Petition — Connell v. American Bankers Ass'n

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3a the Supreme Court af te Bn jones

OCTOBER TERM, 1978

LAWRENCE CONNELL, CHAIRMAN OF THE NATIONAL

CREDIT UNION ADMINISTRATION BOARD, ET AL.,

PETITIONERS

v.

AMERICAN BANKERS ASSOCIATION, ET AL.

FEDERAL HoME LOAN BANK BoaRD, ET AL.,

PETITIONERS

Vv.

INDEPENDENT BANKERS ASSOCIATION OF AMERICA

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

SYSTEM, ET AL., PETITIONERS

Vv.

UNITED STATES LEAGUE OF SAVINGS ASSOCIATIONS

PETITION FOR A WRIT OF CERTIORARI TO THE |

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

WADE H. McCREB, JR.

Solicitor General

STUART E. SCHIFFER

Acting Assistant Attorney General

STEPHEN M. SHAPIRO.

Assistant to the Solicitor General

JOSEPH B. Scott:

Attorney

Department. of Justice

Washington, D.C. 205380

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Statutes and regulations involved .................... 3

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Reasons for granting the petition -.................. 10

re sae secncienecoinednovnsescecen 19

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CITATIONS

Cases:

American Bankers Association, 447 F.

ie nindsaks cncchdssinneéniinniiicndeone 2

Arnold Tours, Inc. v. Camp, 472 F.2d

EE ES ee 17

Board of Governors of the Federal Re-

serve System v. Agnew, 329 U.S. 441.... 12

Board of Governors of the Federal Re-

serve System v. First Lincolnwood

Corp., No. 77-832 (Dec. 11, 1978)........ 12,15

Miller v. Youakim, No. 77-742 (Feb. 22,

Bina SE SR 12

Mourning v. Family Publications Service,

I i msenenens 12

Saxbe v. Bustos, 419 U.S. 66 .................... 15

Zenith Radio Corp. v. United States, 437

iF SS een 12

II

Statutes and regulations:

Federal Credit Union Act, 12 U.S.C. 1751

Oe I rc he nctrctenerccsncnatneiianrenneees 4,7,9,15

Section 107(1), 12 U.S.C. 1757(1).... 15

Section 107(6), 12 U.S.C. 1757 (6).... 15

Section 107(15), 12 U.S.C. 1757

RE Aictiiiniastiksnntiinatterenemncciacsneiacimmecents 15

Section 120(a), 12 U.S.C. 1766(a).... 16

Section 209(a) (11), 12 U.S.C. 1789

OT ig} Qapsipenmaunee saseeeee an aman nivennsceres 16

Federal Deposit Insurance Act, 12 U.S.C.

BE BE Rs Cstiticiocmninnnine 4

Section § 2[18], 12 U.S.C. 1828(g)..6, 13, 14

Section 2(a), 12 U.S.C. 1832 (a)........ 6,13

Federal Reserve Act, 12 U.S.C. 221 et seg... 4,14

Section 19(i), 12 U.S.C. 371a ............ 6, 13

Section 19(j), 12 U.S.C. 371b .......... 13

Section 19(a)-(c), 12 U.S.C. 461 -..... 13

Home Owners’ Loan Act, 12 U.S.C. 1461

OE, icniccteccnincnceninainscrrinndinttinnsinlelntinstiniedtoananes 4

Section 5a, 12 U.S.C. 1464(a) .......... 8,17

Section 5(b) (1), 12 U.S.C. 1464(b)

a ce ciieaarneds ca scgnecnndnantieinbaiaacainapeanptinen 17

Section 6b, 12 U.S.C. 1464(b) .......... 8,17

Financial Institutions Regulatory and In-

terest Rate Control Act of 1978, Pub.

L. No. 95-630, 92 Stat. 3641 ................ 15

Miscellaneous:

42 Fed. Reg. 61977 (1977) -.............:......... 4

43 Fed. Reg. 20001 (1978) .................--..--- 4

43 Fed. Reg. 20222 (1978) .......................- 4

43 Fed. Reg. 22930 (1978) .................-...--- 5

H.R. 4986 (formerly H.R. 3864), 96th

Come, Det Ge.. (here): ..................... 19

S. 1847, 96th Cong., 1st Sess. (1979) ...... 19

Iu the Supreme Court of the United States

OCTOBER TERM, 1978

No.

LAWRENCE CONNELL, CHAIRMAN OF THE NATIONAL

CREDIT UNION ADMINISTRATION BOARD, ET AL.,

PETITIONERS

Vv.

AMERICAN BANKERS ASSOCIATION, ET AL.

FEDERAL HOME LOAN BANK BOARD, ET AL.,

PETITIONERS

Vv.

INDEPENDENT BANKERS ASSOCIATION OF AMERICA

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

SYSTEM, ET AL., PETITIONERS

Vv.

UNITED STATES LEAGUE OF SAVINGS ASSOCIATIONS

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

(1)

2

The Solicitor General, on behalf of the Board of

Governors of the Federal Reserve System, the Fed-

eral Deposit Insurance Corporation, the National

Credit Union Administration, the Federal Home

Loan Bank Board, and the other federal defendants,’

petitions for a writ of certiorari to review the

judgment of the United States Court of Appeals

for the District of Columbia Circuit in these cases.

OPINIONS BELOW

The opinion of the court of appeals (App. A, infra,

la-7a) is not reported. The opinion of the district

court in United States League of Savings Associa-

tions (App. C, infra, 9a-3la) is reported at 463 F.

Supp. 342. The opinion of the district court in

American Bankers Association (App. D, infra, 32a-

41a) is reported at 447 F. Supp. 296. The opinion of

the district court in Independent Bankers Association

of America (App. E, infra, 42a-50a) is not reported.

JURISDICTION

The judgment of the court of appeals was entered

on April 20, 1979. A petition for rehearing in one

of the consolidated cases (Independent Bankers As-

sociation of America) was denied on May 21, 1979

(App. B, infra, 8a). On July 12, 1979, the Chief

Justice extended the time in which to file a petition

for a writ of certiorari to and including August 20,

1 The other federal defendants include individual members

of the petitioner agencies, sued in their official capacities.

3

1979. The jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

QUESTIONS PRESENTED

1. Whether regulations promulgated by the Fed-

eral Reserve Board and the Federal Deposit Insur-

ance Corporation to permit depositors in federally-

insured banks to make pre-arranged, automatic trans-

fers of funds from savings accounts to demand de-

posit accounts in order to cover checks drawn by

depositors or to maintain a specified balance in de-

mand accounts are valid.

2. Whether regulations promulgated by the Na-

tional Credit Union Administration to permit mem-

bers of federal credit unions to withdraw funds from

their accounts by means of a draft are valid.

3. Whether regulations promulgated by the Fed-

eral Home Loan Bank Board authorizing federal

savings and loan associations to establish off-premises

computer terminals through which they can render

financial services to their accountholders are valid.

STATUTES AND REGULATIONS INVOLVED

The pertinent statutes and regulations are set forth

in Appendix F, infra, 51la-70a.

STATEMENT

1. The Federal Reserve Board supervises and

regulates commercial banks that are members of the

Federal Reserve System pursuant to the provisions

4

of the Federal Reserve Act, 12 U.S.C. 221 et seq.

The Federal Deposit Insurance Corporation (FDIC)

regulates and supervises those federally-insured com-

mercial banks that are not members of the Federal

Reserve System under the Federal Deposit Insurance

Act, 12 U.S.C. 1811 et seg. The Naticnal Credit Union

Administration (NCUA) supervises and regulates

federal credit unions chartered under the Federal

Credit Union Act, 12 U.S.C. 1751 et seg. The Fed-

eral Home Loan Bank Board (FHLBB) supervises

and regulates federal savings and loan associations

under the Home Owners’ Loan Act, 12 U.S.C. 1461

et seq.

Each of these agencies, acting under separate

statutory authority conferred y Congress, has

promulgated regulations authorizing the financial in-

stitutions that it supervises to adopt new methods for

the transfer or withdrawal of deposited funds. Spe-

cifically, on December 8, 1977, the NCUA promulgated

a regulation (42 Fed. Reg. 61977 (1977); App. F,

infra, 66a-70a) which authorizes federal credit unions

to adopt share draft programs that enable members

to withdraw funds from their share accounts for

payment to themselves or to third parties by means

of a draft drawn on the credit union and payable

through a bank. On May 1 and May 5, 1978, the

Federal Reserve Board and the FDIC adopted amend-

ments to their regulations (43 Fed. Reg. 20001

(1978), 20222 (1978); App. F, infra, 57a-59a) that

enable depositors at FDIC insured banks to make pre-

arranged, automatic transfers of funds from savings

5

to demand (checking) accounts to cover checks drawn

by depositors or to maintain a specified balance in

their demand accounts. On May 24, 1978, the FHLBB

adopted a regulation (43 Fed. Reg. 22930 (1978);

App. F, infra, 59a-66a) authorizing federal savings

and loan associations to establish “remote service

units”—off-premises computer terminals through

which associations can render various financial serv-

ices, including funds withdrawal, for their customers.

2. In three separate lawsuits, the regulations of

the four agencies were challenged by a trade associa-

tion of financial institutions that competed with the

financial institutions subject to the regulations. The

plaintiffs in United States League of Savings Asso-

ciations challenged the regulations of the Federal

Reserve Board and FDIC authorizing automatic

funds transfers by commercial banks. The plaintiffs

in American Bankers Association challenged the reg-

ulations of NCUA authorizing the use of share drafts

by credit unions. And the plaintiffs in Independent

Bankers Association of America challenged the regu-

lations of the FHLBB authorizing savings and loan

associations to establish remote service units. The

complaint in each case alleged that the challenged

regulations violated statutory provisions applicable

to the particular agency or exceeded the agency’s

rule-making authority.

a. The complaint in United States League of

Savings Associations charged that the automatic

funds transfer (AFT) service authorized by the

Federal Reserve Board and FDIC violates the statu-

6

tory prohibition against payment of interest on de-

mand deposits (12 U.S.C. 37la and 1828(g)) and

also permits withdrawal of funds by negotiable instru-

ment from interest bearing accounts for payment to

third parties, in violation of 12 U.S.C. 1832(a). The

district court granted summary judgment in favor

of the Federal Reserve Board and FDIC (App. C,

infra, 9a-31a). The court pointed out that the auto-

matic funds transfer service permitted by the chal-

lenged regulations requires the existence of both a

savings deposit account and a demand deposit ac-

count. Under such a service, interest is payable only

on the savings account, and negotiable instruments

ean be used only to withdraw funds from the de-

mand account. Referring to the requirement in the

challenged regulations that any AFT service must

preserve the traditional right of the commercial bank

to require 30 days’ notice from a depositor before

money may be withdrawn from the depositor’s sav-

ings account and transferred to his demand account,

the court emphasized that the “two accounts are

distinguished not solely by the payment of interest

but more significantly by the limitation of the right

of withdrawal from savings accounts” (id. at 26a).

The court also noted that, under the challenged regu-

lations, the bank’s right of 30 days’ notice prior to

withdrawal must specifically be brought to the at-

tention of depositors ( ibid.).

On similar grounds, the district court rejected the

contention that the AFT regulations violate the statu-

tory prohibition against withdrawals by negotiable

7

instrument from savings accounts for payment to

third parties. The court again stressed that “Tt]wo

accounts are required to operate the AFT service”

(App. C, infra, 27a) and that “no negotiable orders

are drawn on or third party payment made from

the savings deposit” (ibid.). The court also observed

that the contested service is legally indistinguishable

from other authorized and unchallenged procedures

for withdrawal or transfer of funds from interest

bearing accounts, such as “bill payer” and “tele-

phone transfer” services (id. at 27a-28a).

b. The complaint in American Bankers Associa-

tion charged that the NCUA’s regulations authoriz-

ing the use of share drafts by federal credit unions

are invalid because such powers are not extended to

credit unions by the Federal Credit Union Act, 12

U.S.C. 1751, et seg. The district court granted sum-

mary judgment in favor of the NCUA, finding that

nothing in the Federal Credit Union Act or its legis-

lative history supported the view that federally char-

tered credit unions may not use this method of funds

withdrawal. The court noted that “[s]hare drafts

are simply a variation on established methods of

accessing members’ accounts, similar to previous pro-

cedures for credit union third-party payments, and

similarly valid as part of the exercise of FCU’s in-

cidental powers under the FCU Act” (App. D, infra,

37a).

ce. The complaint in /ndependent Bankers Associa-

tion of America charged that the regulations of the

FHLBB authorizing savings and loan associations to

8

use remote service units (RSUs) exceed the Board’s

authority under Section 5(a) of the Home Owners’

Loan Act, 12 U.S.C. 1464(a), and amount to per-

mission to use check withdrawals from savings ac-

counts, in violation of 12 U.S.C. 1464(b). The dis-

trict court rejected this contention. After noting

that “RSUs are merely an improvement upon tra-

ditional methods whereby members may access their

FSL accounts” and that “RSU activity is in no way

inconsistent with past practices of FSLs or with the

purpose for which H1S$ were created,” the court

held that “RSU activity serves the basic purposes of

FSLs, that the decision to implement such activity

is within the special expertise of the Board, and

that in allowing the utilization of RSUs the Board

has not exceeded the scope of its authority under

Section 5(a) of the HOLA” (App. E, infra, 47a-48a).

The court also rejected the argument that use of

remote service units is the “functional equivalent”

of permitting the depositor to transfer funds from

his savings account by negotiable instrument, observ-

ing that such rough “equivalence” arguments are

properly addressed to Congress, not the courts (7d.

at 49a-50a).

8. Less than a month after hearing arguments in

the three cases, the court of appeals issued a brief

per curiam judgment order, in which it reversed the

three separate decisions of the district court and held

invalid the regulations of each administrative agency.

Without discussing the separate statutory provisions

and legislative history involved in each case, the

court concluded in general terms that “[i]t appears

9

to the court that the development of fund transfers

as now utilized by each type of financial institution

involved herein, commercial banks with ‘Automatic

Fund Transfers,’ savings and loan associations with

‘Remote Service Units,’ and federal credit unions

with ‘Share Drafts,’ in each instance represents the

use of a device or technique which was not and is

not authorized by the relevant statutes, although per-

mitted by regulations of the respective institutions’

regulatory agencies” (App. A, infra, 2a-3a). Without

elaboration of its rationale, the court held that the

automatic funds transfer service is illegal because it

permits banks to pay interest on demand deposits and

also permits withdrawals from savings accounts by

negotiable instruments for the purpose of making

transfers to third parties; that the maintenance of

remote service units by savings and loan associations

amounts to a violation of the prohibition against use

of che xing accounts by such institutions; and that

share drafts used by federal credit unions are the

“practical equivalent” of checks drawn on interest-

bearing time deposits in violation of the Federal

Credit Union Act (id. at 3a-4a).

