as a nonpersonal time deposit with a maturity of less than 18 months.
Depository institutions propose to issue longer-term deposits that would permit the depositor to put the deposit back to the issuing depository institution (i.e., the depositor could require the depository institution to redeem the deposit) a specified period of time after issuance and would provide that redemption would occur upon the expiration of a specified time period after notice by the depositor. For instance, a bank might issue deposits and permit the depositor to present the obligations for redemption, upon at least ten days’ notice, on any date after five years from the date of issuance of the deposits. Depositors would not be allowed to exercise their right to put any earlier than one and one-half years after the date of issuance of the deposit and in no event less than seven days after written notice of the put.
No withdrawals could be made from the deposit account within the first one and one-half years after the date of the deposit, and no withdrawal would occur on less than seven days’ notice. Such a deposit is properly classified as a deposit with a maturity of one and one-half years or more. Section 204.2(f)(3) of Regulation D, which describes long-term nonpersonal time deposits, indicates that if no withdrawal is permitted from the deposits during the first one and one-half years, the deposit is properly classified as having a maturity of one and one-half years or more even if early withdrawal of the deposit is permitted after that time.
The staff assumed that any exercise of the right to withdraw occurs after at least seven days’ written notice so that such a withdrawal occurs on or after the date 18 months from the date the deposit is opened and results in payment of the entire deposit. Consequently, this opinion does not address the issue of the status of any amounts remaining on deposit after a partial withdrawal. STAFF OP. of Aug. 5, 1988.
Authority: 12 CFR 204.2(d) and (f)(3).

2-343.22

TIME DEPOSITS—Reclassification as Transaction Accounts

The question has arisen whether a time deposit may be used to secure a line of credit if the customer could draw on the line of credit other than by appearing at the depository institution, and whether individual draws on a line of credit would count toward the Regulation D transfer limits for savings deposits.
A credit card or other line of credit arrangement secured by a time or savings deposit might not result in the need to reclassify the time or savings deposit as a transaction account in certain cases. The facts of each arrangement must be considered, including the rates of interest charged on the outstanding balances under the lines of credit; the interest earned on the time deposits; the balances ordinarily maintained in the transaction accounts; the activity in the transaction accounts; the frequency with which advances on the lines of credit are satisfied from transfers from the savings deposits rather than other funds from the customer; and the extent to which the depository institution suggests, promotes, or otherwise furthers the establishment of the arrangements. If extensions of credit under the arrangement are regularly satisfied from payments from the depositor rather than from the time or savings deposit, and if the rate of interest charged on the credit extended substantially exceeds the interest earned on the time or savings deposit—e.g., 18 percent vs. 4 percent—then the arrangement generally would not result in a transaction account. Further, individual extensions of credit under the credit line would not count toward the transfer limit on the time or savings deposit as specified in section 204.2(d)(2). STAFF OP. of February 11, 1992.
Authority: 12 CFR 204.2(d)(2) and (e)(5).
See also 2-365.2.

TIME DEPOSITS—IRAs and Keoghs

See IRA/Keogh.

TIME DEPOSITS—Nonpersonal

See Nonpersonal Time Deposits.

2-345

TRANSACTION ACCOUNTS— Combined Savings/Checking Statement

Under the account arrangement, a single statement of account is provided for a depositor’s savings and checking accounts. Transfers from savings to checking may be made only by teller or through the use of an automated teller machine. No preauthorized or telephone transfer access to the savings account is provided. Further, a depositor is not permitted to transfer funds from savings to checking solely for the purpose of making a payment to a third party.
The savings account would not be considered a transaction account for reserve maintenance purposes. One aspect of the plan does deserve comment, however. Any advertising, deposit-contract relationships, and statements of account should indicate clearly that two accounts—a savings and a checking account—are involved, to ensure that customers do not think the service provided constitutes a single account. STAFF OP. of Oct. 7, 1980.
Authority: 12 CFR 204.2(e).

