under this part in the circumstances of the withdrawal privilege so elected. The application of this principle is not affected by the fact that the contract of deposit provides contemporaneous, alternative provisions for withdrawal prior to the stated maturity, either of which the depositor might exercise at his option.

(d) The Board is of the view also that, should the depositor withdraw only a part of the deposit pursuant to exercise of either the 30 days' or the 90 days' written notice provision, it would be permissible for the remainder of the original deposit to bear interest at the 22 percent rate for the specified maturity of 6 months.

[18 F.R. 6206, Sept. 29, 1953]

§ 217.108 Payroll deduction savings plan.

(a) The Board of Governors has been requested by a member bank to consider the question whether accounts accepted by the bank under a payroll deduction savings plan, proposed to be established for approximately 2,500 employees of a company, may be classified as "savings deposits" under § 217.1(e).

(b) Under the proposed plan, the company would withhold a specified amount from the weekly pay of each employee participating in the plan and deposit such amount to the credit of the employee in the member bank. Thus, on each weekly pay day the participating employee of the company would receive with his pay check a "savings account card" which would show on its face his name, the account number, date of issue of the card, columns for the entry of deposits and withdrawals, the current account balance, and the following inscriptions:

PASSBOOK

SAVINGS DEPARTMENT

Bank and Trust Company,

This card must be brought to the bank whenever a deposit is made or money withdrawn. Cards for this account bearing a prior date are hereby cancelled.

Savings account rules and regulations which ordinarily appear on the inside cover of the conventional-type passbook would be printed on the reverse side of the card.

(c) It was explained further that the "savings account cards" would be intended to serve the participating employee-depositors as "savings passbooks" until the following weekly pay day when

new cards would be issued; that deposits or withdrawals by an employee-depositor between pay days would be permissible and would be entered by a savings teller on the then current card; that the account balance at the end of each weekly period would be carried over to the new card; and that interest payments and taxes would be computed and posted quarterly. Thus, any particular card would show only the deposits and withdrawals made during the current week, and issuance of a new card would automatically cancel cards previously issued. It appears that the proposed plan has been devised so as to permit the bank to use its IBM punch card equipment for the processing of the deposits.

(d) The definition of the term "savings deposit" in § 217.1(e) requires that the deposit shall be "evidenced by a passbook" which must be presented in connection with each withdrawal, except where payment is made to the depositor himself. The regulation also requires that every withdrawal shall be entered in the passbook. Furthermore, the Board has indicated previously that the term "passbook" as used in this part means an account book in which deposits and withdrawals are entered and that such a book should be a continuing record of the transactions in the account.

(e) The 1933 amendments to section 19 of the Federal Reserve Act prohibited the payment of interest on demand deposits and the payment of time deposits before maturity but did not make those restrictions applicable to savings deposits. Accordingly, savings deposits were made a favored class of deposits in that they became the only type of deposit with respect to which member banks were given the privilege of making payment on demand with interest and, at the same time, of carrying reserves less than those required against demand deposits. The versions of this part immediately following the 1933 amendments stated that a "savings deposit”, among other things, was a deposit evidenced by a "passbook or other form of receipt". This was similar to the language already in use in Part 204 of this chapter relating to reserves of member banks. However, these definitions proved inadequate to prevent the favored status of savings deposits from leading to certain abuses, including the classification of checking accounts as savings deposits. It was to prevent such abuses and confusion between classes of de

posits that both Part 204 of this chapter and this part were amended in 1936 to provide that a deposit may not be regarded as a savings deposit unless "evidenced by a passbook". These amendments to the regulations recognized that a workable distinction between savings accounts and checking accounts could not be maintained unless the regulatory language was such as to prevent various arrangements which would eliminate the use of passbooks of the kind traditionally a distinguishing mark of savings deposits.

(f) The "savings account card" under consideration appears to differ materially from a passbook as it is generally understood and, accordingly, the Board does not regard such a card as constituting a "passbook" within the meaning of § 217.1(e). Therefore, the accounts as proposed under the plan would not be eligible for classification as "savings deposits".

[19 F.R. 2716, May 12, 1954]

§ 217.109

Adjustment of interest on loan as payment of interest on deposit.

