Question: You said that checking accounts cannot earn interest, but NOW accounts
can. We have a 55 Plus account that we pay interest on. Can we consider that a NOW account? It works basically like a NOW with a couple of extra perks, such as free checks, but we call it our "55 Plus" account.
Answer: Apply a functional definition test. Under Regulation Q, you cannot pay interest on a demand deposit account. You can, however, pay interest on a NOW account. What is the difference between the two? Under Regulation D, in order to meet the definition of a NOW account, the account only be available to certain types of customers (individuals, governmental units, nonprofit organizations, for example) and your institution must reserve the right to require at least seven days' written notice of an intended withdrawal from the account. If you limit eligibility on your "55 Plus" account in accordance with these guidelines, and have a contractual right to require at least seven days' written notice of an intended withdrawal, your "55 Plus" account will meet the definition of a NOW account and you can pay interest on it.
The original version appeared in the October 2002 edition of the Oklahoma Bankers Association Compliance Informer.
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