2-345.1

TRANSACTION ACCOUNTS— Withdrawals from Savings Account Through ATM

Savings accounts should not be regarded as transaction accounts merely because customers of subsidiary banks of a bank holding company may effect cash withdrawals from those accounts through an automated teller machine (ATM) of either the bank at which they maintain their account or an affiliated bank or because they may effect transfers of funds from a savings account to another account maintained at the same bank by using an ATM or a check-verification terminal of the bank at which they maintain their accounts. Such transactions are similar to effecting a transaction by appearing in person at an institution. STAFF OP. of Dec. 22, 1980.
Authority: 12 CFR 204.2(e).

2-345.11

TRANSACTION ACCOUNTS— Transfers Through Institution to Third Parties

A company offers an insurance program to and through credit unions. Under the program, a master policy is issued to the credit union, and the credit union is required by the policy to (1) remit premiums for the portion of insurance that the credit union provides to all members at no cost and (2) remit premiums on behalf of credit union members who have elected to purchase optional additional insurance. The remittance is paid quarterly to the company after the credit union is furnished with a printout listing the total due from the credit union and each of its members participating in the optional insurance. The credit union apparently is authorized by each member to deduct the optional insurance premium from the member’s share account. The credit union then transfers each such payment to its general account and then draws a single credit union draft to cover the total amount due from the credit union under the group plan and from the members under the optional plan.
It appears that the deductions from the accounts would be “preauthorized transfers” as that term is used in section 204.2(e)(6). Consequently, such a transfer would be counted toward the maximum of three transfers per month permitted from a savings deposit or account before it will be considered a transaction account. However, if no more than three transfers, including transfer from the account, can be made during any calendar month or statement cycle of at least four weeks, the account would not be considered a transaction account for purposes of Regulation D and would not be subject to federal reserve requirements.
The last sentence of section 204.2(e)(6) of Regulation D states that an account is not a transaction account “by virtue of an arrangement that permits withdrawals for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer).” This exemption, however, does not apply to transfers to third parties on behalf of depositors or account holders, such as in the arrangement above. STAFF OP. of June 22, 1981.
Authority: 12 CFR 204.2(e)(6).

2-345.12

TRANSACTION ACCOUNTS—Savings Account Allowing Transfers to Agent Institutions

A state-chartered, state-insured savings and loan association proposes a savings account in which the depositor may make withdrawals by personal transactions at the office of the association or by specific written request. The depositor may also appoint an agent, or grant a power of attorney to another person or institution authorizing the agent to make withdrawals on the depositor’s behalf. Depositors would maintain accounts at other depository institutions and name these institutions as agents with respect to the accounts maintained at the institution proposing the plan, thus allowing the agent to make transfers between the accounts at the various institutions. These arrangements would be considered a preauthorized transfer within the meaning of section 204.2(e)(6) of Regulation D because the agent institution in the proposal would represent the third party to whom payment from the depositor’s account is made. STAFF OP. of Dec. 23, 1981.
Authority: 12 CFR 204.2(e)(6).

2-345.13

TRANSACTION ACCOUNTS— Transfers Through ATMs, RSUs, and CVTs

An account is not a transaction account by virtue of permitting transfers to other accounts of the depositor at the same institution through an automated teller machine (ATM) or remote service unit (RSU). Whether or not an ATM or RSU is owned by the bank at which the account is maintained does not affect these rules. Expanding the number of ATMs or RSUs at which such transactions can be effected does not result in giving customers the degree of convenience normally associated with transactions accounts. Therefore, permitting account holders to transfer funds from a savings account to another account at the same bank through an ATM or check verification terminal of an affiliated bank would not result in the savings account being regarded as a transaction account for purposes of Regulation D. STAFF OP. of Dec. 24, 1981.
Authority: 12 CFR 204.2(e)(4).

2-345.14

TRANSACTION ACCOUNTS— Preauthorized Transfers to IRA

A credit union proposes to offer a plan whereby members would authorize the credit union to debit their share deposit accounts and credit their IRA accounts at the credit union with the amount debited. The credit union would effectuate the debits and credits either regularly or at least in a manner such that the member does not have to initiate each particular transaction at the time it occurs. The share account may be a transaction account under section 204.2(e)(6) of Regulation D if the depositor is permitted to make more than three such preauthorized transfers in a calendar month or statement cycle of at least four weeks. STAFF OP. of Feb. 5, 1982.
Authority: 12 CFR 204.2(e)(6).