The court of appeals also expressed the view that

“the methods of transfer authorized by the agency

regulations have outpaced the methods and technology

of fund transfer authorized by existing statutes”

(App. A, infra, 4a-5a). It added (id. at 4a):

The history of the development of these modern

transfer techniques reveals each type of financial

institution securing the permission of its ap-

10

propriate regulatory agency to install these de-

vices in order to gain a competitive advantage,

or at least competitive equality, with financial

institutions of a different type in its services

offered the public. The net result has been that

three separate and distinct types of financial in-

stitutions created by Congressional enactment

to serve different public needs have now become,

or are rapidly becoming, three separate but

homogeneous types of financial institutions offer-

ing virtually identical services to the public, all

without the benefit of Congressional considera-

tion and statutory enactment.

Although the court of appeals ruled that the regu-

lations of each of the four agencies are invalid, it

“recognize[d] that the wisdom of the transfer proce-

dures permitted by the regulations of the several

agencies is a matter of high public financial policy,

involving the financial interests not only of the par-

ties before this court in these proceedings, but also

of other large groups in the nation,” and that “[i]t

is the responsibility of the Congress and not the courts

to determine such policy” (App. A, infra, 6a). The

court therefore stayed the effective date of its ruling

“until 1 January 1980 in the expectation that the Con-

gress will declare its will upon these matters” (id. at

7a).

REASONS FOR GRANTING THE PETITION

1. This case presents issues of substantial public

importance. The decision of the court of appeals seri-

ously curtails the regulatory authority of four ad-

ministrative agencies vested by Congress with pri-

11

mary responsibility for supervising the nation’s

principal financial institutions. In addition, the im-

pact of the decision on the financial community and

the general public is both certain and significant. As

the court of appeals recognized, “enormous invest-

ments have been made by various financial institu-

tions in the installation of new technology [and]

* * * methods of financial operation in the nation

have rapidly grown to rely on much of this” (App.

A, infra, 5a). The court also correctly noted that

“a disruption of the offered services would necessar-

ily have a deleterious impact on the financial com-

munity as a whole * * *” (ibid.).

It is estimated by the Federal Reserve Board and

FDIC that, as of July 1979, depositors held over

$7.1 billion in bank accounts participating in auto-

matic funds transfer programs. Similarly, the Na-

tional Credit Union Administration estimates that

member institutions now hold more than $783 million

in federal credit union share draft accounts. The

Federal Home Loan Bank Board estimates that fed-

eral savings and loan associations operate more than

2,700 remote service units and that over $2.6 billion

is held in savings accounts accessible through RSUs.

Although the court of appeals believed that new

legislation is required to permit automatic funds

transfer, remote service unit, and share draft serv-

ices, the court provided no analysis to show that the

administrative agencies had erred in concluding that

existing legislation provides a sufficient basis for

these services or that the district court had miscon-

12

strued the separate statutory provisions and their

pertinent legislative histories. This broad-brush ap-

proach conflicts with the deliberate congressional plan

to regulate different financial institutions under sepa-

rate statutory schemes.

Nor was the court of appeals warranted in indulg-

ing its own policy view that the financial institutions

here in question have extended their operations be-

yond their proper scope. Under well established prin-

ciples, the court should have deferred to the reason-

able interpretations of the administrative agencies

charged by Congress with the supervision of those

institutions and the enforcement of the statutes de-

lineating the scope of their activities. See Board of

Governors of the Federal Reserve System v. First

Lincolnwood Corp., No. 77-832 (Dec. 11, 1978), slip

op. 138-14; Mourning v. Family Publications Service,

Inc., 411 U.S. 356, 369 (1973); Board of Governors

of the Federal Reserve System v. Agnew, 329 U.S.

441, 449-451 (Rutledge and Frankfurter, JJ., con-

curring); see also Zenith Radio Corp. v. United

States, 487 U.S. 448, 450-451 (1978); Miller v. You-

akim, No. 77-742 (Feb. 22, 1979), slip op. 18-19.

Because the court of appeals invalidated these reg-

ulations on a nation-wide basis, no conflict among

the circuits will emerge in the future. Hence, unless

reviewed by this Court or corrected by new legisla-

tion (see note 5, infra), the decision of the court

below will effectively nullify the regulations of four

administrative agencies and put an end to services

that have proved to be both efficient for financial in-

13

stitutions and beneficial to large numbers of the gen-

eral public.

2. Contrary to the conclusion of the court of ap-

peals, each of the regulations challenged in this liti-

gation comports with the statute under which it was

promulgated.

a. United States League of Savings Associations v. Board

of Governors of the Federal Reserve System

Congress has conferred upon the Federal Reserve

Board and the FDIC extensive authority to define the

terms “savings deposits,” “demand deposits,” and

“interest,” and to regulate withdrawal of savings de-

posits, payment of interest on deposits, and the main-

tenance of required bank reserves. 12 U.S.C. 371b,

461, and 1828(g).

The court of appeals nonetheless concluded that the

reguiations of the Federal Reserve Board and the

FDIC authorizing automatic funds transfers exceed

the congressional grant of authority. In the court’s

view, automatic funds transfers permit indirect pay-

ment of interest on demand deposits, in violation of

12 U.S.C. 37la and 1828(g), and also permit with-

drawal of funds from savings accounts by negotiable

instrument, in violation of 12 U.S.C. 1832(a).

As the district court noted (App. C, infra, 26a-28a),

however, the AFT service requires the existence of

two separate accounts—a savings account and a de-

mand deposit (or checking) account. The regulations

in question preserve the traditional distinction be-

tween the two accounts. Under the regulations, banks

14

are required to reserve their right to a 30-day notice

from customers before transferring funds from a

savings account to a checking account.’ Interest is

paid only on funds that actually remain in the sav-

ings account. The moment funds are transferred to

the checking account, interest payments cease. Thus,

interest is not paid on demand deposits in violation

of 12 U.S.C. 37la and 1828(g). The automatic funds

transfer service merely achieves in an efficient way

what any person maintaining both a savings and

checking account is free to do: transfer funds from

the savings account to the checking account when

convenient or necessary.*

Nor is there substance to the court of appeals’ con-

clusion that automatic funds transfer services permit

bank customers to draw negotiable checks on savings

accounts for payment to third parties. Under the

regulations, the order to withdraw funds from a sav-

ings account is part of the non-negotiable agreement

between the bank and its depositor. The funds with-

drawn from the depositor’s savings account are sim-

ply transferred by the bank to the depositor’s own

non-interest bearing demand deposit account, not to

2 As the district court pointed out, the 30-day notice feature

of a savings account has been the basis for distinguishing

between savings and demand deposit accounts since Congress

enacted the Federal Reserve Act in 1918 (App. C, infra,

15a-17a).

’Commonly used methods for withdrawing funds from

savings acounts for deposit in demand accounts include di-

rections from the depositor in person, by telephone, by bill-

payer service, or by fiduciary arrangement.

15

a third party. The only negotiable instruments

(checks) involved are those drawn by the customer

on his demand deposit account, not on his savings

account. Only after funds are transferred to the de-

mand account can they be used for payment by check

to third parties. Thus, the AFT service does not

permit transfer of savings deposits by negotiable

instrument in violation of the statute.*

b. American Bankers Associution v. Connell

Although the Federal Credit Union Act provides

the authority for federal credit unions to accept mem-

ber funds (12 U.S.C. 1757(6)), the Act and its

legislative history are silent with respect to the pro-

cedures to be followed in withdrawing funds from a

member’s share account. However, federal credit

unions are specifically empowered to make contracts

with their members (12 U.S.C. 1757(1)), and to “ex-

ercise such incidental powers as shall be necessary or

requisite to enable it to carry on effectively the busi-

ness” of a credit union (12 U.S.C. 1757(15)). More-

over, the NCUA is vested with broad authority to

promulgate rules deemed to be necessary or appro-

4 Significantly, Congress has recently reviewed automatic

funds transfer services provided by financial institutions and

has adopted measures that accommodate those services. See

the Financial Institutions Regulatory and Interest Rate Con-

trol Act of 1978, 92 Stat. 3641, 3729, 3713-3714, and 3645.

Thus, Congress has been aware of the banking practices in

question but has not disapproved the administrative construc-

tion. See Board of Governors of the Federal Reserve System

v. First Lincolnwood Corp., supra, slip op. 13-14; Sazbe v.

Bustos, 419 U.S. 65, 74 (1974).

16

priate to implement the provisions of the Act (12

U.S.C. 1766(a), 1789(a) (11) ). These provisions pro-

vide a sufficient statutory basis for the NCUA’s share

draft regulation.

Federally chartered credit unions have tradition-

ally adopted procedures to afford customers conven-

ient access to funds in their accounts and convenient

mechanisms to transfer funds to third parties, in-

cluding pre-authorized payments of recurring bills

and telephone bill-paying services. By permitting the

use of share drafts, the NCUA has merely provided

an additional convenient method for withdrawing

funds. The fact that share drafts are similar to

checks is legally irrelevant. Contrary to the court of

appeals’ assumption, nothing in the Federal Credit

Union Act or any other statute prohibits federally

chartered credit unions from using checks or check-

like instruments to facilitate customer withdrawals

or payments to third parties.

Use of share drafts makes it possible for credit

unions to participate in the benefits of the new tech-

nology of electronic funds transfer. By making ac-

cess to funds more convenient, credit unions are

better able to attract deposits and serve their mem-

bers. And, in keeping with the goal of electronic

funds transfer programs, share drafts minimize the

flow of commercial paper because paid share drafts,

unlike paid checks, are not returned to credit union

members. Under these circumstances, the district

court correctly concluded that the use of share drafts

17

was a proper incident of the business of federally

chartered credit unions. See generally Arnold Tours,

Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972).

c. Independent Bankers Association v. Federal Home

Loan Bank Board

Section 5(b)(1) of the Home Owners’ Loan Act,

12 U.S.C. 1464(b) (1), provides that accounts at fed-

eral savings and loan associations “shall not be sub-

ject to check or to withdrawal or transfer on negotiable

or transferable order or authorization to the asso-

ciation, but the Board may by regulation provide for

withdrawal or transfer of savings accounts upon non-

transferable order or authorization.” Remote service

units fully comply with the express terms of the

statute since they do not subject funds in savings

accounts to transfer by “check” or to “withdrawal

or transfer on negotiable or transferable order or

authorization.” Rather, RSUs permit withdrawal

or transfer of savings funds upon non-transferable

order when the customer uses his personal identifica-

tion card to obtain access to his funds. This proce-

dure is expressly authorized by the last clause of

Section 5(b)(1) and was properly endorsed by the

FHLBB under its broad rule-making authority (12

U.S.C. 1464 (a), (b)).

The assertion of the court of appeals that use of

a remote service unit is the “functional equivalent”

of a checking transaction is groundless. RSUs and

checking transactions are wholly distinct. A cus-

tomer using a remote service unit withdraws funds

18

from his account at a federal savings and loan as-

sociation. The customer gives no one a check or

negotiable instrument. By contrast, a person using

a check or negotiable instrument designates a payee,

who may elect to cash the check himself. The payee

may also direct the drawee bank to pay a third

party, who may, in turn, direct payment to yet an-

other person. In sum, a check is a fully transferable

and negotiable instrument, whereas the machine read-

able cards used by customers to activate remote serv-

ice units are not negotiable or transferable in any

way. See Appendix E, infra, 49a.°

5 The court of apeals apparently concluded that obtaining

funds from a remote service unit was equivalent to obtaining

funds by cashing a check (App. A, infra, 3a). However,

the fact that remote service units may be used as an alterna-

tive to engaging in a checking transaction does not make their

use the same as a checking transaction. Acceptance of that

proposition would mean that passbook savings accounts must

be classified as checking accounts merely because some people

use them in lieu of checking accounts.

RAEI He emery eer ertgn OUR

19

CONCLUSION

The petition for a writ of certiorari should be

granted.°

Respectfully submitted.

WADE H. MCCREE, JR.

Solicitor General

STUART E. SCHIFFER

Acting Assistant Attorney General

STEPHEN M. SHAPIRO

Assistant to the Solicitor General

JOSEPH B. Scott

Attorney

AUGUST 1979

° Two bills introduced in Congress would, if enacted, ex-

pressly sanction the banking practices at issue here. H.R. 4986

(formerly H.R. 3864), 96th Cong., 1st Sess. (1979); S. 1347,

96th Cong., Ist Sess. (1979). The pendency of these proposals

does not, in our view, detract from the importance of this

Court’s review of the decision below. Whether and when the

bills will be enacted is a matter of conjecture. If these pro-

posals are enacted and the present case is mooted thereby, we

will promptly notify the Court.

la

APPENDIX A

NOT TO BE PUBLISHED—SEE LOCAL RULE 8(f,

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

[Filed Apr. 20, 1979]

SEPTEMBER TERM, 1978

Civil Action No. 77-2102

No. 78-1337

AMERICAN BANKERS ASSOCIATION AND

TIOGA STATE BANK, APPELLANTS

Vv.

LAWRENCE B. CONNELL, JR., Administrator of the

National Credit Union Administration, ET AL.

Civil Action No. 76-0105

No. 78-1849

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

a corporation, APPELLANT

Vv.

FEDERAL HOME LOAN BANK BOARD, ET AL.

2a

Civil Action No. 78-0878

No. 78-2206

UNITED STATES LEAGUE OF SAVINGS ASSOCIATIONS,

an Illinois not-for-profit corporation, APPELLANT

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

SYSTEM, an agency of the United States, ET AL.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

- BEFORE: McGowaN, TAMM and WILKEY,

Circuit Judges

JUDGMENT

These causes came on to be heard on their records

on appeal from the United States District Court for

the District of Columbia, and they were argued by

counsel before this panel.

It appears to the court that the development of

fund transfers as now utilized by each type of finan-

cial institution involved herein, commercial banks

with “Automatic Fund Transfers,” savings and loan

associations with “Remote Service Units,” and fed-

eral credit unions with “Share Drafts,” in each in-

stance represents the use of a device or technique

Ml RS NERS TH!

3a

which was not and is not authorized by the relevant

statutes, although permitted by regulations of the re-

spective institutions’ regulatory agencies. Specifi-

cally, the transfer from an interest-bearing time

deposit (savings) account to a noninterest-bearing

demand (checking) account by the Automatic Fund

Transfer system, authorized by the Board of Gov-

ernors of the Federal Reserve System in 43 Fed.

Reg. 20,001 (1978) (to be codified in 12 C.F.R.

§ 217.5(c) (2) and (3)), is that “indirect[] ... de-

vice” prohibited by 12 U.S.C. §371la (1976);* the

Remote Service Units utilized by many savings and

loan associations, pursuant to Federal Home Loan

Bank Board regulations (12 C.F.R. § 545.4-2 (1978) )

which permit the withdrawal of funds from an in-

terest-bearing time deposit account by a device func-

tionally equivalent to a check, are in violation of the

prohibition against checking accounts contained in

Section 5(b) (1) of the Home Owners’ Loan Act of

1 Similarly, the Automatic Fund Transfer system author-

ized by the Federal Deposit Insurance Corporation in 43

Fed. Reg. 20,222 (1978) (to be codified in 12 C.F.R. § 329.5

(c) (2)) is in violation of 12 U.S.C. § 1828(g) (1976), which

directs the Board of Directors of the FDIC to prohibit the

payment of interest on demand deposits. The court is of the

view that the Automatic Fund Transfer system allows, in

effect, for interest to be paid on demand deposits.

