This month's question requiring a detailed answer for fame and prizes:

What a NOW account is (12 U.S.C. 1832(a)), and how does it work?

A NOW account is an interest bearing checking account. It works by paying people an interest rate of the balance of their account.

That's about the extent of my knowledge.

A NOW account (Negotiable Order of Withdrawal) is somewhat of a clone between a traditional transaction account (unlimited transactions) and an Interest-bearing account. (Payment of interest is allowed due to the FI reserving the right to the 7-day's written notice prior to withdrawal.) Generally, it is only available to individuals, sole-props and non-profit corporations. There are some exceptions to this general rule.

A NOW (Negotiable Order of Withdrawal) account is a hybrid of transaction and non-transaction accounts. It features the unlimited transfers of a transaction account with the interest-earning capability of a non-transaction account. NOW accounts are commonly referred to as "Interest-bearing Checking Accounts." In order for the account to be considered a NOW and not an interest-bearing DDA (Demand Draft Account) which are not permitted under Regulation Q, the bank must, by agreement, reserve the right to require seven days advance notice of withdrawal, just as the bank does (or should) for Savings and Money Market (other non-transaction) accounts.

NOW accounts are restricted to natural persons, sole proprietors, and certain non-profit entities. Regulation D describes the types of eligible non-profit entities as those listed in section 501(c)(3) through (13) of the Internal Revenue Code. For-profit entities such as standard corporations, LLCs, Partnerships, etc may not have a NOW account.

Some banks periodically scrub their NOW account database to ensure that there are no ineligible entities with NOW accounts. Banks must ensure that their accounts are classified properly because reserve requirements are calculated based on the account balances for each account type. If there are too many errors in a bank's account classifications, the bank may be required to recalculate reserve requirements and update call report information.

I think GD won this one... no need to go on.

GuitarDude left out one important group that qualifies for NOW account ownership: units of domestic government. For a complete list of groups that are eligible, take a look at section 204.130 of Regulation D.

Can anyone add some background information, like where and when NOW accounts originated?

Now accounts first appeared in the interest rate deregulation era (1980 to 1986). The Fed originally authorized NOW and SuperNow accounts. Today there are no legal distinctions at all between them.

A NOW account is an account that bears interest and permits the depositor to make an unlimited number of third party withdrawals. If by contract or account agreement the bank states that it reserves the right to require seven days' notice before a consumer makes a withdrawal, then the account is not a demand deposit (and therefore can earn interest).

And don't forget the Grandfather provision. A NOW account established on or before August 31, 1981 by a nonqualifying entity may continue to maintain a NOW account.

Those eligible to maintain NOW accounts are (1)individuals, (2) eligible organizations (not-for-profit, operated primarily for religious, philanthropic, charitable, educational, fraternal, or other similar purposes, and (3) officers or employees of federal, state and local governments who are depositing public funds.

NOW accounts that are maintained by customer who does not qualify under one of the three permitted categories are considered demand deposits and violate Regulation Q rule prohibiting the payment of interest on demand deposits. A bank may be fined $1,000 for each violation.


Individuals
Sole proprietors (individuals maintaining a business account either in their own names or in a trade name)
Husband and wife operating unincorporated business as proprietors (not in any formal legal capacity)
Professionals that operate their business on an unassociated basis even if the account is for business purpose (Doctors, dentists, lawyers, etc.)(Doctor Doe, M.D. is eligible but Doctor Doe, M.D.P.C is not eligible)
IOLTA- Lawyer Trust Accounts even if opened by a law firm.
Local Housing authorities
Residential tenants' security deposits
Homeowners and condominium owners associations as described in Internal Revenue Code section 528
Labor unions
Pension and profit sharing funds
Political organizations as described in Internal Revenue Code section 527
Trade and professional associations
Trusts (if all beneficiaries are eligible to maintain Now accounts)
Other fiduciary accounts (if all beneficiaries are eligible to maintain Now accounts)
Escrow accounts for tax and insurance premiums held for eligible individuals and entities.
Business, recreational and social clubs - if not operated for profit
Volunteer Fire Companies
Cemetary Associations.
Governmental Units - federal, state, local (domestic, commonwealth and territorial units) Foreign governments - including embassies - are not included in this definition.
Nonprofit organizations - as described in Internal Revenue Code sections 501(c)(3)- 501(c)(13) and 501(c)(19).