2-345.15

TRANSACTION ACCOUNTS— Transfers Exempt from Regulation E

Question 3-10 of the Official Staff Commentary on Regulation E states that automatic transfers of funds from deposit accounts to pay premiums on group life insurance available only through the depository institution are bona fide intrainstitutional transfers that are exempt from the provisions of Regulation E. Since Regulations D and E serve different purposes, the fact that certain transfers are exempt from Regulation E does not mean that accounts that permit such transfers are exempt from Regulation D. While the transaction does not require application of the consumer protections of Regulation E, the nature of the transaction as a third-party payment is specifically the type of transfer which, when permitted through a deposit account, is intended to subject such an account to the reserve requirements of Regulation D. STAFF OP. of May 14, 1982.
Authority: 12 CFR 204.2(e).

2-345.16

TRANSACTION ACCOUNTS— CD with Line of Credit

The question has arisen whether a certificate of deposit that is tied to a line of credit equal in amount to the certificate of deposit is a transaction account if the customer may access the line of credit only by appearing in person at the bank. Because the customer may gain access to the line of credit only by appearing in person at the bank, the certificate of deposit associated with this line of credit would not be a transaction account. STAFF OP. of July 27, 1983.
Authority: 12 CFR 204.2(e)(1)(vii).

2-345.17

TRANSACTION ACCOUNTS— Withdrawals Through ATM and Transfers Through ATM or POS Terminal

Generally, transfers by a customer at an automated teller machine (ATM) from one of the customer’s accounts to another at the same depository institution, and ATM withdrawals paid directly to the customer are not counted toward the permissible number of transfers and withdrawals from ordinary savings accounts or money market deposit accounts. It does not matter whether the depository institution owns the ATM, has exclusive use of it, or shares the ATM owned by another entity. However, all transactions involving a transfer of funds from a customer’s account to the account of a third party, whether through an ATM or a point-of-sale (POS) terminal, count toward the transfer limit. It is the character of the underlying transfer (that is, whether the payment initiated by the customer is made directly to the customer or the customer’s account rather than to a third party or third party’s account) that determines whether the transfer counts in distinguishing between a savings and a transaction account. STAFF OP. of July 29, 1986.
Authority: 12 CFR 204.2(d)(2).
This digest has been revised to clarify the original staff response that a transfer from a POS terminal to a third party counts toward the transfer limit.

2-345.18

TRANSACTION ACCOUNTS—ATM Card as Debit Card; POS Transactions

A bank offers an automated teller machine (ATM) access card to its consumer customers to use on a network of ATMs to perform banking transactions affecting their accounts. The card is available to any holder of any consumer deposit account to which there is ATM access, which includes holders of savings, money market deposit, checking, and NOW accounts.
The bank is negotiating a point-of-sale (POS) agreement with an oil company to permit holders of transaction accounts to purchase the oil company’s products and services by using ATM cards as debit cards at the oil company’s service stations. Only checking and NOW account customers will be authorized to use the ATM card in this manner, and only these transaction accounts will be debited. The computer that will operate the system will be programmed to permit debit card transactions only on checking or NOW accounts, and not on savings or money market deposit accounts.
A potential problem arises when the computer system is down and holders of ATM cards linked to savings accounts and money market deposit accounts attempt to obtain services from the oil company by using their ATM cards as debit cards. The back-up authorization system, the service station operator, and the POS terminal will be unable to identify and reject a purchase transaction involving an ATM card issued on a savings or money market deposit account because the card is not electronically distinguishable from the ATM cards issued on checking or NOW accounts. If a savings account customer, even though previously instructed not to use an ATM card to make service station purchases, attempts to do so while the authorization system is operating off-line, a circumstance which is expected to be exceedingly rare, a POS transaction will result. The bank will implement an ex post monitoring procedure, designed to meet the requirements of section 204.2(d)(2), footnote 5, of Regulation D, to identify such transactions. Any unauthorized transaction will be identified, and the bank will warn the customer that the account agreement has been violated and that, if further unauthorized transactions occur, the ATM card will be cancelled.
In this particular case, although Regulation D generally prohibits withdrawals from a savings deposit made by a debit card, the bank need not reclassify the savings accounts as transaction accounts because it is expected that unauthorized transactions will be rare and appropriate monitoring procedures will be in place. However, if the bank does not make reasonable good faith efforts to monitor unauthorized transactions and prevent future unauthorized transactions, reclassification of the savings accounts and money market deposit accounts will be required. STAFF OP. of July 29, 1986.
Authority: 12 CFR 204.2(d)(1) and (2).

