Russell P. Dawn, Esq.
Rothgerber, Appel, Powers & Johnson
One Tabor Center, Suite 3000
1200 Seventeenth Street
Denver, CO 80202-5839

Dear Mr. Dawn:

This is in response to your letters of December 21, 1995, and April 9, 1995, with regard to a possible new deposit product for high-end customers, primarily corporations, of a depository institution that is a subsidiary of [word(s) deleted]. The product would consist of a non-interest bearing demand deposit account (DDA), an interest bearing savings account (MMDA), and a line of credit providing overdraft protection for the DDA. Each day, the entire balance of the DDA would be swept into the MMDA, and any overdraft in the DDA resulting from the posting of checks or other debits will be offset by a drawing on the line of credit. The interest rate paid on the MMDA would be less than that charged on the line of credit, and [Word(s) deleted] is proposing a differential of 25 basis points. The MMDA would be pledged as security for drawings under the line of credit. At the end of each week, any amount due under the line of credit would be repaid by transfer from the MMDA.

Under Regulation D (12 C.F.R. Part 204), transaction accounts are currently subject to a ten percent reserve requirement. Section 204.2(e)(5) defines "transaction account" to include:

Deposits or accounts maintained in connection with an arrangement that permits the depositor to obtain credit directly or indirectly through the drawing of a negotiable or nonnegotiable check, draft, order or instruction or other similar device . . . on the issuing institution that can be used for the purpose of making payments or transfers to third persons or others, or to a deposit account of a depositor.

12 C.F.R. 204.2(e)(5). As noted in a staff opinion of October 3, 1989, analyzing an arrangement involving a demand deposit account (DDA), a money market deposit account (MMDA), and a line of credit:

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 . . . reserve requirement[s] 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 checks were drawn.

Fed. Res. Reg. Svce. (FRRS) 2-345.23.

A staff opinion of July 1, 1991, extended this analysis explicitly to a similar situation involving a zero-balance demand account, an MMDA, and a line of credit, stating that:

Section 204.5(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 institution reported the deposits constitute clear violations of Regulation D.

FRRS 2-345.24.

Your fact pattern is very similar to those in the two cases discussed above. Drawings on the line of credit would cover overdrafts in the demand account resulting from paying checks drawn on the DDA. The MMDA would regularly be used to repay the line of credit. The interest rate on the line of credit would be tied to that on the MMDA. The line of credit would be secured by the MMDA.¹ Therefore, staff believes that your proposed arrangement falls under section 204.2(e)(5) of Regulation D.

In addition, section 204.2(b)(2) of Regulation D provides that any MMDA issued to a business that fails to restrict transfers to six per month is a demand account. See 12 C.F.R. 204.2(b)(2). As the arrangement you describe would effectively permit a business customer to draw checks against the balance in the MMDA, staff believes that the MMDA would be a demand account under this provision, and would be required to be reported and reserved against as such.

Finally, under section 217.2(a) of Regulation Q, 12 C.F.R. Part 217, an account that is a demand account for purposes of Regulation D is also a demand account for purposes of Regulation Q. Therefore, payment of interest on this account would be prohibited by section 217.3 of Regulation Q.

I hope this information is helpful. Please contact Rick Heyke of my staff (202/452-3688) if you have any further questions.

Very truly yours,

(signed) Oliver Ireland

Oliver Ireland

Footnotes 1. See staff opinion dated February 11, 1992, FRRS 2-343.22, for an example of facts and circumstances, including an interest rate on a time or savings deposit of 4 percent and an interest rate on a line of credit of 18 percent, that would generally not disqualify the time or savings account. Staff has also passed on smaller interest rate differentials under facts and circumstances where the balances maintained in the transaction account were such that the overdraft protection facility was likely to be used only occasionally. Return to text