The Automatic Fund Transfer system also, in its effect,

violates 12 U.S.C. § 18382(a) (as amended by Pub. L. No.

95-630, § 1301, 92 Stat. 3712, 10 Nov. 1978), which provides

that, except in seven New England states, withdrawals from

savings accounts may not be made by negotiable or trans-

ferable instruments for the purpose of making transfers to

third parties.

4a

1933 (12 U.S.C. §1464(b)(1) (1976)); and the

Share Drafts utilized by some federal credit unions,

pursuant to National Credit Union Administration

regulation (12 C.F.R. § 701.34 (1978)), are the

practical equivalent of checks drawn on these inter-

est-bearing time deposits in violation of the provi-

sions of the Federal Credit Union Act, 12 U.S.C.

§§ 1751-90 (1976).’

The history of the development of these modern

transfer techniques reveals each type of financial in-

stitution securing the permission of its appropriate

regulatory agency to install these devices in order to

gain a competitive advantage, or at least competitive

equality, with financial institutions of a different

type in its services offered the public. The net result

has been that three separate and distinct types of

financial institutions created by Congressional enact-

ment to serve different public needs have now become,

or are rapidly becoming, three separate but homogen-

eous types of financial institutions offering virtually

identical services to the public, all without the bene-

fit of Congressional consideration and statutory

enactment.

This court is convinced that the methods of trans-

fer authorized by the agency regulations have out-

paced the methods and technology of fund transfer

2The Act does not contain an express grant of power to

offer share drafts, nor can that power be implied in view

of the legislative history of laws regulating financial insti-

tutions (see Brief for Appellant in No. 78-1337, at 9-26),

which demonstrates an intent on the part of Congress not to

authorize federal credit union share draft programs.

5a

authorized by the existing statutes. We are neither

empowered to rewrite the language of statutes which

may be antiquated in dealing with the most recent

technological advances, nor are we empowered to

make a policy judgment as to whether the utilization

of these new methods of fund transfer is in the

overall public interest. Therefore, we have no option

but to set aside the regulations authorizing such fund

transfers as being in violation of statute. We do so

with the firm expectation that the Congress will

speedily review ‘the overall situation and make such

policy judgment as in its wisdom it deems necessary

by authorizing in whole or in part the methods

of fund transfer involved in this case or any other

methods it sees fit to legitimize, or conversely, by

declining to alter the language of existing statutes,

thus sustaining the meaning and policy expressed in

those statutes as now construed by this court.

We recognize that enormous investments have been

made by various financial institutions in the installa-

tion of new technology, that methods of financial

operation in the nation have rapidly grown to rely

on much of this, and that a disruption of the offered

services would necessarily have a deleterious impact

on the financial community as a whole, in the absence

of the certainty that new procedures are authorized

for the foreseeable future, which certainty only a

Congressional enactment can give.

We recognize that there are arguments that Con-

gress has, at some times and in some measure, tacitly

approved part of these regulatory authorizations, but

6a

by no means directly, explicitly, or in the whole. We

further recognize that the wisdom of the transfer

procedures permitted by the regulations of the sev-

eral agencies is a matter of high public financial

policy, involving the financial interests not only of

the parties before this court in these proceedings, but

also of other large groups in the nation. It is the

responsibility of the Congress and not the courts to

determine such policy.

On consideration of the foregoing, it is

ORDERED AND ADJUDGED by this court that

the judgments of the district courts under review

herein are reversed and the cases are remanded to

the respective district courts with instructions to

vacate and set aside the applicable portions of the

following regulations:

(1) 43 Fed. Reg. 20,001 (1978) (to be codified

in 12 C.F.R. § 217.5(c)(2) and (3)) of

the Board of Governors of the Federal Re-

serve System ;

(2) 43 Fed. Reg. 20,222 (1978) (to be codified

in 12 C.F.R. § 329.5(c) (2)) of the Board

of Directors of the Federal Deposit Insur-

ance Corporation;

(3) 12 C.F.R. § 545.4-2 (1978) of the Federal

Home Loan Bank Board; and

(4) 12 C.F.R. § 701.34 (1978) of the National

Credit Union Administration; and it is

FURTHER ORDERED, by the Court, that the

effectiveness of this Judgment, insofar as it directs

that the subject regulations be vacated and set aside,

Ae he AR OR ER EE

Ta

is stayed until 1 January 1980 in the expectation

that the Congress will declare its will upon these

matters; and it is

FURTHER ORDERED, by the Court, that the

Clerk is directed to enter copies of this Judgment

in each of the captioned cases.

Per Curiam

For the Court:

/s/ George A. Fisher

GEORGE A. FISHER

Clerk

8a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

[Filed May 21, 1979]

SEPTEMBER TERM, 1978

No. 78-1849

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

a corporation, APPELLANT

Vv.

FEDERAL HOME LOAN BANK BOARD, ET AL.

BEFORE: MCGOWAN, TAMM, and WILKEY;

Circuit Judges

ORDER

Upon consideration of the petition for rehearing

filed by appellees, it is

ORDERED, by the Court, that appellees’ aforesaid

petition for rehearing is denied.

Per Curiam

FOR THE COURT:

/s/ George A. Fisher

GEORGE A. FISHER

Clerk

9a

APPENDIX C

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 78-0878

UNITED STATES LEAGUE OF SAVINGS ASSOCIATIONS,

PLAINTIFF

Vv.

BOARD OF GOVERNORS OF THE FEDERAL

RESERVE SYSTEM, ET AL., DEFENDANTS

MEMORANDUM

This is a suit for declaratory and injunctive relief

brought by the United States League of Savings

Associations (USLSA), a national trade association

representing approximately 4,400 state and federally

chartered savings and loan associations (S & L’s),

to challenge regulations recently promulgated by the

Board of Governors of the Federal Reserve System

(the Board) and by the Federal Deposit Insurance

Corporation (FDIC). |

On May 1, 1978, the Board amended section 217.5

(ce) of its Regulation Q,' which governs methods of

withdrawal from savings deposits, to permit an indi-

112 C.F.R. § 217.5(c).

10a

vidual depositor at a federally insured bank to ar-

range, pursuant to a prior written agreement, for

the automatic withdrawal of funds from his savings

account and the transfer of such funds to demand

deposit or other accounts.” This automatic fund

transfer (AFT) service may be used to cover over-

drafts or to maintain a specified balance in a de-

positor’s checking account. On May 5, 1978, the

FDIC, which regulates all federally insured commer-

2 The complete text of the amendment reads:

Notwithstanding the provisions of subparagraph (1) of

this paragraph, withdrawals may be permitted by a mem-

ber bank to be made automatically or as a normal prac-

tice from a savings deposit that consists only of funds

in which the entire beneficial interest is held by one or

more individuals through payment to the bank itself or

through transfer of credit to a demand deposit or other

account pursuant to a written authorization from the

depositor to make such payments or transfers in order

to cover checks or drafts drawn upon the bank or to main-

tain a specified balance in or to make periodic transfers

to such accounts. In accordance with § 217.1(e) (2), a

member bank must reserve the right to require the de-

positor to give notice in writing of an intended with-

drawal not less than 30 days before such withdrawal is

made. Such notice shall be prominently disclosed and

specifically brought to the depositor’s attention at the

time the automatic transfer service is authorized. A

member bank may not require a depositor to authorize

such automatic transfers to be made from savings de-

posits.

43 Fed. Reg. 20002 (May 10, 1978). The Board has expressed

its intent to monitor the effects of the automatic transfer

service, especially its effect on the competitive structure

among banks and thrift institutions. Not later than one year

after the effective date, the Board will review its findings and

report to the public. Jd.

lla

cial banks that are not members of the Federal Re-

serve System, adopted similar rules by amending

section 329.5(c) of its Rules and Regulations.* The

amended regulations are scheduled to take effect on

November 1, 1978.

Plaintiff USLSA has challenged these regulations

on the ground that they violate the statutory prohi-

bitions against the payment of interest on demand

deposits * and against withdrawal by negotiable in-

312 C.F.R. § 329.5(c). The amendment states:

An insured nonmember bank may permit withdrawals to

be made automatically from a savings deposit that con-

sists of funds deposited to the credit of, and in which

the entire beneficial interest is held by one or more in-

dividuals, through transfer or credit to a demand or other

deposit account of the same depositor pursuant to a

written agreement between the bank and the depositor

authorizing such payments or transfers in connection

with checks or drafts drawn by the depositor upon the

bank, or for any other purpose not prohibited by law or

regulation. Interest earned on a savings deposit may be

transferred pursuant to the provisions of this subpara-

graph whether or not the depositor is an individual. In

accordance with Section 329.1(e) (1) (iii) of this Port

329, the bank must reserve the right to require the de-

positor to give notice in writing of an intended with-

drawal (transfer) not less than 30 days before such

withdrawal (transfer) is made. This reservation shall be

expressly set forth in the written agreement authorizing

transfers pursuant to this subparagraph. The bank may

not require the depositor to enter into an agreement pro-

viding for the automatic transfer of savings deposits as

a condition to maintaining a savings or other deposit

account.

43 Fed. Reg. 20228 (May 11, 1978).

412 U.S.C. § 87la (1976).

12a

strument from interest-bearing savings deposits.* It

notes that under the plan created by the amended

regulations a check drawn on a demand deposit with

insufficient funds would be covered automatically by

a transfer from the drawer’s savings deposit. The

regulations do not require either a service charge for

such transfers or a forfeiture of interest on the funds

transferred.’ Because funds needed to cover a check

5 12 U.S.C. § 1832(a) (1976). Under this section, federally

insured banks and S & L’s may not permit depositors to draw

negotiable instruments against interest-bearing accounts ex-

cept in the six New England states where such accounts,

known as NOW (Negotiable Order of Withdrawal) accounts,

are allowed by express statutory authorization. Pub. L. No.

94-222, 90 Stat. 197 (1976). Recent congressional action

would permit such accounts in New York as well. H.R. 14279,

Financial Institutions Regulatory and Interest Rate Control

Act of 1978, title XIII, 95th Cong., 2d Sess. (1978), 124 Cong.

Rec. H13040 (Oct. 14, 1978). These limited exceptions have

been allowed in states in which state-chartered savings banks

and savings and loan associations are permitted to offer

checking accounts. By such legislation Congress seeks to

protect the competitive position of federally regulated savings

and loan associations, which would be placed at a disad-

vantage if they did not possess similar third-party payment

powers. See R. Rep. No. 93-149, 93d Cong., 1st Sess. 2-5,

reprinted in [1973] U.S. Code Cong. & Ad. News 2014, 2015-

16.

6 As originally proposed, the amendment required the for-

feiture of interest in an amount no less than the interest

actually earned during the previous 30 days on the funds

transferred from savings to checking accounts. 43 Fed. Reg.

5008 (February 7, 1978). The final rule adopted by the

Board does not require the imposition of an interest for-

feiture, but the Board has encouraged member banks to

develop charges for automatic transfers to reflect the costs

of providing the service to depositors. 43 Fed. Reg. 20002

(May 10, 1978). Proposed AFT plans impose these costs in a

13a

can remain in an interest-bearing savings deposit

until the check is presented for payment, plaintiff

contends that the demand deposit account, which can

be maintained with a zero balance, will be a mere

conduit between the savings deposit and the payee

named in the check. The USLSA characterizes AFT

services as a “device” for allowing banks to pay in-

terest on demand deposits and for permitting with-

drawals by negotiable instruments from _interest-

bearing deposits in violation of statutory prohibitions.

Because of the threatened economic injury to savings

and loan associations if the regulations take effect,’

plaintiff has brought this suit for declaratory and

injunctive relief.

variety of ways, either by requiring minimum balances in

Savings or checking accounts, by charging a flat monthly

fee for the service, or by collecting a small fee for every

transfer or for every day a transfer is made, regardless of

the number. See Wash. Post, Oct. 29, 1978, § F, at 1.

7 Plaintiff maintains that a significant erosion of deposits

from S & L’s would occur if the interest rate paid by com-

mercial banks on automatic transfer savings accounts ap-

proached the interest rate paid by savings and loan associa-

tions on passbook savings accounts. Complaint for Injunctive

and Declaratory Relief, 20. This shift in funds from one

type of financial institution to another, such as the transfer

of money from S & L’s to banks, is known as disintermedia-

tion. The parties have stipulated that the staff of the Federal

Reserve System advised the Board of Governors at an open

agency meeting that with the initiation of automatic funds

transfer accounts $10 billion of thrift savings balances would

be vulnerable to conversion to bank savings deposits during

the four year period under consideration. Plaintiff’s Summary

Judgment Motion, Exhibit A.

l4a

Defendants deny this characterization and main-

tain their regulations preserve the longstanding dis-

tinction between interest-bearing savings deposits

and noninterest-bearing demand deposits because the

AFT regulations require the bank to reserve the

right to require a depositor to give at least thirty

days’ notice of withdrawal from AFT accounts. They

also urge that there is no violation of the prohibition

against third-party payment from savings deposits

because separate savings and checking accounts must

be maintained and negotiable instruments are drawn

only against the checking account. This matter is

presently before the Court on defendants’ motion to

dismiss or, in the alternative, for summary judgment

and plaintiff’s cross-motion for summary judgment.

FACTUAL BACKGROUND

The Federal Reserve Board, which was established

by the Federal Reserve Act of 1913,° is the agency

of the federal government authorized by Congress to

supervise and regulate commercial banks that are

members of the Federal Reserve System.’ The Fed-

eral Deposit Insurance Corporation has similar statu-

tory responsibility for supervising and regulating all

banks insured by it that are not members of the

Federal Reserve System.” As a result, the regula-

8 Pub. L. No. 638-43, ch. 6, 38 Stat. 251 (1913).

912 U.S.C. §§ 221 et seg. (1976).

1012 U.S.C. §§ 1811 et seg. (1976).

lda

tions of these two bodies govern the activities of vir- .

tually all commercial banks in the United States.