2-345.19

TRANSACTION ACCOUNTS—Bona Fide Cash Management

A depository institution may not net overdrafts in demand deposits or other transaction accounts against demand deposits or other transaction accounts with positive balances when calculating its aggregate transaction accounts for reserve purposes. Overdrafts are properly reflected on the books of the institution as assets in the form of extensions of credit. If overdrafts in accounts could be treated as negative balances and netted against positive balances in other accounts, depository institutions would under-report and under-reserve their aggregate transaction accounts. However, bona fide cash-management arrangements are excepted. The staff has been asked whether agreements for bona fide cash-management arrangements may be either oral or written and whether the arrangements may be used with intra-company accounts and with accounts held by affiliated companies.
Depository institutions and their customers have flexibility in establishing multiple accounts for cash-management purposes when funds could be placed in one account. Although such an arrangement does not necessarily require a prior written agreement, a written agreement would help a depository institution establish that a particular arrangement comes within that exception.
Generally, a bona fide cash-management arrangement exists and accounts may be netted for reserve purposes when the depository institution and the customer in effect treat the accounts as a single account and the institution has an unrestricted right to offset against one account to cover overdrafts in another account. Generally, the exception applies only to the related accounts of one depositor or to accounts of related depositors (such as cosigners, family members, and interdependent entities) when all the depositors have unfettered use of the funds in all accounts, the multiple accounts are established for the customers’ convenience, and there is no legal impediment to the commingling of funds in the accounts. STAFF OP. of Aug. 14, 1986.
Authority: 12 CFR 204.3(e).
See also 2-306.5 and 2-320.1.

2-345.2

TRANSACTION ACCOUNTS— Automatic Transfers of Savings

If a member bank owns or uses automatic teller machines (ATMs) that cannot be readily modified to permit direct withdrawals from a savings deposit subject to automatic transfers, an ATM may be used to initiate a withdrawal from a checking account that would result in an automatic transfer from the savings deposit account. The bank must, however, provide alternate means of access to savings deposit accounts subject to ATS, such as effecting a withdrawal by personal appearance at the bank or by telephone. Withdrawal slips for a savings account subject to automatic transfer do not have to be made available in the bank lobby, and a bank may require depositors to request the slips from bank personnel. However, customers should be notified of this fact when the automatic transfer service is authorized.
Member banks are permitted to offer ATS to trusteeships, guardianships, and other personal accounts if the entire beneficial interest in the funds on deposit is held by one or more individuals. The use of a single monthly statement for accounts involved in an ATS plan is permissible; however, the statement should clearly reflect the distinct nature of the two accounts, possibly indicating the beginning and ending balances in each account as well as each withdrawal and transfer effected by the depositor. STAFF OP. of Oct. 27, 1978.
Authority: 12 CFR 204.2(e).

2-345.21

TRANSACTION ACCOUNTS— Transfers from Savings to Cover NOW Overdrafts

An overdraft-protection plan that involves transfers from a savings account to cover overdrafts in a NOW account would not cause the account to be regarded as a transaction account unless more than three transfers can be effected by telephone or through preauthorized arrangement in one calendar month or one monthly billing cycle. STAFF OP. of Sept. 24, 1980.
Authority: 12 CFR 204.2(b)(3) and 204.2(e).

