Compliance Bulletin

Final Rules Implement Lifting of Ban on Interest on Demand Accounts
July 19, 2011

Section 627 of the Dodd Frank Act repealed the statutory prohibition against the payment of interest on demand deposits. The Federal Reserve Board and the FDIC separately issued final rules to implement the lifting of the ban.

 The Board’s rule repeals Regulation Q (Prohibition Against Payment of Interest on Demand Deposits) effective as of July 21, 2011 and amends certain references to Regulation Q in other regulations [1]. Regulation Q is a depression-era rule promulgated by the Board in 1933.

Section 343 of the Dodd-Frank Act provides for full insurance coverage for noninterest-bearing transaction accounts from December 31, 2010 through December 31, 2012. In the FDIC’s final rule, the definition of the term “interest” currently included in 12 CFR 329.1© (pertaining to interest on deposits [2]) is retained but is moved to Section 330.1 (pertaining to deposit insurance coverage) because of its usefulness in interpreting the requirements of implementing the insurance coverage provision.

The FDIC is also importing 12 CFR Section 329.103 (pertaining to allowable premiums [3]) into Part 330 as an interpretive rule, designated as section 330.101. The FDIC believes this would be useful to banks in determining whether an account qualifies for unlimited insurance coverage as a noninterest-bearing transaction account.

While the Federal Reserve Board is repealing Regulation Q, the FDIC notes that it, along with other federal banking agencies, has regularly interpreted issues arising from the interest prohibition in the same manner as the Board. In light of the value of these interpretations, the FDIC states that it will “continue to rely upon Regulation Q and Federal Reserve interpretations of that regulation for purposes of implementing temporary, unlimited deposit insurance coverage pursuant to section 343 of the DFA.”

Both the FDIC and the Federal Reserve Board declined requests not to repeal Regulation Q or to delay the effective date. The repeal of Regulation Q is effective as of July 21, 2011.

  1. Conforming changes are made to Section 204.10 of Regulation D (pertaining to payment of interest on Federal Reserve balances), deleting a reference to Regulation Q; Official Staff Interpretation at Section 230.2(n) of Regulation DD (Truth in Savings Act) pertaining to the definition of interest; and Section 230.7(a)(1) also of Regulation DD pertaining to the permissible methods of paying interest.
  2. 12 CFR 329.1© states: “The term interest means any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit. A bank’s absorption of expenses incident to providing a normal banking function or its forbearance from charging a fee in connection with such a service is not considered a payment of interest.”
  3. Section 329.103 describes the circumstances under which a bank’s provision of a premium will not be considered payment of interest.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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