The Federal Reserve Act of 1913 specifically de-

fined the terms “demand deposit” and “savings de-

posit” and prescribed separate reserve requirements

for each." Savings deposits were subject to the legal

right of: the bank, at its discretion, to require a

depositor to give at least thirty days’ notice before

withdrawing funds from the account. In contrast,

demand deposits were not subject to any such re-

quirement. The Banking Act of 1935, however, r--

pealed the statutory definitions of “savings deposit”

and “demand deposit” that had appeared in the 1912

Act and substituted provisions granting the Board

and the FDIC authority to define such terms.’* In

addition, they were authorized to determine what

shall be deemed a payment of interest, and to pre-

scribe rules and regulations “necessary to effectuate

the purposes of this section and to prevent evasions

thereof.” * Board regulations relating to deposits

and the payment of interest by member banks are

known collectively as Board “Regulation Q.” Since

1936 Regulation Q and the corresponding FDIC regu-

lations have continued to distinguish savings deposits

and demand deposits on the basis of the bank’s right

to require “notice in writing . . . not less than 30

11 Pub. L. No. 63-43, ch. 6, 38 Stat. 251 (1918).

2 Pub. L. No. 74-305, 49 Stat. 684 (1935).

1312 U.S.C. §§ 461, 1828(g) (1976).

14 Td.

nasinenin RE

l6a

days before such withdrawal is made” from savings

accounts.*®

On March 15, 1976, the Board and the FDIC pub-

lished for comment proposals authorizing AFT that

were essentially the same as the regulations chal-

lenged here.*® No further action was taken on these

proposals and on February 7, 1978, the Board re-

published for comment its proposal to authorize mem-

ber banks to offer AFT plans.” The Board received

a record number of comments on the AFT proposal,"

and after considering the responses, adopted the

amendments permitting automatic fund transfers on

May 1, 1978. The FDIC took similar action on May

5, 1978. In adopting the challenged regulations, the

Board stated that AFT would benefit the public by

providing an additional and convenient means of sav-

13 Compare 12 C.F.R. §§ 217.1(e) (2), 329.1(e) (1) (iii)

(1978) (defining time depsits) with 12 C.F.R. §§ 217.1(a),

329.1(a) (1978) (demand deposits include every deposit that

is not time or savings deposit).

1641 Fed. Reg. 12039 (March 23, 1976).

1743 Fed. Reg. 5008. The FDIC did not publish a sepa-

rate proposal for amending its regulations, but invited com-

ments on the Federal Reserve Board proposal. Jd. at 7705.

18 Of the 1,380 comments received, 721, or 52.2%, favored

the proposal. Broken down by categories, 517 comments were

from individuals, with 82% in favor of the proposal ; 382 were

from commercial banks, with 66.5% in favor of the proposal ;

and 370 were from savings and loan associations, with 100%

opposed to the proposal. 43 Fed. Reg. 20001 (May 10, 1978).

The FDIC received 436 comments, of which approximately

50% were in favor of adoption. 43 Fed. Reg. 20222 (May 11,

1978).

17a

ings withdrawal service and would also increase the

efficiency of the Federal Reserve System’s check clear-

ing operations by reducing the number of return

items processed by the system.’®

The regulations emphasize that AFT services are

available only to individuals and that such services

are entirely voluntary, both on the part of the bank

and of the customer. The amended regulations re-

quire that any bank offering the AFT service reserve

the right to require thirty days’ notice before with-

drawal and to disclose prominently and specifically

the legal right of the bank to demand such notice.”

Because of this requirement, the Board concluded

that the amendment did not alter the basic distinc-

tion between savings and demand deposits and thus

did not violate the statutory prohibition against the

payment of interest on demand deposits. In address-

ing the argument that the amendments violated the

prohibition of 12 U.S.C. § 1832 against negotiable

orders or third-party payments from savings ac-

counts, the Board concluded that the new regulations

provide a withdrawal service that is “identical in its

essential elements to withdrawal services that banks

already are authorized to offer to depositors such as

1° 43 Fed. Reg. 20001 (May 10, 1978). The Board staff has

estimated a cost savings of $4 to $6 million per year from a

reduction in the number of checks returned due to insufficient

funds. Memorandum to the Board from its Legal Division and

Division of Federal Reserve Bank Operations (October 22,

1975), Federal Reserve Board Administrative Record, at 22.

2043 Fed. Reg. 20002 (May 10, 1978).

18a

withdrawals in person or via telephone.” * Plaintiff

contens, however, that bank plans utilizing AFT

services are being merchandized and are generally

perceived as interest-bearing checking accounts.”

217d. In recent years there has been a liberalization of

methods of withdrawing funds from savings deposits. In 1961

the Board and the FDIC codified a longstanding ruling that

allowed depositors to prearrange with their banks to make

automatic withdrawals from savings deposits for the purpose

of paying installments of principal, interest, or other charges

due on a real estate loan or mortgage. 26 Fed. Reg. 12031

(Dec. 15, 1961). In April, 1975 the Board adopted an inter-

pretation of Regulation Q that permitted a depositor to

withdraw funds from a savings account at an insured bank by

telephone. 40 Fed. Reg. 16831 (Apr. 15, 1975). At the same

time, the Federal Home Loan Bank Board (FHLBB), which

regulates federally insured S & L’s, authorized its members,

which are prohibited from offering checking accounts, to offer

bill payer services pursuant to which a depositor may arrange

in advance for an S & L to pay bills from the depositor’s sav-

ings account or to transfer funds to any account at a com-

mercial bank without any further action by the depositor. 12

C.F.R. § 545.4-1 (1978). In response to this amendment, the

Board in July, 1975 and the FDIC in August, 1975 authorized

commercial banks to offer similar bill payer services, except

that authority to transfer funds automatically to a depositor’s

checking account to cover overdrafts or to maintain a mini-

mum balance was withheld. 12 C.F.R. § 217.5(c), 329.5 (c)

(1978).

22 Many newspaper reports discussing the new AFT regu-

lations have characterized their adoption as a move by the

Board and the FDIC to let banks pay interest on checking

accounts. See Appendix to Consolidated Points and Authori-

ties in Opposition to Defendants’ Alternative Motions to Dis-

miss or for Summary Judgment and in Support of Plaintiff’s

Cross-Motion for Summary Judgment at A5-1 to A5-38. A

number of bank advertisements promoting AFT services have

described them as “interest on your checking account” and

“as close as we can legally come to paying interest on check-

ing.” Id. at A9-1 to Al1-1.

19a

MERITS

A. Judicial Review.

Defendants have moved to dismiss plaintiff’s com-

plaint on the ground that the subject matter of the

challenged regulations is committed to agency dis-

cretion by law and therefore is not subject to judicial

review. Section 10(a) (2) of the Administrative Pro-

cedure Act * exempts from judicial review any action

by an agency that is committed to the discretion of

the agency by law. This exemption, however, is a

very narrow exception applicable only “in those rare

instances where the statutes are drawn in such broad

terms that in a given case there is no law to apply.”

Citizens to Preserve Overton Park v. Volpe, 401 U.S.

402, 410 (1971).

Defendants argue that the Federal Reserve Act

and the Federal Deposit Insurance Act demonstrate

a clear legislative intent to leave regulation of the

practices involved here to the federal agencies, be-

cause the only standards to be applied in reviewing

defendants’ actions are legal standards that are to

be defined by the defendant agencies. In further

support of this argument, they note that in 1935

Congress abolished the statutory definitions of sav-

ings and demand deposits and contemporaneously en-

acted legislation granting agencies the right to define

these terms.** They suggest that this conduct indi-

8 5 U.S.C. § 701 (a) (2) (1976).

*4 Pub. L. No. 74-305, ch. 614, 49 Stat. 684 (1935).

20a

cates a congressional intent to vest exclusive discre-

tion over the area with the expert agencies.

In response, plaintiff maintains that there is spe-

cific governing law to apply in this case, namely, 12

U.S.C. § 371, which states that no member bank shall,

directly or indirectly, by any device whatsoever, pay

any interest on any deposit which is payable on de-

mand...” and 12 U.S.C. § 1828(g), the correspond-

ing provision of the Federal Deposit Insurance Act.

It suggests that these statutes delineate the scope of

the agencies’ discretion and the legal standards by

which their conduct is to be judged.

The presumption favoring district court jurisdic-

tion to review actions of federal agencies is not easily

overcome and will not be cut off unless there is “per-

suasive reason to believe that such was the purpose

of Congress.” Abbott Laboratories v. Gardner, 387

U.S. 136, 140 (1967) ; see Citizens to Preserve Over-

ton Park v. Volpe, 401 U.S. 402, 410 (1971). In

one of the most recent Supreme Court discussions of

this issue, the Court held that it is necessary to re-

view the statutory authority involved in order to

determine “whether nonreviewability can fairly be

inferred from the statute.” Morris v. Gressette, 432

U.S. 491, 501 (1977). In making this determination,

the specific statute in question should be examined

“within the context of the entire legislative scheme.”

Id. at 503.

The specific statute at issue in Morris was section

5 of the Voting Rights Act of 1965, which estab-

25 42 U.S.C. § 1978c (1970 & Supp. V 1975).

2la

lishes two alternative methods by which states sub-

ject to the Act can obtain federal preclearance re-

view of a change in their voting laws. The Court

concluded that because of the “unusual” and “se-

vere” nature of the section 5 remedy and its legis-

lative history, it was clear that Congress intended to

provide states with an expeditious alternative to

declaratory judgment actions by allowing submission

to the Attorney General. Because judicial review of

the Attorney General’s action would necessarily and

unavoidably extend the time period specified in the

statute, the Court held that such review was pre-

cluded. Jd. at 504-05.

Here neither the statutory language nor the legis-

lative history of the Banking Act of 1935 indicates

a similar congressional intent to preclude judicial

review. Therefore, the strong presumption favoring

judicial review should govern here.

B. Standing.

. Defendants also seek dismissal of the present ac-

tion on the ground that plaintiff lacks standing to

sue. Because USLSA brings this suit in a repre-

sentative capacity on behalf of its members, it must

establish that its individual members would satisfy

the requirements of standing if the members them-

selves had brought the action. Simon v. Eastern Ken-

tucky Welfare Rights Organizations, 426 U.S. 26. 40

(1976). The current test of standing, enunciated by

the Supreme Court in Association of Data Processing

Service Organizations, Inc. v. Camp, 397 U.S. 150,

22a

153 (1970), requires the complaining party to show

the challenged action will result in “injury in fact”

and that the interests that the party seeks to protect

are arguably within the “zone of interests” to be

protected and regulated by the particular statute.

Here, plaintiff has alleged that it represents over

4,400 S & L’s, which hold over 98% of the total as-

sets held by all savings and loan associations in the

United States,?* and that the regulations promulgated

by defendants are likely to produce disintermediation

of savings and loan assets of at least $10 billion. For

the purposes of ruling on a motion to dismiss for

lack of standing, the trial court must accept as true

all material allegations of the complaint. Warth v.

Seldin, 422 U.S. 490, 501 (1975). It is well-estab-

lished that threatened economic injury produced by

unlawful competition raises a justiciable controversy

and that a trade association has standing to chal-

lenge such action on behalf of its members.”

Although plaintiff USLSA satisfies the “injury in

fact” requirement of standing, it still must satisfy

the requirement is within the “zone of interests”

sought to be protected by the applicable statute. A

recent opinion of this circuit interpreting this re-

quirement held that “the particular statutory section

should be the focus of analysis when applying the

26 Complaint for Declaratory and Injunctive Relief, {| 8.

27 See, e.g., Investment Co. Institute v .Camp, 401 U.S. 617,

620-21 (1971) ; Association of Data Processing Service Orga-

nizations, Inc. v. Camp, 397 U.S. 150, 157 (1970) ; Independent

Bankers Ass’n V. Smith, 534 F.2d 921, 926 (D.C. Cir. 1976).

ae

23a

zone test” and that litigants cannot “borrow the ar-

guable regulatory or protective intent embodied in

one provision . . . and apply it to a provision where

the intent is not evident, in order to satisfy the zone

test.” Tax Analysts & Advocates v. Blumenthal, 566

F.2d 130, 140-41 (D.C. Cir. 1977). An amicus curiae

brief filed by the American Bankers Association in

support of defendants’ motion to dismiss argues that

the Tax Analysts decision limits the USLSA to the

specific statutory sections which it claims forbid the

challenged regulations—12 U.S.C. §§ 371a, 1828(¢)

and 1832—as a source of congressional intent to safe-

guard the competitive position of savings and loan

associations. Therefore amicus urges that plaintiff

cannot borrow this intent from a wholly unrelated

aspect of federal banking laws—the statutory differ-

ential in interest rates permitted on savings accounts

offered by S & L’s and by commercial banks.”*

In the Tax Analysts decision, however, the Court

of Appeals indicated that it is appropriate to exam-

ine both particular and general provisions of a statu-

tory scheme when these provisions share an “iden-

tity of purpose.” 566 F.2d at 140. The Court deter-

mined that this approach was not appropriate in the

case before it, which involved the Internal Revenue

Code, because the Code is an extraordinarily complex

document that does not have a single unified purpose,

but instead is intended to accomplish a wide variety

of social and economic goals. Jd. at 141. The Court

2812 U.S.C. § 461 note (1976).

24a

concluded that if litigants were allowed to transfer

the congressional intent and purpose embodied in one

section of the Code into other contexts regulated by

different provisions of the Code, endless litigation

would result. Id.

Unlike the multi-purpose Internal Revenue Code,

the provisions of the federal banking laws all reflect

the goal of achieving a controlled money supply and

regulated competition between financial institutions.

Because plaintiff’s complaint for declaratory and in-

junctive relief also reflects these purposes, the Court

finds that the interests represented by the USLSA

are within the zone of protected interests.

C. Summary Judgment.

Defendants seek summary judgment on the ground

that the challenged regulations are a reasonable exer-

cise of the agencies’ statutory authority to define

deposits, prescribe methods of withdrawal, and regu-

late the payment of interest on deposits. Plaintiff

has cross-motioned for summary judgment, claiming

that defendants, by adopting the AFT regulations,

acted in excess of and contrary to their statutory

authority and that consequently their action was arbi-

trary and capricious.

Plaintiff’s central argument is that the AFT regu-

lations violate the statutory prohibition of 12 U.S.C.

§ 371a, which states: “No member bank shall, di-

rectly or indirectly, by any device whatsoever, pay

any interest on any deposit which is payable on de-

I

25a

mand....”*” It claims that AFT services constitute

such a device for the indirect payment of interest

and offers the following scenario of how this could

be achieved. If a bank offered an AFT plan without

service charges, interest forfeiture provisions, re-

quired minimum balances, or required minimum

transfers, a depositor could maintain a zero balance

in his checking account and simply by writing a

check, trigger an automatic transfer of funds from

his savings account in the exact amount necessary to

cover the amount of the check. Using this plan, a

depositor could maintain all transactional funds nor-

mally kept in a checking account in an interest-bear-

ing savings account without in any way impairing

his access to those funds for the purpose of making

third-party payments by check.

The above plan probably represents the farthest

possible extension of AFT services. Although such

plans appear to offer, and indeed, are promoted as

offering, “interest on checking accounts,” this Court

concludes that they do not violate the statutory pro-

hibition of 12 U.S.C. §871la. Automatic transfer

*® This prohibition applies to banks regulated by the Federal

Reserve Board. Congress has authorized the FDIC “by regu-

lation [to] prohibit the payment of interest or dividends on

demand deposits in insured nonmember banks... .” 12 U.S.C.

§ 1828(g) (1976). The FDIC has adopted a regulation pro-

hibiting the payment of interest on demand deposits that

tracks the language of 12 U.S.C. § 87la. 12 C.F.R. § 329.2(a)

(1978).