2-345.22

TRANSACTION ACCOUNTS—Point-of-Sale (POS) Terminals

A company is considering offering a service that will allow a customer to make purchases at a POS location with a debit card (with direct credit to the merchant’s account) or with scrip obtained at the POS terminal (with an immediate debit to the customer’s account and credit to the merchant’s account). The customer would also have the option of exchanging the scrip for cash from that merchant rather than using the scrip to make a purchase from that merchant. Under either arrangement, the customer is in effect making a third-party payment to the merchant. Several questions were raised about the effect of alternative features of the service on the reserve treatment of accounts subject to POS access.
Briefly, allowing access to an ordinary savings account through either the scrip arrangement or the direct debit card transfer arrangement would cause that account to be classified as a transaction account. However, both arrangements can be used with a money market deposit account (MMDA), and the account would not be a transaction account unless the customer is permitted or authorized to make more than three such transactions per month.
Under section 202.2(d)(2)(i) of Regulation D, a savings deposit is not considered a transaction account, even though the depositor is permitted to make up to three withdrawals per month for the purpose of moving funds to another account of the depositor or making payments to third parties, as long as none of the withdrawals or transfers may be made by check, draft, or similar order—including debit card. The definition of “savings deposit” also includes an MMDA from which the depositor is permitted to make up to six withdrawals per month for the purpose of moving funds to another account of the depositor or making payments to third parties, and no more than three of these six transfers may be by check, draft, debit card, or similar order made by the depositor and payable to third parties (§  204.2(d)(2)(ii)). However, such an account will not meet this definition if the customer is authorized or permitted to make more than six withdrawals or transfers or three third-party payment orders per month. In that case, the account would be considered a transaction account subject to the higher reserves applicable to such accounts (§ 204.2(e)(2)). Consequently, MMDAs used with either the scrip arrangement or the debit card arrangement would not be regarded as transaction accounts so long as access by debit card is limited to an aggregate of six withdrawals and transfers per month, with no more than three of the withdrawals or transfers being by check or debit card—including debit card transactions at POS terminals.
Regulation D bases its distinctions between accounts on whether the depositor, by agreement or practice of the depository institution, is permitted or authorized to make such withdrawals or transfers and not on whether the withdrawals or transfers are actually made. Thus, an institution could offer MMDAs with and without POS access. Generally, if any of the depositors with such access are permitted or authorized to exceed the three-per-month limitation, then the Board would consider any account permitting or authorizing such access a transaction account. Footnotes 5 and 6 of Regulation D provide for such monitoring on an ex post basis and for exceptions to the rule for occasional excess transfers. STAFF OP. of Aug. 11, 1986.
Authority: 12 CFR 204.2(d)(2)(i) and (ii), and 204.2(e).

2-345.23

TRANSACTION ACCOUNTS— Transfers from MMDA to Cover Line of Credit

The staff has been asked about the proper treatment of a proposed arrangement consisting of an account intended to qualify as a money market deposit account (MMDA), a demand deposit account, and a line of credit to cover overdrafts in the demand deposit account. Checks drawn on the demand deposit account in excess of the balance would be paid from loan proceeds transferred to the account, and the bank would note a drawing on the line of credit. Once a week, funds from the MMDA would be transferred to cover outstanding balances on the line of credit. The interest rate imposed on drawings on the line of credit would be equal to that paid on the MMDA, adjusted to account for the effect of reserves. The MMDA would secure the line of credit, which would be limited to the amount deposited in the MMDA. If, at the end of a day, there are balances in the demand deposit account in excess of a specified minimum, the excess would be used to pay any amount owed on the line of credit and any excess would be transferred into the MMDA.
Under section 204.2(e)(5) of Regulation D, an account maintained in connection with an arrangement that permits a depositor to obtain credit directly or indirectly through the drawing of checks is a transaction account. The proposed arrangement falls under that section; therefore, the MMDA would be a transaction account subject to a 12 percent reserve requirement because (1) the MMDA would regularly be used to repay the line of credit; (2) interest on the line of credit would be tied to the interest rate on the MMDA; (3) the line of credit would be secured by the MMDA; and (4) drawings on the line of credit would result from overdrafts in a demand deposit account on which the checks were drawn.
The staff has previously stated that a transfer out of an MMDA to repay an extension of credit by a depository institution, where the extension of credit was previously made to cover an overdraft on that MMDA, does not result in a separate transfer countable against the MMDA transfer limits (see 2-342.13). In that case, the transfer giving rise to the overdraft counted as one third-party transfer, and the repayment of the overdraft constituted the repayment of a loan by the depository institution and not a third-party transfer. That opinion did not apply to a prearranged plan linking an MMDA to a line of credit in a situation that would permit the customer to exceed the MMDA transfer limits by writing checks against the line of credit. STAFF OP. of Oct. 3, 1989.
Authority: 12 CFR 204.2(e)(5), 204.2(d)(2)(ii), and 204.5(e).

