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NOW....Should You Continue Offering These Accounts

By Jon Tavares, JD, LLM, CRCM, NCCO 26 Jun 2019

I still receive a number of questions on Negotiable Order Withdrawal (NOW) Accounts every month, even though these accounts are pretty much pointless. This week's post will discuss what a NOW Account is, why they were created, why they are pointless and how to convert them to interest checking accounts.

 

In a NOW Account, a depository institution has reserved the right to require at least seven days' notice prior to a withdrawal or transfer that is subject to check, draft, negotiable order of withdrawal, share draft or a similar item provided the depositor is eligible to hold a NOW Account. To be eligible to hold a NOW Account, the depositor must be an individual, sole proprietor, non-profit organization or government unit. For-profit organizations are not eligible to hold a NOW Account.

 

Section 11 of the Banking Act of 1933 (Glass-Steagall) and Regulation Q prohibited depository institutions from paying interest on demand deposits. In the 1970's a number of financial institutions petitioned Congress to create an account similar to a demand deposit on which they can pay interest. Congress created and phased in NOW Account. By 1980, financial institutions nationwide could offer NOW Accounts.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 repealed Section 11 of Glass-Steagall and the Federal Reserve Board repealed Regulation Q in 2011, thereby permitting depository institutions to pay interest on demand deposits. With depository institutions now able to pay interests on demand deposits, even to for-profit organizations, NOW Accounts became redundant. On top of being redundant, NOW Accounts are costing depository institutions time and money. Many institutions do not have a real firm grasp of the difference between NOW Accounts and interest checking accounts. Many institutions even have created "Business NOW" or "Commercial NOW" accounts. These are not really NOW Accounts as for-profit organizations are still prohibited from holding a NOW Account. If an institution maintains a NOW Account, they must have policies and procedures in place to ensure the depositor is eligible, monitor the accounts and properly report them. All of this is time and money that can and should be spent elsewhere.

 

I recommend that depository institutions do away with their NOW Accounts and convert them to interest checking accounts. Essentially, this is a simple and painless procedure that involves simply changing the name of the account and how it is classified on your system. You don't have to change any rates, terms or conditions of the account (though, you can remove the provision reserving the right to require seven days' notice prior to a withdrawal). Because you are not decreasing the annual percentage yield or making an adverse change, no prior notice is required. You don't have to close the account and reopen it. I recommend that you simply send a letter or include a message in your next periodic statement informing the depositor of the new account name. That's it - it's that simple and painless.

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