30Some commercial banks in the Washington, D.C. area

have already begun promoting “zero balance checking” plans

utilizing AFT service. See Wash. Post, Oct. 29, 1978, § F, at 5.

26a

services require the existence of both a savings de-

posit and a demand deposit. The two accounts are

distinguished not solely by the payment of interest

but more significantly by the limitation of the right

of withdrawal from savings accounts.” Indeed, the

amount of interest offered on time deposits is in-

versely related to the limitations on withdrawal im-

posed by such accounts.” This distinction is pre-

served by the AFT regulations, which require banks

to reserve the right to demand thirty days’ notice

of withdrawal and to bring this requirement specifi-

cally to the attention of depositors.

Plaintiff contends that this requirement is “illu-

sory” because it is unlikely to occur given the chaos

to financial institutions that would result if the statu-

tory notice period was invoked before withdrawals

were permitted. But the imposition of a notice re-

quirement in AFT situations would produce a situ-

ation no different than its use with respect to ordi-

nary savings deposits, where the possible disruption

of financial services is just as real. Although other

courts interpreting unrelated provisions of the bank-

ing laws have emphasized that the form cf a bank

service must not be allowed to mask its substance,”

81 See 12 C.F.R. §§ 217.1 (e) (2) ; 329.1(e) (1) (iii) (1978).

82 See 12 C.F.R. § 217.7 (1978).

83 See, e.g., First National Bank in Plant City v. Dickinson,

396 U.S. 122, 187 (1969) (bank’s armored car messenger serv-

ice and off-premises receptacle for receiving packages con-

taining money constituted “branch” in violation of branch-

27a

this Court finds that the AFT regulations do not

constivute a device for the payment of interest on

demand deposits.

The second major concern voiced by the USLSA

is that the automatic funds transfer regulations vio-

late the statutory prohibition against withdrawals by

negotiable instrument for third-party payment from

savings accounts. 12 U.S.C. § 1832(a). Under the

AFT regulations a bank customer’s check drawn on

a zero balance account to a third party triggers a

withdrawal from the savings account to cover the

check. Although the existence of a checking account

which serves as a conduit for payment to the third

party factually distinguishes an AFT account from

statutorily-authorized NOW accounts, plaintiff main-

tains that the checking account does not prevent the

AFT-linked accounts from functioning as a NOW:

account. ;

Although plaintiff attempts to minimize the sig-

nificance of the checking account linked to AFT serv-

ice, its importance cannot be ignored. Two accounts

are required to operate the AFT service and no nego-

tiable orders are drawn on or third party payment

made from the savings deposit. Defendants have sug-

gested that AFT is merely an extension of the tele-

phone transfer bill payer services. Telephone trans-

banking laws) ; Independent Bankers Ass’n V. Smith, 534 F.2d

921, 938-39 (D.C. Cir.) (off-premises “customer-bank com-

munication terminals” were branches; lack of similarity to

typical branch was difference in form, not difference in sub-

stance or result), cert. denied, 429 U.S. 862 (1976).

28a

fer permits a bank to transfer a depositor’s funds

from a savings to a demand deposit account pursuant

to transfer instructions conveyed by telephone.™

Under AFT plans, such transfers would be auto-

matically triggered on the basis of a prior authoriza-

tion rather than requiring an individual telephone

conversation for each transaction. AFT services also

resemble bill payer services, for in both the deposi-

tor’s bank withdraws funds from the depositor’s ac-

count on the basis of a single prearrangement with

the depositor, on an automatic basis, and without any

further participation or action by the depositor.* The

only difference is that bill payer services send the

withdrawn funds by check or direct deposit to the

depositor’s creditors while funds withdrawn by AFT

are added directly to the depositor’s demand deposit

account.

After oral argument of the parties’ cross-motions

for summary judgment was held in this case, both

houses of Congress enacted a bill entitled “The Fi-

nancial Institutions Regulatory and Interest Rate

Control Act of 1978.” ** Defendants urge that the

3412 C.F.R. § 217.152 (1978).

8512 C.F.R. §§ 217.5(c) (1) (vii), 329.5(c) (1) (vi) (1978).

36 H.R. 14297, 95th Cong., 2d Sess. (1978), 124 Cong. Rec.

H13040 (Oct. 14, 1978). As of the date of this memorandum,

the enrolled bill has not yet been signed or vetoed by President

Carter. By its Order of October 19, 1978, the Court directed

the parties to this action to submit supplemental memoranda

addressing the impact, if any, of this bill on the present liti-

gation should it become law.

The bill contains three provisions that make reference to

AFT services. Section 104 of Title 1 of the bill provides that

29a

passage of this bill indicates congressional awareness

of the AFT regulations and that body’s intent to

defer to defendant agencies’ expertise in the affected

subject areas. The Court cannot agree with this

characterization. In its report discussing the interest

rate differential provision, the Senate Committee on

Banking, Housing, and Urban Affairs declared that

the proposed bill “is not intended to authorize auto-

matic transfer accounts nor to preclude a finding by

a court of competent jurisdiction that such accounts

are either permissible or impermissible under exist-

ing law.” ** During the House debate on the measure,

explicit recognition was given to the present litiga-

tion challenging the legality of the AFT regulations

and no opinion was expressed on the question.** The

preauthorized transfers pursuant to an AFT agreement shall

not constitute the payment of an overdraft that would violate

the bill’s prohibition against a member bank’s payment of

overdrafts of its executive officers or directors. Section 903

(b) (D) of Title XX of the bill excludes AFT transfers be-

tween accounts from the provisions of the Electronic Funds

Transfer Act, which establishes a regulatory framework for

EFT systems. Title XVI of the bill eliminates the interest

rate differential on savings deposits enjoyed by mutual sav-

ings banks, which are also permitted to offer checking serv-

ices, if the two accounts are linked by AFT. Without this

legislation, nothing would prohibit mutual savings banks of-

fering checking accounts from entering into an AFT agree-

ment with customers that would permit automatic transfers

from a 514% savings account to a checking account even

though all other institutions offering similar services, includ-

ing NOW accounts, would be limited to a 5% interest ceiling.

37S. Rep. No. 95-1273, 95th Cong., 2d Sess. 3 (1978).

38 124 Cong. Rec. H13075 (daily ed. Oct. 14, 1978) (remarks

of Rep. Rousselot).

30a

passage of “The Financial Institutions Regulatory

and Interest Rate Control Act of 1978” thus cannot

be viewed as in any way dispositive of the legal

questions raised by AFT services.

The final issue raised by plaintiff is that defend-

ants acted arbitrarily and capriciously in adopting

the AFT regulations. The specific claim is that it

cannot be determined from the record whether de-

fendants gave proper consideration to the competitive

impact of AFT plans and to the impact of such plans

on deposit reserve policies. The arbitrary and ca-

pricious standard is the most limited form of judi-

cial review over agency actions and the scope of such

review is narrow and highly deferential to the

agency. Citizens to Preserve Overton Park v. Volpe,

401 U.S. 402, 415 (1971). Here the administrative

record of the Board proceedings alone comprised

over 400 pages in addition to the almost 1,400 writ-

8° As one means of controlling the money supply, Congress

has mandated that member banks of the Federal Reserve Sys-

tem maintain certain minimum reserves with respect to de-

mand and savings deposits. 12 U.S.C. § 461(b) (1976). The

Board has always required significantly larger reserves for

demand deposits than for savings deposits. For example, on

December 31, 1977, the Board’s regulations required a 7%

to 16144 % range of reserves for demand deposits but reserves

of only 3% for savings deposits. 64 Fed. Res. Bull. A9, Table

1.15 (“Member Bank Reserve Requirements”) (Jan. 1978).

Plaintiff contends that initiation of AFT services will result

in a shift of funds from checking accounts to linked savings

accounts that will free up reserves in an amount equal to the

difference between the reserve requirements for the respective

accounts.

Abe v on

3la

ten comments received on AFT services.“ Given such

a fully developed record and the widespread atten-

tion the AFT proposals have received at every stage

of their consideration, there appears to be no support

for plaintiff’s argument that the decision on AFT

services was arbitrary and capricious except for the

agencies’ lack of agreement with plaintiff’s position.

In conclusion the Court finds that automatic fund

transfer regulations do not violate the statutory pro-

hibitions against the payment of interest on demand

deposits or against negotiable instruments drawn on

savings deposits. This result is supported by the

convenience and other benefits AFT services will pro-

duce for bank customers and by the role such services

will play in reducing the number of checks returned

for insufficient funds. Therefore, defendants’ motion

for summary judgment is granted and all other mo-

tions are denied.

/s/ Oliver Gasch

Judge

Date: Oct. 30, 1978

40 See note 18 supra.

32a

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Filed Mar. 7, 1978]

Civil Action 77-2102

AMERICAN BANKERS ASSOCIATION, ET AL.,

PLAINTIFFS

Vv.

LAWRENCE B. CONNELL, JR., ET AL., DEFENDANTS

MEMORANDUM

This an action by the American Bankers Associa-

tion and Tioga State Bank against the National

Credit Union Administration (“NCUA”) and its

Administrator, challenging the statutory authority

of Federal Credit Unions (“FCUs’’) to operate share

draft programs under the Federal Credit Union Act

(the “FCU Act”), 12 U.S.C. §1751, et seq.’ The

1Qn February 17, 1978, this Court denied motions to inter-

vene filed by the Independent Bankers Association of America

(seeking intervention as party-plaintiff), Credit Union Na-

tional Association, National Association of Federal Credit

Unions, and the Consumer Federation of America (seeking

intervention as parties-defendant). However, the Court

granted these organizations leave to participate as amici

curiae. The terms “plaintiff” and “defendant” used herein

shall include reference to the positions of the amici.

nh Watts re Ki tne Bt a tle ce stead BENS TAT OM be vs

33a

matter is before the Court on the parties’ cross-

motions for summary judgment. For the reasons dis-

cussed below, the Court finds that there are no genu-

ine issues of material fact and that Defendants are

entitled to judgment as a matter of law.

A share draft is a demand draft which is drawn

by a member on his credit union share account and

which is made payable to third parties. Each share

draft is payable through a particular commercial

bank. The function of the payable-through bank is

to receive share drafts through bank clearing chan-

nels and present them to the credit union for pay-

ment. Share drafts are similar in appearance to

checks and other drafts in that they provide spaces

for a date, the name of the payee, the amount of the

draft, and the member’s signature as drawer. The

member fills in the share draft, signs it, and delivers

it to the payee in return for goods or services or for

cash. Because the accounts on which share drafts

are drawn are share accounts, such accounts earn

dividends in the same fashion as regular credit union

shares. However, no dividends are paid on those

funds that are withdrawn from the account by share

draft or otherwise before the end of the dividend

period. Share draft accounts are subject to the right

of FCUs to require sixty (60) days advance notice

of withdrawal.

FCU share drafts originated in 1974 as an experi-

mental pilot program approved by NCUA. By late

1977 some 514 FCUs in at least forty-five (45) states

were participating in share draft programs. In Sep-

84a

tember 1976, the American Bankers Association filed

an action challenging the legality of the experimental

share draft program. That litigation was dismissed

without prejudice after NCUA agreed to undergo

rule-making procedures and promulgate a formal

rule governing share drafts. On December 8, 1977,

NCUA published its final rule, which authorizes

FCUs to continue establishing and implementing

share draft programs.’ Plaintiffs filed the instant

lawsuit on December 9, 1977.

The issue before the Court is whether, consistent

with the terms of the FCU Act and the general

statutory scheme controlling federal financial insti-

tutions, the NCUA can authorize FCUs to utilize

share drafts as a means of accessing members’ ac-

counts. A secondary issue in the case is whether the

manner in which NCUA promulgated its regulation

comports with the standards of the Administrative

Procedure Act.

The Court begins with the proposition that a de-

partmental construction of its own enabling legisla-

tion is entitled to great deference from the Courts.

Udall v. Tallman, 380 U.S. 1, 16 (1965). The inter-

pretation given the statute by the agency charged

with its administration is sustainable as long as that

interpretation has a reasonable basis in law. Only

where there are compelling indications that the inter-

2 See 12 C.F.R. § 701.34 at 42 Fed. Reg. 61977 (1977). The

effective date of the rule was February 6, 1978, but imple-

mentation of the rule has been deferred pending resolution of

the motions for summary judgment.

85a

pretation is plainly erroneous should a Court invali-

date an administrative construction of a statute.

Espinoza v. Farah Manufacturing Company, 414 U.S.

86, 94-95 (1974) ; Zuber v. Allen, 396 U.S. 168, 192-

193 (1969); Board of Dir. & Officers, Forbes Fed-

eral Credit Union v. National Credit Union Admin-

istration, 477 F.2d 77, 784 (10th Cir. 1973).

It is uncontested that FCUs possess the power to

authorize and regulate withdrawals from share ac-

counts. The source for this power is no where found

in the express provisions of the FCU Act.* Rather,

such power must be inferred from the language of

12 U.S.C. § 1757(15), which grants FCUs the au-

thority to “exercise such incidental powers as shall

be necessary or requisite to enable [FCUs] to carry

on effectively the business for which [FCUs are] in-

corporated.” An activity is authorized as an “inci-

dental power” if it is convenient or useful in con-

nection with the performance of one of the institu-

tion’s established activities pursuant to its express

powers. Arnold Tours v. Camp, 472 F.2d 427, 482

(1st Cir. 1972).

Defendants contend that the authority for FCUs

to use share drafts procedures likewise can be in-

ferred from the “incidental powers” clause of the

3’ While 12 U.S.C. § 1757(6) gives FCUs the express auth-

ority to receive the funds of their members for deposit into

withdrawable share accounts, and makes those shares subject

to the terms, rates and conditions established by the board

of directors and the Administrator, the Act is completely silent

as to how withdrawals may be requested or paid.

86a

FCU Act.‘ Plaintiffs argue that share draft powers

fail to qualify as incidental powers under the Arnold

Tours standard. Plaintiffs liken share drafts to

checks and demand deposits and claim that absent

express statutory authorization FCUs lack the au-

thority to permit members to access their accounts

by means of share drafts.

Both sides focus too strongly on the mechanics of

accessing accounts. What is important is not the

method by which withdrawals are effected, but

rather the type of account involved in this litigation:

the traditional FCU share account.’ There is no legal

restriction on the amount or frequency of withdraw-

als from credit union share accounts. In the past,

FCU members have had a variety of options avail-

able for withdrawing funds and making payments to

third-parties out of their share accounts, including

* Defendants also argue that share drafts are expressly

authorized under the FCU Act as part of the exercise of

FCUs’ powers to contract, 12 U.S.C. § 1757(1), or powers to

receive and condition payments on shares, 12 U.S.C. § 1757

(6). However, the Court is not persuaded that either express

provision, by itself, extends to the accessing of members’ share

accounts by means of share drafts.

