Rep. Fernand St Germain (D-R.I.) yesterday scheduled hearings in early May on a bill to permit payment of interest on checking accounts in all types of federally insured financial institutions.
It is time, the House Banking sub-committee chairman declared, to "stop all the gimmickry that has surrounded efforts to 'backdoor' interest on checking accounts and give the consumer a straightforward freedom of choice in handling his checking accounts."
The announcement was triggered by a U.S. Appeals Court decision last Friday declaring illegal automatic fund transfers between savings and checking accounts, operation of remote service units in shopping centers by savings and loan associations, and the writing of share drafts on credit union savings accounts. All are forms of "backdoor" checking with interest.
The three-judge panel said the systems were illegal because they had been authorized by regulatory agencies, "all without the benefit of congressional consideration and statutory enactment." By setting Jan. 1, 1980, as the effective date of its order, the panel clearly indicated it wanted Congress to tackle that issue in the interim.
St Germain said his legislation would end the 45-year-old prohibition against payment of interest by banks on checking accounts, and permit federally insured mutual savings banks, credit unions and savings and loan associations to offer checking accounts to their customers. he added, "Financial institutions will compete for funds on a straight price basis and will be in a position to give up many of the costly giveaways and other grimmicks now employed to attract deposits."
The Senate Banking Committee is not expected to hold hearings before early summer. Sen. Williams Proxmire (D-Wis.) is known to favor extension nationwide of NOW (Negotiable Order of Withdrawal) accounts as an alternative to the broader St Germain bill.
Aside from some technical aspects, the main difference is that NOW accounts are directed only at consumers whereas universal checking with interest would extend to commercial accounts as well, a Senate staff member explained. NOW accounts are permitted in the New England states and New York, but efforts thus far to allow them nationwide have been defeated in Congress.
In the past session, both bills have met with considerable opposition from segments of the financial community on the grounds checking-with interest accounts are too expensive for institutions. The court's decision is bound to give new urgency to these hearings.
Meanwhile, reaction continued to come in Federal Home Loan Bank Board Chairman Robert McKinney criticized the court decision and said the board would pursue all available remedies in the courts. (Regulatory agencies are not allowed to appeal directly to the Supreme Court.) He also asked for congressional "clarification" of the powers of the financial regulatory agencies in matters like remote service units. These computer-based terminals allow customers to make depostis and withdrawals away from S&L offices.
The Credit Union National Association, a trade organization, asked for emergency legislation in the House to extend interest-paying transaction accounts nationwide by all financial institutions. And the National Association of Federal Credit Union urged Congress to begin work immediately to ensure the right of consumers to use their share draft accounts.
There is now about $800 million outstanding in share draft accounts with automatic transfer to checking account provisions. Despite their growth since last November when they were first authorized, automatic transfer accounts are not a good deal for the average customer, according to Maryland finance officials. Service charges can wipe out the interest earned on the account unless the customer has balance of $5,000 or more, they said.