Interest on Business Checking
April 19, 2004
Ann vom Eigen, Legislative & Regulatory Counsel
ALTA members urge inclusion of language regarding “the treatment of escrow accounts maintained at depository institutions for the purpose of completing the settlement of a real estate transaction” in any legislation allowing banks to pay interest on business checking accounts. S. 1967, the Interest on Business Checking Act of 2003, introduced in the Senate by Senator Chuck Hagel, includes the necessary language in Section 6. This language would ensure continuation of the current Federal legal treatment of escrow accounts maintained at depository institutions. Under current law, ALTA members receive services instead of interest on these types of accounts. We would like to continue to have the option of receiving those services under any revised law allowing banks to pay interest.
Regulation Q prohibits payments of interest on demand deposits. ALTA is seeking language clarifying that current legal interpretations under Regulation Q, which allow title companies and agencies to receive services, will be carried forward for “escrow accounts maintained at a depository institution for the purpose of completing the settlement of a real estate transaction,” and specifying that Federal law treatment still applies to these types of accounts.
The U.S. House of Representatives passed H.R. 758, the Business Checking Freedom Act of 2003 on April 1, 2003 and H.R. 1375, the Financial Services Regulatory Relief Act on March 18, 2004 to repeal Reg. Q. Senator Chuck Hagel (R-NE) introduced S. 1967, the Interest on Business Checking Act of 2003, last year to allow banks to pay interest on corporate checking accounts. The House and Senate bills would all repeal the current statutory and Regulation Q (Federal Reserve) prohibitions on banks paying such interest and would raise questions about the continued validity of certain well-established financial benefits and checking services that large depositors now receive from banks in lieu of interest. These financial benefits are now provided in accordance with current guidance under Regulation Q. For example, Regulation Q provides that offering the following services without charge is not the payment of interest:
- Armored car services;
- Short-term overdraft privileges;
- Printed checks;
- Safe deposit boxes and night depository facilities;
- Preparation of reports required of a bank by a municipality;
- Loans at preferential interest rates; and
- Maintenance of a permanent record of all checks and deposits.
H.R. 758 and H.R. 1375 include in Section 7, a Rule of Construction, language that attempts to ensure that the current regulatory treatment under Regulation Q would continue for real estate transaction escrow accounts under the revised law. Unfortunately, the House bills also contain language relating to state law, which is intended to limit escrows for payment of interest on taxes and insurance. As that language has an uncertain effect on escrow closing accounts for real estate settlements, ALTA sought and obtained narrower language in S. 1967 to eliminate confusion between the two types of accounts, as well as language specifying that Reg. Q treatment be allowed not just under federal banking statutes but also under any other law affecting the payment of interest on deposits. While the House and Senate bills are very similar, S. 1967 is preferable because it provides more clarity on these issues of concern to ALTA.
The Federal Reserve Congressional staff has indicated “they don’t have a dog in this fight.”