In two recent cases, the Board was presented with questions as to whether an adjustment in the interest rate charged by a member bank on a loan to its customer involved a payment of interest on a demand deposit in violation of section 19 of the Federal Reserve Act and § 217.2(a). Although somewhat similar superficially, the two cases differed factually and the Board reached different conclusions. The two cases are as follows:

(a) Interest charged borrower on net withdrawable credit. (1) In the first case considered by the Board, it appeared to be contemplated that a member bank would extend credit to a certain Corporation on the basis of certain installment paper received by the bank from the Corporation and that, in calculating the amount of interest payable by the Corporation to the bank, there would first be deducted from the principal amount of the credit the amount of a cash margin or reserve which would be set aside in a demand deposit account with the bank by the Corporation but which apparently would not be subject to withdrawal. For example, if the credit amounted to $100,000, and a cash margin or reserve of $7,500 were set aside, interest at the rate of 42 percent would be computed on the basis of $92,500.

(2) In its reply, the Board referred to the fact that it has been the Board's general policy for many years not to pass upon the question whether particular practices involve a payment of interest in violation of this part, except after consideration of all the facts and circumstances of a specific case as developed by examinations of the member bank involved, but to rely instead upon the cooperation and good faith of member banks in adapting their practices to conform to the spirit and purpose of the law and the Board's regulation. This policy has proved to be the most feasible basis for dealing with questions of this kind. However, the Board stated that, as it understood the facts in this case, interest is charged by the bank at the agreed rate on the net amount of the credit available for withdrawal, and no interest is charged on that part of the proceeds which is retained by the bank as a "reserve" and set up as a nonwithdrawable deposit. The Board stated, therefore, that this view of the matter, if factually correct, suggested that the proposed arrangement would involve no question as to a payment of interest on the deposit.

(b) Amount paid to borrower for account of depositor. (1) In the other case recently considered by the Board, it appeared that a certain Mortgage Company on the West Coast is engaged in originating and servicing real estate mortgage loans in a given area. After the mortgage loans are in "final form", they are sold by the Mortgage Company to insurance companies, including a certain Life Insurance Company. In most cases, the loans are held by the Mortgage Company from two months to twelve months before they are sold to an insurance company. In order to provide this interim financing, the Mortgage Company borrows continuously from a local national bank through demand notes secured by the real estate loans "in process of completion". The amount of such borrowing was in excess of $1,000,000 from September 1950 to August 1953, and at times has been in the neighborhood of $3,000,000.

(2) The Mortgage Company also services real estate loans for the aforementioned Life Insurance Company. This arrangement involves the collection of interest and principal payments from mortgagors and the accumulation of such collections for periodic transfer to

*

* * *

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an

the Life Insurance Company. Prior to 1953, the Mortgage Company from time to time would transfer the balances in its several collection accounts to the Life Insurance Company in New York. Early in 1953, pursuant to its policy of leaving funds on deposit in the localities in which they originate, the Life Insurance Company instructed the Mortgage Company to make the transfers from the collection accounts into a demand account in the above-mentioned national bank in the name of the Life Insurance Company, and this procedure has been followed for the past year or more. A memorandum in the credit files of the national bank dated February 9, 1953, mentions that, under the new arrangement just described, the balance in the Life Insurance Company's account with the bank "will be allowed to build up; and for this reason * it has been agreed that we will continue to charge the [Mortgage Company] interest rate of 44 percent but that twice each year-probably July and in January-we will compute the increase in average balance maintained with us by the [Life Insurance Company] and adjust the interest rate paid by the [Mortgage Company] by making rebate to the latter." A notation in the national bank's credit files dated August 3, 1953, refers to the memorandum just quoted and reiterates that the bank had "agreed to make the [Mortgage Company] a 1⁄2 of 1 percent interest adjustment upon net loanable funds derived from additional balances placed with us by the * Life Insurance Company." This notation, which is followed by a computation by which the national bank ascertained that the average "Additional Loanable Funds" in the Life Insurance Company's account during the first six months of 1953 amounted to $82,930.67, also stated that "Based upon the above, adjustment of 2 of 1 percent for the six-month period would amount to $207.33, which amount was remitted to the [Mortgage Company] * ** August 11, 1953." The information submitted also showed that in all probability the "refund" for the last six months of 1953 would exceed the amount for the first six months in that year. Although the national bank makes the payment to the Mortgage Company, the Life Insurance Company benefits from the arrangement to the extent that it permits the Mortgage Company, which is producing real estate

* *

loans on behalf of the Life Insurance Company, "to continue to function profitably and obtain the required bank credit".