5 While share drafts differ from checks in certain respects,

most notably in the 60 day notice provision which applies to

share drafts, the distinction between share drafts and checks

or demand deposits seems irrelevant to the Court. Share drafts

may actually be equivalent to checks. In whatever manner

share drafts are classified, however, the function of share

drafts remains constant: share drafts are simply a method of

accessing credit union share accounts. The validity >r in-

validity of share drafts must be measured, therefore, in terms

of the relationship between share drafts and share accounts.

cic clic ea

37a

cash withdrawals, and withdrawals by travelers

checks, by money order, or by credit union check.

Further, it is not necessary that members make their

withdrawals in person. Share drafts have been de-

veloped as a more convenient and efficient means by

which FCUs can offer withdrawal and payment serv-

ices, allowing FCUs to take advantage of advance-

ments in computer technology.® Share drafts are

simply a variation on established methods of access-

ing members accounts, similar to previous procedures

for credit union third-party payments, and similarly

valid as part of the exercise of FCUs incidental pow-

ers under the FCU Act.’ To rule otherwise would be

to raise form over substance, to deny the history of

the use of drafts in commercial practice, and to un-

reasonably limit the undisputed power of FCUs to

honor and regulate share account withdrawals.

Such a holding does not work violence with the

statutory purposes for which FCUs were created.

FCUs exist for the purposes of promoting thrift

among members and creating a source of credit for

provident or productive enterprises. 12 U.S.C. § 1752

(1). There has been no suggestion that the share

draft program, as presently conducted on an experi-

mental basis, has adversely affected the viability of

6 The major advancement in the field has been the develop-

ment of electronic funds transfer devices.

7See in the context of state-chartered credit unions, the

Court’s discussion in Iowa Credit Union League v. Iowa De-

partment of Banking, Civil No. CE 6-3152 (D. Iowa May 24,

1977), appeal docketed, No. 2-60827, Supreme Court of Iowa,

July 8, 1977.

38a

FCUs or the interests of FCU members. The Court

is satisfied that the use of share drafts will serve

the basic purposes of FCUs.*

Further, the Court is persuaded that a finding that

share draft practices are among the incidental powers

of FCUs is not inconsistent with the legislative his-

tory of the FCU Act or the general Congressional

scheme controlling federal financial institutions. Leg-

islative history in this case has minimal utility. On

the one hand, there is no indication from the Con-

gressional debates on the FCU Act and other related

legislation that Congress has intended to prohibit

FCus from utilizing share draft procedures. Through-

out the course of development by FCUs of various

methods of withdrawal from members’ share ac-

counts, there has been total silence from Congress

concerning the propriety of any of these methods.

Congress has been well aware of the on-going share

draft program for several years now,’ and yet in

passing sweeping amendments to the FCU Act in

1977 failed to include any provision evidencing dis-

agreement with the NCUA’s position regarding share

drafts. When Congress has intended to proscribe

conduct on the part of financial institutions, Con-

8 See the conclusions of the Administrator of NCUA, ex-

pressed at 42 Fed. Reg. 69178 (December 8, 1977).

® Between 1974 and 1976, share drafts were called to the

attention of the Congress during testimony before the House

and Senate oversight committees on federal financial insti-

tutions on numerous occasions. See the subcommittee hear-

ings cited in Defendants’ brief in support of Defendants’ mo-

tion for summary judgment, pp. 24-25.

See th a ae ee ed ie

DP ne Ne ATO I KB et ne St BOP nt Oe

39a

gress has done so with dispatch and specificity. See

12 U.S.C. §§ 1464(b) and 1882." Thus it might be

possible to find an implied ratification by Congress

of NCUA’s approval of FCU share drafts. See Mas-

sachusetts Mutual Life Ins. Co. v. United States, 288

U.S. 269, 283 (1933); Alabama Association of In-

surance Agents v. Board of Governors of the Federal

Reserve System, 533 £.2d 224 (5th Cir. 1976).

On the other hand, measures which would have

authorized certain third-party payment powers on

the part of FCUs have been introduced in the Con-

gress, but have failed to pass.’ In addition, there is

language in the Congressional discussions on the FCU

Act and related legislation that Congress has inten-

tionally deferred consideration of the issue of FCU

third-party payment powers.’* This deferred consid-

10 With respect to the NOW account legislation, 12 U.S.C.

§ 1832, it is interesting to note that FCUs were expressly ex-

cluded from the definition of “depository institutions” covered

by the statute.

11 See H.R. 8199 (1965) and 29 (1969), which would have

given FCUs the authority to offer checking accounts for their

members. See also H.R. 13077 (1976), which would have

authorized FCUs to offer third-party payment accounts in

states where state-chartered credit unions had that power.

In addition, a provision in the proposed Credit Union Modern-

ization Act of 1977 (123 Cong. Rec., p. H-166) would have

amended 12 U.S.C. § 1757 to give FCUs the power to “sell,

purchase or handle any money transfer instrument to or for

members,” but did not pass.

12 See the remarks of Rep. J. William Stanton, Cong. Record,

March 1, 1977, p. H-1525. See also the remarks of Senator

Thomas McIntyre in the context of the NOW account legis-

40a

eration is evident in the fact that there is presently

pending before the Congress several pieces of pro-

posed legislation which relate to FCU share draft

powers.”

Congressional failure to specifically address the

share draft issue and the spectre of future legisla-

tion on the subject do not mean that FCUs presently

lack the authority to adopt share draft procedures.

As noted earlier, share draft practices are valid as

part of the exercise of the incidental powers of FCUs.

If Congress eventually acts with regard to share

drafts, Congress then will be making a policy judg-

ment.* This Court cannot and will not indulge in

such policy judgments. If accessing FCU members’

accounts by means of share drafts is to be proscribed,

it must be proscribed by the legislature.

The NCUA promulgated its final rule concerning

share drafts, 12 C.F.R. § 701.34, after extensive rule-

making which included the solicitation of written and

lation, Hearings, Senate Banking Committee, Subcommittee

on Financial Institutions, 98d Cong., 1st Sess., March 30,

1978, p.3.

13 See, for e.g., S. 2055, introduced on June 9, 1977, which

would authorize the use of NOW Accounts by banks, savings

and loans, and credit unions, and bring FCU share draft regu-

lations into accord with regulations to be promulgated as to

NOW Accounts.

14 Both sides make much about the competitive position of

FCUs vis-a-vis commercial banks. However, there is at pres-

ent no policy concern with respect to competitive balance re-

flected in the FCU Act. This is what distinguishes the case

at hand from Independent Bankers Association of America v.

Smith 534 F.2d 921 (D.C. Cir. 1976).

‘ és ttn ito Pe

4la

oral views of numerous persons, organizations and

banks, and which involved hearings in which plain-

tiffs and the various amici participated. The Court

is not persuaded that the manner in which the rule

was formulated is in any way violative of the provi-

sions of the Administrative Procedure Act. In creat-

ing the NCUA, Congress directed the agency to be

more responsive to the needs of credit unions and to

provide more flexible and innovative regulation.”

NCUA’s actions with respect to share drafts are con-

sistent with its mandate. The Court finds that

NCUA’s determination that share draft practices are

in accord with the statutory purposes of FCUs and

within the authority of FCUs under the provisions

of the FCU Act has a rational basis and is not arbi-

trary or capricious or otherwise plainly erroneous.

For the above-stated reasons, the Court concludes

that defendants are entitled to summary judgment

herein.

/s/ Aubrey E. Robinson, Jr.

AUBREY E. ROBINSON, JR.

United States District Judge

March 7, 1978

(Date)

15 See S. Rep. No. 518, 91st Cong., 2d Sess., 3 (1970).

42a

APPENDIX E

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

[Filed Jun. 30, 1978]

Civil Action 76-0105

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

PLAINTIFF

v.

FEDERAL HOME LOAN BANK BOARD, ET AL.,

DEFENDANTS

MEMORANDUM

This is an action in which the Independent Bank-

ers Association of America (“IBAA”), a commercial

bank trade association, challenges the authority of

the Federal Home Loan Bank Board (the “Board”)

to promulgate pursuant to the Home Owners’ Loan

Act of 1938, as amended, 12 U.S.C. § 1461, et seq.

(the “HOLA”) an electronic funds transfer system

(“EFTS”) regulation which permits federal savings

and loan associations (“FSLs”) to utilize remote

service units (““RSUs”) as a means of accessing mem-

bers’ accounts. The matter is before the Court on

the Parties’ cross-motions for summary judgment.

= cine slic ek pee er

43a

For the reasons discussed below, the Court finds that

there are no genuine issues of material fact and that

Defendants are entitled to judgment as a matter of

law.*

RSUs are computer terminals which allow FSL

members to access their FSL accounts without having

to appear at an FSL office. RSUs may be located off

the premises of an FSL’s authorized office in places

like shopping centers, office buildings, transportation

depots and retail sales establishments. RSUs may be

completely automated or may require the partici-

pation of the personnel at the establishment where

the unit is located. Access through an RSU to a

member’s account is dependent upon the use of a

machine-readable instrument in the possession and

control of the account holder.

On January 9, 1974, the Board adopted § 545.4-2

of its Rules and Regulations, 12 C.F.R. § 545.4-2,

authorizing FSLs to operate electronic funds transfer

systems on an experimental basis upon Board ap-

1 The Court finds that Plaintiff has the requisite standing

to challenge the statutory authority of the Board to permit

FSLs to operate RSU programs and therefore proceeds to a

consideration of the merits with regard to the first, second,

third, tenth and eleventh counts of Plaintiff’s Complaint. See

Wisconsin Bankers Association v. Robertson, 190 F.Supp. 90,

94 (D.D.C. 1960), aff’d 294 F.2d 714 (D.C. Cir. 1961) ; Inde-

pendent Bankers Association of America v. Smith, 402 F.

Supp. 207, 208 (D.D.C. 1975), aff’d 534 F.2d 921 (D.C. Cir.

1976), cert. den. 429 U.S. 862 (1976). In addition to its

general challenge to adoption of the RSU regulation, Plaintiff

has raised a number of secondary issues in this lawsuit relat-

ing to specific provisions of the RSU regulation and with re-

gard to these issues the Court finds that Plaintiff lacks stand-

ing. See footnote four, infra.

44a

proval. This experimental regulation has been ex-

tended periodically by the Board and has remained

in uninterrupted existence for over four (4) years.”

The present RSU regulation extension expires on

June 30, 1978.* After unsuccessfully attempting to

persuade the Board to terminate the RSU program,

Plaintiff filed the instant lawsuit on January 19,

1976.

The issue before the Court is whether consistent

with its statutory authority under the HOLA the

Board has validly authorized FSLs to establish and

operate RSUs.‘ Analysis of this issue involves two

2 On June 26, 1974, the Board amended the original experi-

mental regulation, simplifying its terms. See Board Resolu-

tion No. 74-573. This amendment was effected after the Board

underwent rulemaking procedures, see 39 Fed. Reg. 16484,

in which a number of public comments were received, includ-

ing comments from Plaintiff herein.

3Qn May 24, 1978, the Board adopted a final remote service

unit regulation. See Board Resolution No. 78-311, 43 Fed.

Reg. 22,929 (May 30, 1978). The permanent RSU regulation

closely tracks with previous requirements and becomes effec-

tive July 1, 1978.

4In addition to IBAA’s claims that the Board has exceeded

its authority under 12 U.S.C. § 1464 in adopting the RSU

regulation, IBAA makes a number of other arguments against

the regulation: that the regulation permits FSLs to establish

branch offices without complying with Board requirements for

the establishment of such offices; that the Board’s determi-

nation that RSUs do not constitute branch offices is arbitrary

and capricious; that merchant participation in RSU projects

amounts to the unlawful conduct of the business of FSUs by

third parties contrary to 12 C.F.R. §§ 545.15 and 556.6; that

merchant participation constitutes an unsafe and unsound

policy and practice contrary to 12 U.S.C. § 1726 and 12 U.S.C.

§563.17; that merchant participation involves the making of

45a

considerations: whether the Board has exceeded its

authority under Section 5(a) of the HOLA, 12 U.S.C.

§ 1464(a)* and whether utilization of RSUs violates

the prohibition contained in Section 5(b)(1) of the

HOLA, 12 U.S.C. § 1464(b)(1)° against accounts

unsecured loans to merchants in violation of 12 U.S.C. § 1464

(c) and 12 C.F.R. § 545.6; and that the regulation fails to

provide adequate measures to protect the privacy of informa-

tion and the security of funds involved in RSU transactions,

contrary to the requirements of the Bank Protection Act, 12

U.S.C. § 118, et seq. With respect to these arguments, the

Court finds that Plaintiff lacks standing to contest such mat-

ters. Questions relating to the propriety of excluding RSUs

from the Board’s branching regulations, to merchant partici-

pation in RSU projects, and to the privacy of information and

the security of funds involved in RSU transactions are mat-

ters directed to the exclusive discretion of the Board, to be

decided in accord with the best interests.of FSLs. Commercial

banks are not within the zone of interests protected by the

HOLA in connection with such decisions. See Union National

Bank of Clarksburg v. Federal Home Loan Bank Board, 233

F.2d 695, 696-7 (D.C. Cir. 1956). Therefore, IBAA’s claims

with regard to these matters must be dismissed.

512 U.S.C. § 1464(a) provides:

In order to provide local mutual thrift institutions in

which people may invest their funds and in order to

provide financing of homes, the Board is authorized, un-

der such rules and regulations as it may prescribe, to

provide for the organization, incorporation, examination,

operation and regulation of associations to be known as

“Federal Savings and Loan Associations,” and to issue

charters therefor, giving primary consideration to the

best practices of local mutual thrift and home-financing

institutions in the United States.

612 U.S.C. § 1464(b) (1) provides, in pertinent part:

An association may raise capital in the form of such

savings deposits, shares or other accounts . .. as are

46a

subject to check withdrawal. The Court approaches

these questions mindful that an agency construction

of its own enabling legislation is entitled to great

deference. Kupiec v. Republic Federal Savings and

Loan Association, 512 F.2d 147, 151 (7th Cir. 1975) ;

Udall v. Tallman, 380 U.S. 1, 16 (1965). The inter-—

pretation given the statute by the agency charged

with its administration and that agency’s exercise

of its expert judgment are sustainable as long as that

judgment has a reasonable basis in law. See Guaranty

Savings and Loan Association v. Federal Home Loan

Bank Board, 330 F. Supp. 470, 473 (D.D.C. 1971).

Only where there are compelling indications that the

interpretation is plainly erroneous should a Court

invalidate an administrative construction of a statute.

Espinoza v. Farah Manufacturing Company, 414

U.S. 86, 94-5 (1974); Zuber v. Allen, 396 U.S. 168,

192-3 (1969); Central Bank v. Federal Home Loan

Bank of San Francisco, 430 F.Supp. 1080, 1085 (N.D.

Cal. 1977).

