Bank Promotional Giveaways And The "Toaster Rule"

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Question:

I'd like to offer a product to banks that they may like to use for new and existing account promotions. I was informed of a "Toaster Rule" that goes into affect if a gift exceeds $10 or $20, depending on account size. Then, the bank would be subject to additional taxes. Is this part of Regulation DD,12 CFR 230.2(f)? Where can I obtain the complete compliance and regulation info?

Answer:

Reg. Q is a key.

Section 217.3 Interest on demand deposits.
No member bank of the Federal Reserve System shall, directly or indirectly, by any device whatsoever, pay any interest on any demand deposit.

What qualifies and what is exempted?

Section 217.2 Definitions.
(d) Interest means any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit. A member 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.

And the premium or "toaster" rule is summed up below. Note the exception in (b).

Section 217.101 Premiums on deposits.
(a) Section 19(i) of the Federal Reserve Act and section 217.3 of Regulation Q prohibits a member bank from paying interest on a demand deposit. Premiums, whether in the form of merchandise, credit, or cash, given by a member bank to a depositor will be regarded as an advertising or promotional expense rather than a payment of interest if:

(1) the premium is given to a depositor only at the time of the opening of a new account or an addition to an existing account;

(2) no more than two premiums per account are given within a 12month period; and

(3) the value of the premium or, in the case of articles of merchandise, the total cost (including taxes, shipping warehousing, packaging, and handling costs) does not exceed $10 for deposits of less than $5,000 or $20 for deposits of $5,000 or more.

The costs of premiums may not be averaged. The member bank should retain sufficient supporting documentation showing that the total cost of a premium, including shipping, warehousing, packaging, and handling costs, does not exceed the applicable $10/$20 limitations and that no portion of the total cost of any premium has been attributed to development, advertising, promotional, or other expenses. A member bank is not permitted directly or indirectly to solicit or promote deposits from customers on the basis that the funds will be divided into more than one account by the institution for the purpose of providing more than two premiums per deposit within a 12month period.

(b) 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.

Reg. DD, TISA, addresses bonus and disclosure rules.

First published on BankersOnline.com 3/4/02