(3) Summarizing the foregoing facts, it appears that the national bank, in consideration of the Life Insurance Company's maintaining an increased demand deposit balance with the bank, has paid to the Mortgage Company 2 percent per annum of the average "Additional Loanable Funds" so maintained on deposit by the Life Insurance Company. In August 1953 such payment was made by the national bank through an actual remittance to the Mortgage Company.

(4) Based on these facts, the Board of Governors expressed the view that the arrangement involves a payment by the national bank for the account of its depositor, the Life Insurance Company, as compensation for the use of funds constituting a demand deposit, and therefore constitutes the payment of interest on a demand deposit by a member bank in violation of section 19 of the Federal Reserve Act and § 217.2(a). [19 F.R. 3006, May 25, 1954]

§ 217.110 Withdrawal from "savings deposit" not evidenced by a pass book.

For text of this interpretation, see § 204.105 of this subchapter.

[20 F.R. 4209, June 16, 1955]

(b) The purpose of the May 16, 1955, amendment was to permit member banks, at their option, to classify deposits as "savings deposits," although not evidenced by a passbook. However, any such deposit must be evidenced by a written receipt or agreement, and the deposit must be one in respect to which the depositor is required, or may at any time be required, by the bank to give notice in writing of an intended withdrawal not less than 30 days before such withdrawal is made, and withdrawals are permitted only through payment to the depositor himself but not to any other person whether or not acting for the depositor.

Furthermore, the amendment made no change in the classes of persons whose deposits may be classified as "savings deposits".

(c) The "Savings Deposit Receipt" in question certifies that a certain sum has been deposited with the bank by a named depositor. It recites that payment of such amount "will be made to the named depositor" plus interest at 22 percent per annum from date of the deposit, upon surrender of the receipt; that, upon request, interest will be paid and endorsed upon the receipt every six months; and that the bank shall have the option of redeeming the receipt at any time upon six months' written notice to the depositor. The receipt then states that "The bank reserves the right to require thirty days' prior notice in writing before paying this savings deposit receipt." Finally, the receipt states that it is "non-negotiable." It appears that the receipt constitutes the deposit contract between the bank and the named depositor.

(d) The inquiry explained that the national bank intended to use the savings deposit receipt "only in connection with deposits of school districts and any other savings deposits that might qualify under Regulation Q". The Board has indicated in earlier interpretations that deposits of "school districts" may be classified as "savings deposits.'

(e) In the circumstances as outlined in this section, including the specific limitation in the savings deposit receipt that "Payment will be made to the named depositor," the Board is of the view that a deposit represented by the receipt described may be classified as a "savings deposit” under this part. [20 F.R. 7355, Oct. 4, 1955]

§ 217.112

Interest on time deposits with alternate maturities.

(a) The Board was asked recently whether four forms of time deposit contracts complied with the requirements of this part. The first was evidenced by a certificate which provided for a maturity 6 months after date of deposit with an option on the part of the depositor to withdraw part or all of the funds, without notice, on the 30th day after the date of deposit, or on the 90th day after the date of deposit, and which provided that funds withdrawn on the 30th day would bear interest at a rate of 1 percent, funds withdrawn on the 90th day would bear interest at a rate

of 2 percent, and funds withdrawn at the end of 6 months would bear interest at a rate of 22 percent.

(b) With respect to the form of certificate in paragraph (a) of this section, the Board referred to its interpretation published as § 217.105 which expressed the view that if a time certificate permits withdrawal either at a specified maturity or prior to such time after a specified period of written notice the maximum rate of interest will depend upon which of such withdrawal privileges is elected by the depositor and the maximum rate applicable under the regulation in the circumstances of the withdrawal privilege so elected. For example, a certificate providing for payment 5 years after date with interest at 21⁄2 percent, but providing also for earlier payment after 90 days' written notice with interest at 2 percent, would comply with the regulation. Such certificate has a single fixed maturity but provides that an earlier maturity may be fixed at the option of the depositor with a resulting reduction in the rate of interest payable. (c) The Board pointed out that, by contrast, the certificate described in paragraph (a) of this section had several fixed maturities, the first of which was 30 days after date of deposit, so that the deposit when established was payable 30 days after date. Section 217.6 provides that no member bank shall pay interest at a rate in excess of 1 percent per annum on a time deposit having a maturity date less than 90 days after the date of deposit or payable upon written notice of less than 90 days. The Board said that, consequently, the 2 percent and 22 percent rates of interest provided for under the form of time certificate described in paragraph (a) of this section would be in excess of the maximum rates prescribed by this part.