Section 5(a) of the HOLA constitutes a broad

grant of statutory authority. See Wisconsin Bankers

Association v. Robertson, supra. It is well-established

authorized by its charter or by regulations of the Board

... [T]he payment of any savings account shall be sub-

ject to the right of the association to require . . . advance

notice . .. . Savings accounts shall not be subject to check

or to withdrawal or transfer on negotiable or transfer-

able order or authorization to the association, but the

Board may by regulation provide for withdrawal or trans-

fer of savings accounts upon non-transferable order or

authorization.

“a ae) m1

47a

that the HOLA confers wide discretion upon the

Board in regulating the operation of FSLs. Bloom-

field Federal Savings and Loan Association v. Ameri-

can Community Stores Corp., 396 F.Supp. 384, 386

(D. Neb. 1975); Federal Home Loan Bank Board v.

Rowe, 284 F.2d 274, 278 (D.C. Cir. 1960); Bridge-

port Federal Savings and Loan Association v. Federal

Home Loan Bank Board, 307 F.2d 580, 584 (3d Cir.

1962), cert. den. 371 U.S. 950 (1963); Central

Savings and Loan Association of Chariton v. Federal

Home Loan Bank Board, 422 F.2d 504, 506-7 (8th

Cir. 1970). Intrinsic to the authority and function

of the Board is the power to initiate, adopt and insti-

tute the best practices of savings institutions. Bloom-

field, supra, at 388. The Board is not limited to ex-

isting FSL practices, but may adopt new methods to

better service FSL members. Chariton, supra, at

506-7."

The Court is persuaded that RSUs are merely an

improvement upon traditional methods whereby mem-

bers may access their FSL accounts. The Court is

satisfied that RSU activity is in no way inconsistent

with past practices of FSLs or with the purposes for

which F'SLs were created. FSLs exist to promote

7™The propriety of Board authorization of new methods of

FSL operation is underscored by the 1968 amendment to Sec-

tion 5(b) (1) of the HOLA, designed to give the Board greater

flexibility in developing new account instruments and in at-

tracting new FSL members. See H.R. Rep. No. 1042, 90th

Cong., Ist Sess., 3 and 7 (1967) ; 114 Cong. Rec. 20540 (1968)

(remarks of Representative Hanna); H.R. Rep. No. 1585,

90th Cong., 2d Sess., 107-8 (1968).

48a

thrift and provide a source for home financing. 12

U.S.C. § 1464(a).* There has been no suggestion that

RSU use to cate has adversely affected the viability

of FSLs or the interests of FSL members. Rather,

the record indicates the opposite to be true.® The

Court finds that RSU activity serves the basic pur-

poses of FSLs, that the decision to implement such

activity is within the special expertise of the Board,

and that in allowing the utilization of RSUs the Board

has not exceeded the scope of its authority under

Section 5(a) of the HOLA. See Bloomfield, supra.

Section 5(b) (1) of the HOLA expressly prohibits

FSL accounts from being subject to “check or to

withdrawal or transfer on negotiable or transferable

order or authorization.” Plaintiff argues that RSU

activity violates this proscription. However, a close

reading of the Uniform Commercial Code belies Plain-

tiff’s claim. The U.C.C. defines a check as a negotiable

instrument drawn on a bank and payable on demand.

U.C.C. § 3-104(2) (1972 ed.) Negotiable instruments

are defined, in pertinent part, as writings signed by

the maker or drawer containing an order to pay a

sum certain which is payable on demand or at a defi-

nite time to the bearer. U.C.C. § 3-104 (1972 ed.).

The RSU transaction and the machine readable in-

8 See also S. Rep. No. 91, 73d Cong., 1st Sess., 2 (1933) ;

H.R. Rep. No. 55, 73d Cong., 1st Sess., 2 (1933).

® See, for e.g., Stipulation No. 69 of the Second Set of Stipu-

lations herein. See also the Final Report of the National Com-

mission on Electronic Funds Transfers, p. 1389 (October 28,

1977).

49a

strument used to effect that transaction do not fit

within the ambit of the U.C.C. definitions. FSL ac-

counts are accessed through RSUs by use of an “RSU

activator.” This activator must be in the possession

and control of the member. Activators are non-

transferable. No negotiable or transferable instru-

ment is used in connection with the operation of RSUs

and therefore RSU transactions do not constitute

“checking transactions” within the meaning of the

language of 12 U.S.C. § 1464(b) (1).

Nonetheless, Plaintiff insists that RSU activity is

the functional equivalent of checking activity and

should be invalidated on that basis. Plaintiff de-

rives its equivalence argument from a reading of

the line of “branch banking” cases involving national

bank use of customer-bank communications terminals

(“CBCTs”). Chief among these cases are Independ-

ence Bankers Association of America v. Smith, supra,

and Illinois ex rel Lignoul v. Continental Ill. Nat’l

Bank and Trust Co., 536 F.2d 176 (7th Cir. 1976),

cert. den. 429 U.S. 871 (1976). The analysis in these

cases, however, is inapposite to the matter at hand.

The CBCT cases were decided in the context of the

McFadden Act, 12 U.S.C. § 36(f), a statute restrict-

ing the location of branch banks and afforded a broad

judicial gloss not applicable to the HOLA. See Smith,

534 F.2d at 935-6, fn. 59. The Court finds nothing

in the language of the HOLA or its legislative history

which similarly forecloses the Board from acting as

it has done here. The Court rejects Plaintiff’s con-

tention that RSU activity is the functional equivalent

50a

of checking activity and therefore invalid. Plaintiff

calls upon the Court to make a policy judgment of

the sort better left to the Congress. If RSUs are to

be proscribed on the ground that RSUs are the func-

tional equivalents of checks, such a proscription must

emanate from the Congress and not the Courts.” This

Court concludes that Board authorization of RSU

services does not violate 12 U.S.C. § 1464(b) (1). See

Bloomfield, supra, at 388.

For the reasons stated above, the Court finds that

Defendants are entitled to judgment herein as a mat-

ter of law.

/s/ Aubrey E. Robinson, Jr.

AuBREY E. ROBINSON, JR.

United States District Judge

June 30, 1978

Date

10 Jt is noteworthy that Congress has been aware of the

Board’s RSU program from its inception and has taken no

action to prohibit FSLs from offering RSU services. See, e.g.,

the subcommittee hearings cited in Defendants’ brief in sup-

port of Defendants’ motion for summary judgment, p. 58.

Congress’ creation of the National Commission on Electronic

Funds Transfers on October 24, 1974, in no way interferes

with the power of the Board to adopt and implement an RSU

regulation. In creating the National Commission, Congress

did not impose a moratorium on EFTS activity. Rather, the

National Commission has existed to study and report on the

problems posed by the new EFTs technology and among its

sources has drawn on the RSU experience.

5la

APPENDIX F

STATUTES AND REGULATIONS

Statutes:

1, 12 U.S.C. 371a provides in pertinent part:

No member bank sha’ directly or indirectly, by

any device whatsoev.., pay any interest on any

deposit which is payable on demand * * *.

2. 12 U.S.C. 371b! provides in pertinent part:

The [Federal Reserve] Board may from time

to time, after consulting with the Board of Di-

rectors of the Federal Deposit Insurance Corpo-

ration and the Federal Home Loan Bank Board

prescribe rules governing the payment and ad-

vertisement of interest on deposits, including

limitations on the rates of interest which may

be paid by member banks on time and savings

deposits. The Board may prescribe different rate

limitations for different classes of deposits, for

deposits of different amounts or with different

maturities or subject to different conditions re-

garding withdrawal or repayment, according to

the nature or location of member banks or their

depositors, or according to such other reasonable

bases as the Board may deem desi i

ee y esirable in the

* * * * *

1 The quoted portion of 12 U.S.C. 871b was enacted in 1966

to be effective for one year (see 80 Stat. 823, 824). The effec-

tive date has since been extended on several occasions (see

12 U.S.C: note). The provision is currently effective

through December 15, 1980 (92 Stat. 3641, 3713).

52a

8. 12 U.S.C. 461 provides in pertinent part:

(a) The [Federal Reserve] Board is author-

ized for the purposes of this section to define

the terms used in this section to determine what

shall be deemed a payment of interest, to deter-

mine what types of obligations, whether issued

directly by a member bank or indirectly by an

affiliate of a member bank or by other means,

and, regardless of the use of the proceeds, shall

be deemed a deposit, and to prescribe such regu-

lations as it may deem necessary to effectuate

the purposes of this section and to prevent eva-

sions thereof. —

(b) Every member bank shall maintain re-

serves against its deposits in such ratios as shall

be determined by the affirmative vote of not less

than four members of the Board * * *.

. 12 U.S.C. 1819 provides in pertinent part:

Upon June 16, 1933, the [Federal Deposit In-

surance] Corporation shall become a body cor-

porate and as such shall have power—

* * * * *

Tenth. To prescribe by its Board of Directors

such rules and regulations as it may deem nec-

essary to carry out the provisions of this chap-

ter.

5. 12 U.S.C. 1828(g) provides in pertinent part:

The Board of Directors [of the Federal De-

posit Insurance Corporation] shall by regulation

prohibit the payment of interest or dividends on

demand deposits in insured nonmember banks

and for such purpose it may define the term “de-

53a

mand deposits”; but such exceptions from this

prohibition shall be made as are now or may

hereafter be prescribed with respect to deposits

payable on demand in member banks by section

19 of the Federal Reserve Act, as amended, or

by regulation of the Board of Governors of the

Federal Reserve System. The Board of Direc-

tors may from time to time, after consulting

with the Board of Governors of the Federal

Reserve System and the Federal Home Loan

Bank Board, prescribe rules governing the pay-

ment and advertisement of interest or dividends

on deposits, including limitations on the rates

of interest or dividends that may be paid by in-

sured nonmember banks (including insured mu-

tual savings banks) on time and savings deposits.

The Board of Diiectors may prescribe different

rate limitations for different classes of deposits,

for deposits of different amounts or with differ-

ent maturities or subject to different conditions

regarding withdrawal or repayment, according

to the nature or location of insured nonmember

banks or their depositors, or according to such

other reasonable bases as the Board of Directors

may deem desirable in the public interest. The

Board of Directors is authorized for the pur-

poses of this subsection to define the terms “time

deposits” and “savings deposits,” to determine

what shall be deemed a payment of interest, and

to prescribe such regulations as it may deem

necessary to effectuate the purpose of this sub-

section and to prevent evasions thereof. * * *

54a

6. 12 U.S.C. 1832 provides in pertinent part:

(a) Withdrawal by negotiable or transferable

instruments; exceptions

No depository institution shall allow the owner

of a deposit or account on which interest or divi-

dends are paid to make withdrawals by negoti-

able or transferable instruments for the purpose

of making transfers to third parties, except that

such withdrawals may be made in the States of

Massachusetts, Connecticut, Rhode Island, Maine,

Vermont, and New Hampshire.’

(b) Definition

For purposes of this section, the term ‘“deposi-

tory institution” means—

(1) any insured bank as defined in sec-

tion 1813 of this title;

(2) any State bank as defined in section

1813 of this title;

(3) any mutual savings bank as defined

in section 1813 of this title;

(4) any savings bank as defined in sec-

tion 1813 of this title;

(5) any insured institution as defined in

section 1724 of this title; and

(6) any building and loan association or

savings and loan association organized and

operated according to the laws of the State

in which it is chartered or organized; and,

for purposes of this paragraph, the term

55a

“State” means any State of the United

States, the District of Columbia, any terri-

tory of the United States, Puerto Rico,

Guam, American Samoa, or the Virgin Is-

lands.

(c) Fine

Any depository institution which violates this

section shall be fined $1,000 for each violation.

. 12 U.S.C. 1464 provides in pertinent part:

(a) Organization authorized

In order to provide local mutual thrift institu-

tions in which people may invest their funds and

in order to provide for the financing of homes,

the [Federal Home Loan Bank] Board is au-

thorized, under such rules and regulations as it

may prescribe, to provide for the organization,

incorporation, examination, operation, and regu-

lation of associations to be known as “Federal

Savings and Loan Associations”, and to issue

charters therefor, giving primary consideration

to the best practices of local mutual thrift and

home-financing institutions in the United States.

(b) Capital; members of the association; voting

rights; payment of savings accounts and

withdrawals; nontransferable orders or au-

thorizations; authorization to borrow, give

security, act as surety, and issue notes,

bonds, debentures, or other obligations

(1) An association may raise capital in the

2 The state of New York was added to the list of states

excluded from the proscription of paragraph (a) of this

Section by 92 Stat. 3641, 3712.

form of such savings deposits, shares, or other

accounts, for fixed, minimum, or indefinite peri-

ods of time (all of which are referred to in this

56a

section as savings accounts and all of which shall

have the same priority upon liquidation) as are

authorized by its charter or by regulations of

the Board, and may issue such passbooks, time

certificates of deposit, or other evidence of sav-

ings accounts as are so authorized. * * * Sav-

ings accounts shall not be subject to check or to

withdrawal or transfer on negotiable or trans-

ferable order or authorization to the association,

but the Board may by regulation provide for

withdrawal or transfer of savings accounts upon

nontransferable order or authorization.

12 U.S.C. 1757 provides in pertinent part:

A Federal credit union shall have succession in

its corporate name during its existence and shall

have power—

(1) to make contracts;

* * * * *

(6) to receive from its members, from

other credit unions, from an officer, em-

ployee, or agent of those nonmember units

of Federal, State, or local governments and

political subdivisions thereof enumerated in

section 1787 of this title and in the manner

so prescribed from the Central Liquidity Fa-

cility, and from nonmembers in the case of

credit unions serving predominately low-

income members (as defined by the Board)

payments on shares which may be issued at

varying dividend rates, and payments on

share certificates which may be issued at

varying dividend rates and maturities, sub-

ject to such terms, rates, and conditions as

57a

may be established by the board of directors,

within limitations prescribed by the Board;

* * * * *

(15) to exercise such incidental powers

as shall be necessary or requisite to enable

it to carry on effectively the business for

which it is incorporated.

9. 12 U.S.C. 1766 provides in pertinent part:

(a) The Board may prescribe rules and regu-

lations for the administration of this chapter

(including, but not by way of limitation, the

merger, consolidation, and dissolution of corpo-

rations organized under this chapter).

10. 12 U.S.C. 1789 provides in pertinent part:

(a) In carrying out the purposes of this sub-

chapter, the Board may—

. (11) prescribe such rules and regula-

tions as it may deem necessary or appro-

priate to carry out the provisions of this

subchapter. '*!

Regulations :

1, 12 C.F.R. 217.5(e)(2) and (3) (see 43 Fed.

Reg. 20001, May 10, 1978) provides:

Notwithstanding the provisions of subpara-

graph (1) of this paragraph, withdrawals may

be permitted by a member bank to be made auto-

* Pursuant to the Financial Institutions Regulatory and

Interest Rate Control Act of 1978, Pub. L. No. 95-630, 92 Stat.

3680, the National Credit Union Administration is now under

the management of a three-member National Credit Union

Administration Board instead of an Administrator. Mr.

Lawrence Connell, who previously served as Administrator

is now Chairman of the Board.

