§ 1030.7 Payment of interest.
(a) Permissible methods —
(1) Balance on which interest is calculated. Institutions shall calculate interest on the full amount of principal in an account for each day by use of either the daily balance method or the average daily balance method. Institutions shall calculate interest by use of a daily rate of at least 1/365 of the interest rate. In a leap year a daily rate of 1/366 of the interest rate may be used.
1. Prohibited calculation methods. Calculation methods that do not comply with the requirement to pay interest on the full amount of principal in the account each day include:
i. Paying interest on the balance in the account at the end of the period (the “ending balance” method).
ii. Paying interest for the period based on the lowest balance in the account for any day in that period (the “low balance” method).
iii. Paying interest on a percentage of the balance, excluding the amount set aside for reserve requirements (the “investable balance” method).
2. Use of 365-day basis. Institutions may apply a daily periodic rate greater than 1/365 of the interest rate - such as 1/360 of the interest rate - as long as it is applied 365 days a year.
3. Periodic interest payments. An institution can pay interest each day on the account and still make uniform interest payments. For example, for a one-year certificate of deposit an institution could make monthly interest payments equal to 1/12 of the amount of interest that will be earned for a 365-day period (or 11 uniform monthly payments - each equal to roughly 1/12 of the total amount of interest - and one payment that accounts for the remainder of the total amount of interest earned for the period).
4. Leap year. Institutions may apply a daily rate of 1/366 or 1/365 of the interest rate for 366 days in a leap year, if the account will earn interest for February 29.
5. Maturity of time accounts. Institutions are not required to pay interest after time accounts mature. (See 12 CFR Part 217, Regulation Q of the Board of Governors of the Federal Reserve System, for limitations on duration of interest payments.) Examples include:
i. During a grace period offered for an automatically renewable time account, if consumers decide during that period not to renew the account.
ii. Following the maturity of nonrollover time accounts.
iii. When the maturity date falls on a holiday, and consumers must wait until the next business day to obtain the funds.
6. Dormant accounts. Institutions must pay interest on funds in an account, even if inactivity or the infrequency of transactions would permit the institution to consider the account to be “inactive” or “dormant” (or similar status) as defined by state or other law or the account contract.
(2) Determination of minimum balance to earn interest. An institution shall use the same method to determine any minimum balance required to earn interest as it uses to determine the balance on which interest is calculated. An institution may use an additional method that is unequivocally beneficial to the consumer.
1. Daily balance accounts. Institutions that require a minimum balance may choose not to pay interest for days when the balance drops below the required minimum, if they use the daily balance method to calculate interest.
2. Average daily balance accounts. Institutions that require a minimum balance may choose not to pay interest for the period in which the balance drops below the required minimum, if they use the average daily balance method to calculate interest.
3. Beneficial method. Institutions may not require that consumers maintain both a minimum daily balance and a minimum average daily balance to earn interest, such as by requiring consumers to maintain a $500 daily balance and a prescribed average daily balance (whether higher or lower). But an institution could offer a minimum balance to earn interest that includes an additional method that is “unequivocally beneficial” to consumers such as the following: An institution using the daily balance method to calculate interest and requiring a $500 minimum daily balance could offer to pay interest on the account for those days the minimum balance is not met as long as consumers maintain an average daily balance throughout the month of $400.
4. Paying on full balance. Institutions must pay interest on the full balance in the account that meets the required minimum balance. For example, if $300 is the minimum daily balance required to earn interest, and a consumer deposits $500, the institution must pay the stated interest rate on the full $500 and not just on $200.
5. Negative balances prohibited. Institutions must treat a negative account balance as zero to determine:
i. The daily or average daily balance on which interest will be paid.
ii. Whether any minimum balance to earn interest is met.
6. Club accounts. Institutions offering club accounts (such as a “holiday” or “vacation” club) cannot impose a minimum balance requirement for interest based on the total number or dollar amount of payments required under the club plan. For example, if a plan calls for $10 weekly payments for 50 weeks, the institution cannot set a $500 “minimum balance” and then pay interest only if the consumer has made all 50 payments.
7. Minimum balances not affecting interest. Institutions may use the daily balance, average daily balance, or any other computation method to calculate minimum balance requirements not involving the payment of interest - such as to compute minimum balances for assessing fees.
(b) Compounding and crediting policies. This section does not require institutions to compound or credit interest at any particular frequency.
1. General. Institutions choosing to compound interest may compound or credit interest annually, semi-annually, quarterly, monthly, daily, continuously, or on any other basis.
2. Withdrawals prior to crediting date. If consumers withdraw funds (without closing the account) prior to a scheduled crediting date, institutions may delay paying the accrued interest on the withdrawn amount until the scheduled crediting date, but may not avoid paying interest.
3. Closed accounts. Subject to state or other law, an institution may choose not to pay accrued interest if consumers close an account prior to the date accrued interest is credited, as long as the institution has disclosed that fact.
(c) Date interest begins to accrue. Interest shall begin to accrue not later than the business day specified for interest-bearing accounts in section 606 of the Expedited Funds Availability Act (12 U.S.C. 4005 et seq.) and the Board of Governors of the Federal Reserve System's implementing Regulation CC (12 CFR part 229). Interest shall accrue until the day funds are withdrawn.
1. Relation to Regulation CC. Institutions may rely on the Expedited Funds Availability Act (EFAA) and Regulation CC of the Board of Governors of the Federal Reserve System (12 CFR part 229) to determine, for example, when a deposit is considered made for purposes of interest accrual, or when interest need not be paid on funds because a deposited check is later returned unpaid.
2. Ledger and collected balances. Institutions may calculate interest by using a “ledger” or “collected” balance method, as long as the crediting requirements of the EFAA are met (12 CFR 229.14).
3. Withdrawal of principal. Institutions must accrue interest on funds until the funds are withdrawn from the account. For example, if a check is debited to an account on a Tuesday, the institution must accrue interest on those funds through Monday.