2-345.24

TRANSACTION ACCOUNTS— Combined MMDA and Demand Deposit

Several depository institutions were offering an account arrangement to some customers that combined a money market deposit account (MMDA) with a demand deposit. Typically, the depository institution allowed a customer to create overdrafts in a demand deposit during the week and then pay off the aggregate overdraft at the end of the week with one transfer from the MMDA. The rate of interest paid on the money market deposit account equals the rate of interest charged on the overdraft line of credit, and the number of transfers from the MMDA to cover the overdrafts would never exceed the six-per-month limit that applies to automatic interaccount transfers. Thus, the depository institution considered the demand account balance as zero when it calculated its transaction accounts and included the balance in the MMDA in its time deposits when filing Form FR 2900.
Section 204.2(e)(5) was added to Regulation D because arrangements involving time deposits and credit lines are effective substitutes for transaction accounts and provide the opportunity to avoid transaction-account reserve requirements. This section clearly covers this type of account arrangement. Therefore, the arrangement and the way the depository institutions reported the deposits constitute violations of Regulation D. STAFF OP. of July 1, 1991.
Authority: 12 CFR 204.2(e)(5).

2-345.25

TRANSACTION ACCOUNTS— Transfers from Demand Accounts for Investment Purposes

A bank proposes to provide a service to customers that would involve coordination among the bank, its customers, and an independent trust company organized under state law. Each customer would authorize the bank to transfer the amount above a predetermined level in its demand account to a pooled demand account maintained by the trust company at the bank. At the direction of the customer, the trust company would then place those funds in a variety of investments, including a money market account at the bank and professionally managed money funds. The customer would deal directly with the trust company on all issues involving the invested funds. The bank would not be involved with the funds other than to facilitate the transfer of funds between accounts as directed by the customer or the trust company. Demand-account overdrafts are not anticipated, but if an overdraft did occur, the bank would inform the trust company, which would transfer funds to the customer’s account to cover the overdraft.
This trust arrangement is, in effect, substantially similar to an arrangement described in interpretation 12 CFR 204.134 (at 2-287), in which the Board indicated that the arrangement in which customers maintain checking accounts and have excess funds from those accounts swept into commingled time desposits was an arrangement that—
[S]ubstitutes time deposit balances for transaction accounts balances with no practical restrictions on the depositors’ access to their funds, and serves no business purpose other than to allow the payment of higher interest through the avoidance of reserve requirements. As the time deposits may be used to provide funds indirectly for the purposes of making payments or transfers to third persons, the Board has determined that the time deposits should be considered to be transaction accounts for purposes of Regulation D.
The staff believes that this interpretation applies to the proposed trust arrangement. STAFF OP. of July 16, 1992.
Authority: 12 CFR 204.2(d)(2), 204.2(e), and 204.134.
See also 2-342.13 and 2-345.23.

2-360.11

TRANSITIONAL ADJUSTMENTS— U.S. Agency of Foreign Bank

A two-year phase-in period applies to a U.S. agency of a foreign bank that becomes subject to reserve requirements by virtue of its parent’s asset growth above $1 billion. Accordingly, the phase-in schedule that appears in section 204.4(c) would apply, although the specific dates indicated therein should be modified to reflect the date on which the institution’s total worldwide consolidated assets surpassed $1 billion. STAFF OP. of Sept. 28, 1981.
Authority: IBA § 7, 12 USC 3105; 12 CFR 204.4(c).