58a

matically or as a normal practice from a savings

deposit that consists only of funds in which the

entire: beneficial interest is held by one or more

individuals through payment to the bank itself

or through transfer of credit to a demand de-

posit or other account pursuant to a written

authorization from the depositor to make such

payments or transfers in order to cover checks

or drafts drawn upon the bank or to maintain

a specified balance in or to make periodic trans-

fers to such accounts. In accordance with § 217.1

(e) (2), a member bank must reserve the right

to require the depositor to give notice in writing

of an intended withdrawal not less than 30 days

before such withdrawal is made. Such notice

shall be prominently disclosed and specifically

brought to the depositor’s attention at the time

the automatic transfer service is authorized. A

member bank may not require a depositor to au-

thorize such automatic transfers to be made

from savings deposits.

A member bank may permit depositors to

maintain deposits subject to negotiable orders of

withdrawal where authorized by Federal law.

2. 12 C.F.R. 329.5(c) (2) (see 43 Fed. Reg. 20222,

May 11, 1978) provides:

An insured nonmember bank may permit

withdrawals to be made automatically from a

savings deposit that consists of funds deposited

to the credit of, and in which the entire benefi-

cial interest is held by one or more individuals,

through transfer of credit to a demand or other

deposit account of the same depositor pursuant

to a written agreement between the bank and

59a

the depositor authorizing such payments or

transfers in connection with checks or drafts

drawn by the depositor upon the bank, or for

any other purpose not prohibited by law or regu-

lation. Interest earned on a savings deposit may

be transferred pursuant to the provisions of this

subparagraph whether or not the depositor is an

individual. In accordance with Section 329.1(e)

(1) (ili) of this Part 329, the bank must reserve

the right to require the depositor to give notice

in writing of an intended withdrawal (trans-

fer) not less than 30 days before such with-

drawal (transfer) is made. This reservation

shall be expressly set forth in the written agree-

ment authorizing transfers pursuant to this sub-

paragraph. The bank may not require the de-

positor to enter into an agreement providing for

the automatic transfer of savings deposits as a

condition to maintaining a savings or other de-

posit account.

3. 12 C.F.R. 545.4-2 (see 43 Fed. Reg. 22930,

May 30, 1978) provides:

(a) Definitions. As used in this section—

(1) “Activator” means a machine-readable in-

strument used to activate an RSU; a passbook

may not be so used. |

(2) “Generic data” means statistical informa-

tion which does not identify any individual ac-

countholder.

(3) “Personal security identifier’ (PSI)

means any word, number, or other security iden-

tifier essential for user access of an account

through an RSU.

60a

(4) “Remote service unit” (RSU) means an

information processing device, including associ-

ated equipment, structures, and systems, by

which information relating to financial services

rendered to the public is stored and transmitted,

instantaneously or otherwise, to a financial in-

stitution. Any such device not on the premises

of any facility of a Federal association which,

for activation and account access, requires use

of an activator and PSI in the possession and

control of the user, is an RSU.

The term includes, without limitation, both ‘“on-

line” computer terminals and “off-line” cash dis-

pensing machines. It excludes automated teller

machines on the premises of a Federal associa-

tion, unless shared with other financial institu-

tions. An RSU is not a branch, satellite, or other

type of office, facility, or agency of a Federal

association under §§ 545.14, 545.14-1, 545.14-2,

545.14-3, 545.14-4, 545.14-5, 545.15.

(5) “RSU account” means a savings account

(including a savings deposit) or loan account

which may be accessed through an RSU.

(6) “User” means an RSU accountholder of

a Federal association authorized to access an

RSU.

(b) General. A Federal association may es-

tablish or use RSUs in the State of its home

office or in the primary service area, as deter-

mined by the Pvard, of any of its out-of-State

branches, and may participate in RSU opera-

tions with other financial institutions as the

Board may approve.

(c) RSU financial services. A Federal asso-

ciation’s board of directors may, by resolution,

6la

authorize it to offer any of these financial serv-

ices to the public through RSUs:

(1) Crediting existing savings accounts;

(2) Debiting such accounts up to the avail-

able balance therein, provided that no negotiable

or transferable order or authorization is used

unless permitted by Federal law;

(3) Crediting payments on loans in which the

association has an investment or which it is

servicing ; and

(4) Related financial services as the Board

may approve upon application.

(d) RSU activator. Each RSU activator shall

bear the words “Not Transferable” or their

equivalent.

(e) RSU access techniques. A Federal asso-

ciation shall provide a PSI to each user and re-

quire its use when accessing an RSU; it may not

employ RSU access techniques which require the

user to disclose a PSI to another person.

(f) Account agreements. A Federal associa-

tion shall clearly disclose in writing to each user

before an RSU account is opened, all terms and

conditions of the RSU agreement, including

rights and obligations in case of loss, theft, or

error and the privacy of account information.

The association shall also inform each user that:

(1) Loss or theft of the activator should be

promptly reported to a person or phone number

specified by the association ; and

(2) The PSI is for security purposes and

should not be disclosed to third parties.

(g) Service charges. A Federal association

may impose charges for RSU financial services.

62a

(1) New accounts. A schedule of charges

shall be disclosed in writing to a prospective user

before an RSU account is opened.

(2) Existing accounts. Users shall be notified

in writing 30 days before service charges are

initiated or increased by the association.

(h) Error resolution. A Federal association

shall establish error resolution procedures for

RSU accounts, and inform users that:

(1) Written notification of error should be

made within 60 days of receipt of the statement;

(2) Resolution of alleged error by correction

or written confirmation of the transaction (in-

cluding copies of any documents relied on by the

association) shall be made by the association

within 10 business days after receiving such noti-

fication.

(i) Liability for Loss. A Federal association

shall be liable to a user for RSU account losses

resulting from the association’s:

(1) Failure to carry out the user’s transac-

tion order correctly including such failure re-

sulting from prior uncorrected error of the asso-

ciation;

(2) Failure to correct an account error with-

in 10 business days after receiving written noti-

fication from the user; or

(3) Processing a transaction order from an

unauthorized person, unless the association

proves that such action resulted from the user’s

negligence.

(j) Account statements. A Federal associa-

tion shall issue each user a statement of RSU

account transactions monthly if the account has

63a

been used in that time, quarterly if not; such

statement shall include at least the date, type,

amount, and location of each RSU transaction;

(k) RSU receipts. Each RSU must provide

to users at the time of an RSU transaction a

receipt containing at least the following: Date,

type, amount, and location of transaction, and

information sufficient to identify the user. A re-

ceipt which is manually written must be signed

by the user and the RSU operator.

(1) Privacy of account data. A Federal asso-

ciation chall allow users to obtain any informa-

tion concerning their RSU accounts. Except for

generic data or data necessary to identify a

transaction, no Federal association may disclose

account data to third parties, other than the

Board or its representatives, unless express writ-

ten consent of the user is given, or applicable

law requires. Information disclosed to the Bank

Board will be kept in a manner to ensure com-

pliance with the Privacy Act, 5 U.S.C. 552(a).

A Federal association may operate an RSU ac-

cording to an agreement with a third party or

share computer systems, communications facili-

ties, or services of another financial institution

only if such third party or institution agrees to

. abide by this section as to information concern-

ing RSU accounts in the Federal association.

(m) Bonding. A Federal association shall

take all steps necessary to protect its interest in

financial services processed at each RSU, includ-

ing obtaining available fidelity, forgery, and

other appropriate insurance.

(n) Security. A Federal association shall pro-

tect electronic data against fraudulent altera-

64a

tions or disclosure. All RSUs shall meet the

minimum security devices requirements of Part

563a of the Insurance Regulations as though

such units were offices, as defined in § 563a.1 of

said part, except to the extent that an applicant

satisfies the Board that those requirements are

inappropriate. Alternate measures satisfactory

to the Board must be taken for installation,

maintenance, and operation of security devices

and procedures, reasonable in cost, to discourage

robberies, burglaries, larcenies, and computer

theft and to assist in identification and appre-

hension of persons who commit such acts.

(0) Competitive implications. The Board will

consider competitive implications of applications

made under this section and may, in an appro-

priate case, (1) request the views of the Anti-

trust Division of the Department of Justice, (2)

request an applicant to obtain a business review

letter from such Division under 28 CFR 50.6,

and/or (3) require a Federal association to

share RSU activities with another financial in-

stitution under reasonable terms and conditions.

A Federal association may not enter into any

agreement for exclusive right to engage in RSU

activities at any location(s). A Federal associa-

tion may not require any person to become an

RSU user as a condition of obtaining a loan or

any other service offered by the association.

(p) Amplications—(1) General. A Federal

association shall obtain the Board’s written ap-

proval before entering into any RSU activity or

materially altering a previously approved one.

Before applying for such approval, a Federal

association shall obtain from the Supervisory

65a

Agent written advice that there is no present

supervisory objection to such application.

(2) Start-up date. A Federal association shall

have its approved RSU activity operational no

later than 12 months after Board approval, un-

less the Board grants an extension.

(3) Filing. Two copies of any RSU activity

application shall be filed with the Supervisory

Agent. The original and two copies shall be sent

to the Director, Office of Industry Development,

Federal Home Loan Bank Board, Washington,

D.C. 20552. Additional material may be re-

quested by the Director or the Supervisory Agent.

Applicants may file information to supplement

or amend applications.

(q) Board supervision. Each Federal associa-

tion which engages in any RSU activity shall be

subject to rules and regulations which the Board

may hereafter prescribe or any resolution which

the Board may adopt, including requirements to

terminate or modify such activity, whether en-

gaged in separately or with others. A Federal

association may share an RSU controlled by an

institution not subject to examination by a Fed-

eral regulatory agency only if such institution

has agreed in writing that the RSU is subject

to such examination by the Board as it deems

necessary.

(:) Reporting. A Federal association which

engages in RSU activities shall submit to the

Board, at the association’s expense, such reports

as the Board may require regarding such activi-

ties.

(s) Exception for previously approved RSU

projects. Paragraphs (d) through (1) and (q)

66a

of this section shall apply beginning January 1,

1979, to Federal associations engaging in RSU

activities approved prior to July 1, 1978.

4. 12 C.F.R. 701.34 (see 42 Fed. Reg. 61977, Dec.

8, 1977) provides:

(a) For purposes of this section:

(1) “Share draft” means a negotiable or non-

negotiable draft used to withdraw shares from

a share draft account.

(2) “Payable through bank” means a bank

that has been designated to make presentment

of a share draft to the Federal credit union for

payment.

(3) “Truncation” means the original share

draft is not returned to the member.

(4) “Share draft account” means any regular

share account from which the Federal credit

union has agreed that shares may be withdrawn

by means of a share draft or other order.

(5) “Liquidity reserve” means an allocation

of current assets recorded on the credit union’s

records as cash or deposits and investments as

authorized by Section 107 of the Federal Credit

Union Act: Provided, That, any investments isi-

cluded as a portion of this reserve shall be re-

deemable within 60 days and have a maturity

not in excess of 90 days.

(b) A Federal credit union may provide its

members with share drafts. The board of direc-

tors shall determine, prior to requesting approval

to implement the share draft program, that the

members’ use of share drafts is economically and

operationally feasible for the Federal credit

union.

67a

(c) A Federal credit union must submit a

written request to operate a share draft pro-

gram to the Administration at least 60 days

prior to the proposed date of implementation.

The request shall include:

(1) An official copy of the minutes of the

board of directors authorizing a request for ap-

proval to implement the share draft program.

(2) All background documentation which sup-

ports the board of directors’ decision that the

members’ use of share drafts is economically

and operationally feasible for the Federal credit

union.

(3) A statement that the forms and proce-

dures to be used have been reviewed by legal

counsel.

(4) A statement that the board of directors

has determined appropriate surety bond cover-

age is in force.

(5) A statement of operational specifications

which expressly provide for:

(i) Identification of the payable through

bank;

(ii) Truncation;

(iii) Establishing a share draft account agree-

ment with each member which outlines the cred-

it union’s and member’s responsibilities ;

(iv) Recording of share overdrafts and giving

members notification of such overdrafts should

they occur;

(v) Encoding each share draft with the rout-

ing and transit number of the payable through

bank, the share draft account number, and the

serial number of the share draft in accordance

with standards required for use in a clearing

68a .

system utilizing Magnetic Ink Character Recog-

nition devices;

(vi) Preprinting the name of the payable

through bank and the name of the credit union

on the share draft;

(vii) A method for each member using share

drafts to maintain a record of share drafts

drawn;

(viii) Submission of a periodic statement of

account, no less frequently than quarterly, to

each member who has a share draft account

which shall include for each share draft proc-

essed the serial number, date of payment and

the amount of payment;

(ix) Establishing responsibility for detection

of unauthorized or forged drafts;

(x) Procedures for processing stop payment

orders;

(xi) Procedures for providing members with

copies of paid drafts should copies be requested;

(xii) Procedures for retaining paid drafts or

copies of paid drafts on file for a period of five

years or as required by state law, whichever is

greater; .

(xiii) The fees, if any, to be charged, pro-

vided such fees shall not exceed the direct and

indirect costs of providing the service; and

(xiv) Procedures for establishing and main-

taining an average daily liquidity reserve equal

to 125 per cent of the aggregate amount paid on

share drafts during the preceding month divided

by the number of days on which share drafts

were paid during that month.

(d) A Federal credit union may not com-

mence operating a share draft program until it

69a

has received written approval from the Admin-

istration, which may limit member participation

for a period not to exceed one year. Approval

will not be given if:

(1) The requirements of paragraph (c) of

this section have not been met;

(2) The supervisory committee has not ful-

filled its statutory requirements as specified in

the Federal Credit Union Act; or

(3) The management of the credit union has

demonstrated through prior performance its in-

ability to handle the additional activity the share

draft program will generate.

(e)(1) The Federal credit union shall notify

the Administration in writing, at least 60 days

in advance of its proposed implementation date,

of any modification relating to:

(i) The payable through bank;

(ii) Truncation procedures;

(iii) The share draft agreement;

(iv) Procedures for establishing and main-

taining a liquidity reserve; and

(v) Any material modification not previously

reviewed and approved by the Administration.

(2) Implementation of a modification is con-

tingent upon written approval of the Adminis-

tration.

(3) The Federal credit union shall immedi-

ately notify the Administration as to any matter

affecting the information provided pursuant to

paragraphs (c)(1) through (c)(4) of this sec-

tion.

(f) If a share draft program or a request

for modification is not approved, or the share

70a

draft program is approved for limited member

participation, the Administration will provide to

the requester a written notice setting forth the

basis for such action.

(g) A Federal credit union shall not waive

the right to require notice as set forth in the

bylaws, but may guarantee payment of a share

draft provided that:

(1) A specific guarantee authorization is ob-

tained for the share draft from the Federal

credit union; and

(2) The guarantee authorization is immedi-

ately noted on the share draft account to prevent

the withdrawal of shares needed to pay the guar-

anteed share draft.

W ou. 8. coveenment printine orrice; 1979 2eecis 51