Final passage of legislation phasing out ceilings on interest rates paid by banks and giving the Federal Reserve more effective control over the money supply was completed yesterday on a voice vote in the Senate. The bill now goes to the president for his signature.
The savings and loan industry, which had supported the bill known as the Depository Institutions and Monetary Control Act of 1980, hailed it as "the most significant legislation since World War II for savers, home borrowers and savings and loan associations." The American Bankers Association said it would "improve the ability of saving consumers to get a fair return on their funds." And the National Association of Mutual Savings Banks echoed, "Consumers everywhere will benefit."
Most of the provisions are of a long-term nature. Limits on the rates of interest paid on savings accounts will be phased out over a six-year period until they reach market rates. Currently banks and thrifts can pay 5 1/4 to 5 1/2 percent on passbook accounts, whereas money market mutual funds pay market rates of 14 percent and more. Federal regulators have set a target of raising passbook rates by a minimum of 1/4 percentage point during the next 18 months.
The most immediate benefit to savers, according to the U.S. League of Savings Associations, is a hike in the amount of insurance on accounts from $40,000 to $100,000. This is expected to act as a spur to sales of "jumbo" certificates of deposit which require a minimum deposit of $100,000 and currently pay more than 16 percent annual interest.
Another provision that will provide useful in the near future is a federal override of state usury laws. For those businesses and agricultural customers who can afford loans at up to 21 percent interest a year, money will become available in many states where loan rate ceilings previously made them illegal. a
All usury ceilings have been taken off mortgage loans. Though the market for these has virtually dried up as the result of 16-17 percent interest rates, the new act will make it legal for money lenders to make such loans if there is demand. And, as the cost of money begins to decline in recessionary times, the usury override will have the effect of making funds available on an equitable nationwide basis.
A third change of intermediate-term consequences is a rise from 12 to 15 percent in the interest rate credit unions can charge loan customers. Although 15 percent is still not up to market rates, the National Association of Federal Credit Unions is already petitioning regulators to raise that limit, as provided for in the legislation.
It authorized the continued use of automatic transferal of funds from savings to checking accounts at banks, of credit union share draft accounts which pay interest on checking, and of remote service units which enable customers to access their savings and loan accounts at points of sale. Legal authority for these transactions would have expired March 31.
Just over 10 percent of credit unions now offer share draft accounts. Dick McConnell, executive vice president of the National Association of Federal Credit Unions, predicted the number of accounts would double by the end of this year. Credit unions currently pay 5-7 percent nominal interest on share draft accounts depending on the balance.
Starting Jan. 1, 1980, financial institutions throughout the country will be able to offer customers negotiable order of withdrawal (NOW) accounts, a form of interest-on-checking account. In New England, New York and New Jersey, where they have been in existence for some time, a minimum balance of $500-$1,000 is customarily required. The nominal annual interest rate is about 5 percent, although the effective yield -- based on the average minimum daily balance according to how many checks are written on the account -- is somewhat less. Approximately 40 percent of demand (checking) deposits are already in NOW accounts in the states that permit them.
The act also broadens the types of services financial institutions may offer. Savings and loan associations will be able to issue credit cards, make consumer loans up to 20 percent of their assets and make second-lien loans on property.
Besides enjoying increased loan and investment powers, mutual savings banks will be permitted to accept corporate demand deposits. The National Association of Mutual Savings Banks predicted these new powers would attract more funds, which in turn would be available for mortgage loans.
Most of the above changes will be very gradual. The ailing savings industry is counting on these new powers to rebuild its financial strength within six years when interest rate ceilings will be completely removed and thrifts will be longer have the advantage of being able to offer savers 1/4 percent more interest than banks.
At the same time the industry is counting on another change -- one not in the legislation just passed -- to give it a quicker shot in the arm. As an equalizer to offering savers higher rates, thrifts expect to be able to charge borrowers higher rates through the use of renegotiable rate mortgages. The Federal Home Loan Bank Board plans to issue its final proposal next week on this revolutionary new type of mortgage loan.