I. DEMAND DEPOSITS
Under 12 C.F.R. Part 217 “Demand Deposits” are defined in Section 204.2(b)(1) to include:
A. Any deposit that has a maturity or required notice period of less than seven days;
B. Any deposit regarding which the bank does not reserve the right to require at least seven days’ written notice prior to withdrawal or transfer of any funds from the account; or
C. Any other deposit from which, under the terms of the deposit contract, the depositor is authorized to make, during any month or statement cycle of a least four weeks, more than six transfers by means of a preauthorized or automatic transfer or telephonic (including data transmission) agreement, order or instruction, which transfers are made to another account of the depositor at the same bank, to the bank itself, or to a third party: provided, that any deposit specified in this paragraph (3) will be deemed to be a “demand deposit” if more than three of the six authorized transfers are authorized to be made by check, draft, debit card or similar order made by the depositor; and provided further, that no deposit specified in this paragraph (3) will be deemed to be a “demand deposit” if the entire beneficial interest of the deposit is held by a depositor identified in paragraph (2) of section 2(a) of Pub. L. 93-100 (12 U.S.C. 1832(a)(2)).
Paragraph (1) of section 2(a) of Pub. L. 93-100 authorizes banks to let certain depositors make withdrawals from interest-bearing deposits by negotiable or transferable instruments for the purpose of making transfers to third parties – i.e., to hold deposits commonly called “NOW accounts.” 12 U.S.C. 1832(a)(1). Paragraph (2) of section 2(a) of Pub. L. 93-100 provides: “Paragraph (1) shall apply only with respect to deposits or accounts 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 U.S.C. 1832(a)(2). See, article on “Now Account Eligibility” in Volume II, Deposit Accounts section, NBA Compliance Handbook.
Section 204.2(d)(2) describes certain transfers that are not included as any of the six transfers allowed pursuant to Section 204.2(b)(1). (See, above):
A. Transfers from a deposit described in Section 204.2(a)(1) that are made to the bank are not deemed to be included within the six transfers permitted for a nondemand deposit by that paragraph when the transfers are made for the purpose of repaying loans and associated expenses at the bank (as originator or servicer). This exemption does not apply to transfers to the bank that are made for the purpose of repaying loans that are made by the bank to the depositor’s demand account for the purpose of covering overdrafts.
B. Transfers from a deposit described in Section 204.2(a)(1)that are made to another account of the same depositor at the bank are not deemed to be included within the six transfers permitted for a nondemand deposit by that paragraph when the transfers are made by mail messenger, automated teller machine or in person.
C. Withdrawals from a deposit described in Section 204.2(a)(1)are not deemed to be included with the six transfers permitted for a nondemand deposit by that paragraph when the withdrawals are made by mail, messenger, telephone (via check mailed to the depositor), automated teller machine, or in person.
II. INTEREST
The term “interest” is defined in section 330.1(k) to mean:
“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.”
III. PREMIUMS
FDIC regulations contain an interpretive ruling pertaining to “premiums” found in § 330.101 and states in full:
This interpretive rule describes certain payments that are not deemed to be “interest” as defined in § 330.1(k).
A. Premiums, whether in the form of merchandise, credit, or cash, given by a bank to the holder of a deposit will not be regarded as “interest” as defined in § 330.1(k) if:
1. The premium is given to the depositor only at the time of the opening of a new account or an addition to, or renewal of, an existing account;
2. No more than two premiums per deposit are given in any twelve-month interval; and
3. The value of the premium (in the case of merchandise, the total cost to the bank, including shipping, warehousing, packaging, and handling costs) does not exceed $10 for a deposit of less than $5,000 or $20 for a deposit of $5,000 or more.
B. The costs of premiums may not be averaged.
C. A bank may not solicit funds for deposit on the basis that the bank will divide the funds into several accounts for the purpose of enabling the bank to pay the depositor more than two premiums within a twelve-month interval on the solicited funds.
D. The bank must retain sufficient information for examiners to determine that the requirements of this section have been satisfied.
E. Notwithstanding paragraph (a) of this section, any premium that is not, directly or indirectly, related to or dependent on the balance in a demand deposit account and the duration of the account balance shall not be considered the payment of interest on a demand deposit account and shall not be subject to the limitations in paragraph (a) of this section.
NOTE: The exception contained in paragraph e. of the interpretive ruling allows banks some flexibility in developing promotions in that there is no certain limit of the size or number of premiums a bank may pay to a depositor and the premiums can be linked to actions other than account openings or additional features to existing accounts. A bank should be cautioned that when it considers paying a premium to customers, it should examine whether or not the premium to be paid is considered a “bonus” under the Truth-in-Savings Act and its implementing Regulation DD.
IRS Ruling on “Premiums.” An IRS Revenue Procedure, issued June 27, 2000, addresses administrative relief for financial institutions that give away certain non-cash premiums to depositors when opening new accounts. The previous IRS stance was that the fair market value of merchandise given as premiums was subject to interest reporting if it, in addition to the interest paid on the account, exceeded $10. That stance was modified by the latest Revenue Procedure to state that a depositor does not have to pay tax on and the financial institution does not have to report as interest those premiums having a fair market value of $10 or less for a deposit up to $5,000 or $20 for a deposit of $5,000 or more.