Otero Savings & Loan Association v. Federal Home Loan Bank Board

Prior to December 31, 1980, depository institutions, such as banks and savings-and-loan associations, were prohibited from paying interest on demand deposit accounts, or checking accounts, with limited exceptions in several northeastern states. The Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Home Loan Bank Board (the bank board) had oversight authority over savings-and-loan associations. Otero Savings & Loan Association (Otero) (plaintiff), a Colorado-based bank, had a program called the Check-In program, which used automatic-transfer system accounts to manage the transfer of funds between its customers’ savings accounts and checking accounts. Essentially, a customer was able to collect interest on funds kept in a savings account until a payment was drawn on the customer’s checking account. Funds were automatically transferred from the savings account to the checking account to make funds available for payment. Otero implemented its Check-In program 268 days before December 31, 1980, which is the date Otero would have been legally authorized to institute its program. The FSLIC brought an administrative proceeding against Otero for its Check-In program. At the conclusion of the proceeding, the bank board determined that the Check-In program violated the prohibition on interest-bearing checking accounts. The bank board ordered that Otero was barred from opening any new Check-In accounts or similar accounts for 268 days because it had gained a 268-day competitive advantage by instituting the program prematurely. Otero sued the bank board and the FSLIC, challenging the bank board’s order. Otero argued that its two-account automatic-transfer system was not prohibited and that the restriction on paying interest applied only to negotiable-order-of-withdrawal (NOW) accounts, i.e., single-account systems that pay interest directly on savings accounts that permit withdrawals by negotiable instruments.