(d) The second deposit contract on which the Board's views were requested was a 6 months' time deposit with interest at a rate of 24 percent but with an alternate fixed maturity of 90 days after date with interest at 2 percent. The third contract represented a deposit payable 11 months after date with interest at a rate of 2% percent but with alternate fixed maturities of 90 days, 4 months, and 5 months, with interest at 2 percent; 6, 7, and 8 months, with interest at 24 percent; and 9 and 10 months with interest at 2% percent. The Board stated that the foregoing views expressed with respect to the form of deposit con

tract described in paragraph (a) of this section were applicable also to the second and third forms of contracts described in this paragraph.

(e) The fourth form of contract represented a time deposit having a fixed maturity dated 6 months after the date of deposit but with an option on the part of the depositor to withdraw a part or all of the funds either on 90 days' advance written notice at a rate of 2 percent, or on 30 days' advance written notice at a rate of 1 percent if withdrawn during the first 90 days or at a rate of 2 percent if withdrawn after the 90th day following the date of deposit. The Board said that such a contract providing for payment of interest at a rate of 2 percent on a deposit withdrawn after 30 days' written notice would not comply with this part.

(f) The Board said that in connection with all four of the forms of deposit contracts described in this section, it is important to bear in mind that the maximum permissible interest rate does not depend upon the length of time the deposit is left with the bank. Where the deposit contract provides a fixed maturity but with an option on the part of the depositor to withdraw after a prescribed period of notice, the maturity is that named in the certificate unless and until the depositor exercises his option to change that maturity, and in that event the maximum interest rate payable will be the rate applicable under the regulation with respect to the period of such notice of withdrawal given by the depositor. Where the certificate itself names alternate fixed maturities, as in three of the certificates discussed in this section, without provision for withdrawal after notice upon the option of the depositor, the certificate must be regarded as maturing at the earliest fixed maturity and, if not withdrawn at that time or at any subsequent fixed maturity, as being automatically renewed until the date of the next following fixed maturity; and the maximum interest rate payable upon withdrawal at any fixed maturity would be the maximum rate applicable under the regulation to the period from the previous automatic renewal to the date of such withdrawal.

[21 F.R. 6269, Aug. 21, 1956]

§ 217.113 Time certificate of deposit with automatic renewal.

(a) The Board of Governors has been asked to consider whether a proposed

certificate which recites that the deposit evidenced thereby would be payable to the depositor on return of the certificate 12 months after date with interest at a certain per cent per annum payable semiannually, but which contains a legend on the face thereof which states that it is "continuous," that "no renewal is necessary," and refers to the reverse side of the certificate for "further provisions," complies with the provisions of this part.

(b) The reverse side of the certificate recites that it "shall be considered renewed automatically for an additional period of 6 months beyond its original term and thereafter for additional periods each of 6 months; unless presented for redemption within 10 days after the end of the original term or any subsequent term provided for herein, or unless the depositor shall have given written notice to the bank of his desire to redeem this Certificate 30 days prior to the original or any subsequent maturity date." It is recited further that the bank retains the right to redeem the certificate on the original or any subsequent maturity date upon 30 days' prior written notice, and reserves the right to change the interest rate for any subsequent renewal period from time to time upon 30 days' written notice prior to the beginning of such renewal.

(c) The Board would have no objection to the classification of the proposed certificate as a "time certificate of deposit" merely because it would be labeled as a "Savings Certificate." However, for a certificate to be classified as a "time certificate of deposit", § 217.1 (c) requires that the provisions of the certificate relating to the manner and terms of payment appear "on its face". The provisions which appears on the reverse side of the certificate with respect to automatic renewal and redemption are of a kind that should appear on the face of the certificate. Otherwise, the Board believes a certificate in the form proposed would be properly classifiable as a "time certificate of deposit" under this part.

(d) Such certificate in no event is payable prior to the expiration of the original 12 months' period or one of the successive renewal periods of 6 months each. Therefore, under the principle applicable to time certificates of deposit with alternate fixed maturities stated in § 217.112, it would be permissible for the certificate in question to bear interest at a rate not to exceed 3 percent per annum. This conclusion would not be affected