2-360.13

TRANSITIONAL ADJUSTMENTS— Reorganization of Banking Subsidiaries

After acquiring another bank holding company, a bank holding company (the acquirer) reorganized to integrate the acquired organization’s subsidiaries. This integration was accomplished through three simultaneous transactions in which the assets and liabilities of the acquired organization’s bank were divided between two banks and a trust company of the acquirer. One part of the transaction required a national bank to purchase the assets and assume some of the branches of the acquired organization’s bank, which was a nonmember bank. The acquirer asked whether the acquisition of the assets and deposit liabilities of the branches by the national bank, a member bank, qualifies for treatment under section 204.4 of Regulation D or whether the assets and liabilities must be treated as a de novo branch.
The acquirer should be permitted to treat its deposits acquired from these transactions under the merger rules in section 204.4(e) of Regulation D rather than as new branches. The deposits acquired were formerly subject to an eight-year phase-in as nonmember deposits under section 204.4(a). Further, the regulatory treatment of the transaction by the Comptroller of the Currency is consistent with treating the branch deposits as deposits acquired in a single merger. Therefore, the deposits and other accounts of the acquirer should be allocated in accordance with the procedures set forth in section 204.4(e)(2) and reserves should be calculated accordingly. STAFF OP. of Oct. 23, 1985.
Authority: 12 CFR 204.4(a) and (e). (Prior to April 1, 1986, current section 204.4(e) was 204.4(g).)

2-360.14

TRANSITIONAL ADJUSTMENTS— Successors to Closed Thrifts

The Reserve Banks have been treating the reservable liabilities of new thrift institutions that result from supervisory closings of their financially troubled predecessors as though the new thrifts merged with their predecessors under section 204.4(e) of Regulation D, and they have not applied a phase-in or reduction of reserve requirements of the new thrifts. Some new thrifts maintain that supervisory transfers of the assets and liabilities of financially troubled thrifts to the new thrifts should not be treated as mergers or consolidations. Rather, the new thrifts believe they should be treated as de novo institutions subject to a two-year phase-in under section 204.4(c).
The Board staff reviewed the situation and concluded that the Reserve Bank’s treatment of these liabilities is proper and required by Regulation D. New thrifts that are created in order to assist in the liquidation of a closed thrift pursuant to section 406(a) of the National Housing Act usually acquire the bulk of the liabilities held by their predecessors at the time of closing and also purchase a comparable amount of assets of, and succeed to certain rights and privileges enjoyed by, their predecessors. Treating these acquisitions under the merger rules maintains the continuity of the reserve base because the new institution succeeds to the reserve requirements of its closed predecessors. Even if these thrifts were considered de novo institutions, they still would not be entitled to a phase-in of reserves because section 204.4(c)(2) requires a de novo institution with $50 million or more in reservable liabilities for any computation period to maintain 100 percent of its required reserves.
The new thrifts, as successors to the closed thrifts and to their low reserve tranches, should maintain appropriate lagged reserves on nonpersonal time deposits reported by the closed banks prior to their closings. At the same time, the new thrifts are entitled to the reserve benefits of the lagged vault cash reported by their predecessors prior to the closings. This is consistent with the treatment of these transactions as consolidations. STAFF OP. of Jan. 3, 1989.
Authority: 12 CFR 204.4(c) and (e).

2-362

“U.S. RESIDENT”

Foreign diplomats and employees of international organizations who reside in the United States are considered U.S. residents for purposes of Regulation D. STAFF OP. of Nov. 18, 1981.
Authority: 12 CFR 204.2(s).
See also 12 CFR 204.2(t).

2-362.1

“U.S. RESIDENT”—Resident of Guam

A resident of Guam is not a United States resident for purposes of Regulations D and Q. STAFF OP. of July 17, 1981.
Authority: 12 CFR 204.2(s).

2-365

VAULT CASH—In-Transit Exception

A courier company, as agent for a domestic bank, picks up U.S. currency one day each week from banks located overseas for delivery to the domestic bank. The domestic bank’s account with each of the foreign banks is debited on the same day the currency is picked up. In one instance, the currency arrived in the city of the domestic bank’s head office on the same day, but too late for delivery to the bank’s office. Thus, the courier had to store the currency in its own vaults overnight, until delivery could be made the following day. Because the courier was acting as agent for the domestic bank while holding the currency, the question arises whether currency in transit from a foreign depository institution located outside the United States to a domestic depository institution can be treated as vault cash for purposes of the Report of Transaction Accounts, Other Deposits and Vault Cash (Form FR 2900) before the domestic institution receives the cash at its office. currency
Regulation D defines “vault cash” as U.S.and coin owned and held by a depository institution that may, at any time, be used to satisfy depositors’ claims. Generally, in order to be classified as vault cash, currency and coin must be in the possession of the reporting institution or in transit from a correspondent depository institution. In addition, in limited cases the staff has determined that depository institutions may count coin and currency held by third parties as vault cash, even though the circumstances are not explicitly covered by the regulation. In answering the questions dealing with vault cash beginning at 2-306.9, the staff relied heavily on the immediate availability of a known amount of cash at known locations in the vicinity of the bank’s offices. Further, currency in the hands of nondepository third parties was clearly the reporting bank’s currency.
In the case in question, the offshore banks are not depository institutions for purposes of Regulation D, and the domestic bank may not, therefore, rely on the in-transit exception and count the currency held by its contract courier as vault cash. The domestic bank would not know until after the fact whether or not the currency was available. Also, both notification of arrival and actual delivery of the currency to the domestic bank occur the day after the domestic bank’s accounts at the foreign banks are debited. Therefore, the earliest the domestic bank may include the currency as vault cash would be upon its actual receipt of currency at one of its banking offices. Allowing the bank to count the currency the day before it actually receives and controls it would amount to an as-of adjustment to vault cash, which is inconsistent with the concept of vault cash. STAFF OP. of Feb. 26, 1985.
Authority: 12 CFR 204.2(k)(1) and (2).

2-365.1

VAULT CASH—In-Transit Exemption

Currency and coin sent by armored carrier from a retail establishment, such as a grocery store, to a depository institution qualifies as cash in transit for purposes of Regulation D. For the currency and coin to apply toward a depository institution’s reserve requirements under section 204.3(b), they must qualify as “vault cash” as defined in section 204.2(k). To qualify, currency and coin in transit must be in transit to or from a Federal Reserve Bank or a correspondent depository institution. Here, the currency and coin are in transit from a retail establishment to the depository institution and thus cannot be considered vault cash. STAFF OP. of Sept. 10, 1986.
Authority: 12 CFR 204.2(k).

2-365.2

VAULT CASH—Safekeeping Agreements for Coin and Currency

Bank A proposes to enter into transactions with some of its correspondent banks, some of which may be affiliates of Bank A. Under the proposed transactions, a correspondent bank would sell coin and currency to Bank A, which would credit or cause to be credited the account of the correspondent bank at Bank A or at a Federal Reserve Bank. Bank A and the correspondent bank would enter into a safekeeping agreement whereby the correspondent bank would segregate and hold in its vault the coin and currency that it sold to Bank A. This coin and currency would be owned by Bank A, which would have the right to have the coin and currency on demand. It is anticipated that Bank A would collect the coin and currency at least weekly, but there is no commitment by Bank A to collect the coin and currency on any schedule. Bank A would not collect the coin and currency daily because of the costs of transportation.
The correspondent bank would hold no ownership interest in the coin and currency, would not include the coin and currency on its books, and would not use the coin and currency in meeting its reserve requirements or for other purposes. All correspondent banks from which Bank A would purchase coin and currency would be within one-half day’s drive of Bank A. The coin and currency sold by the correspondent banks to Bank A would be coin and currency in excess of the needs of the correspondent banks.
Coin and currency in a vault that is on the premises of another institution and that is rented by the reporting institution may qualify as vault cash if (1) the reporting institution has full rights of ownership of the coin and currency, and books the coin and currency as an asset; (2) the reporting institution has full rights to obtain the coin and currency immediately in order to satisfy customer demands, which requires that the coin and currency be reasonably near the reporting depository institution; and (3) the institution from which the vault is rented does not include the coin and currency as its own vault cash (see 2-307.2). Further, a depository institution may not sell its excess vault cash to another institution for use in satisfying reserve requirements by means of an overnight trust receipt if the selling institution will continue to hold the coin and currency in its vault (see 2-307).
The transaction proposed by Bank A would not result in vault cash for purposes of Regulation D. Implicit in the qualification of off-premises coin and currency as vault cash is the requirement that the depository institution have a legitimate business purpose, other than the reduction of reserves, for maintaining the coin and currency off premises. A business purpose might be shown, for example, if vault cash is kept off premises because the institution owning the vault cash lacks vault facilities or uses the cash in providing cash services to other banks. STAFF OP. of January 31, 1992.
Authority: 12 CFR 204.2(k)(1).

VAULT CASH—Use of to Meet Carryover Deficiencies


Back to top