New York Codes, Rules and Regulations › Title 3 - BANKING › Legal Interpretations › LI 4 - Savings Banks and Savings and Loan Associations › Section LI 4.19 - Direct deposits of payroll funds by a corporate employer into a checking account maintained at a savings bank by its employee

Current through Register Vol. 46, No. 28, July 10, 2024
The department has been asked for its opinion of the legality
				  of an arrangement whereby, pursuant to an agreement among a savings bank, its
				  depositors and the corporate employer of the depositors, some of the depositors
				  have instructed the corporate employer to deposit all or part of their salaries
				  into checking accounts which they maintain with the savings bank. The
				  department has concluded that this arrangement is authorized by the Banking
				  Law.
The authority for a savings bank to accept deposits of all or
				  a part of a depositor's salary from his corporate employer into the depositor's
				  checking account is found in section 234.1 of the Banking Law as supplemented
				  by section 234.23. Subdivision one of section 234 authorizes savings banks "to
				  receive and repay deposits, including demand deposits." It also authorizes
				  savings banks to "exercise all such incidental powers as shall be necessary to
				  conduct the business of a savings bank." Subdivision 23 of section 234
				  authorizes savings banks "to have and exercise all other powers necessary or
				  appropriate in conducting the business of the savings bank." While the
				  incidental powers authorized by subdivision 23 relate to the general conduct of
				  the business of a savings bank (including the receipt of demand deposits), the
				  incidental powers authorized in subdivision one relate specifically to the
				  receipt of deposits, including demand deposits. Thus, it is clear that the
				  Banking Law now authorizes savings banks to perform those operations associated
				  with the receipt of demand deposits including the making of an arrangement for
				  the direct deposit of salaries into the checking accounts of their
				  depositors.
The Banking Law does impose certain restrictions upon the
				  acceptance of checking accounts by savings banks, including a prohibition of
				  the imposition of charges for maintaining these accounts or for honoring checks
				  drawn on them as well as prohibition of the maintenance of checking accounts
				  for corporate depositors. Neither section 234.1 nor any other section of the
				  Banking Law, however, appears to impose limitations on the method or the
				  mechanics by which deposits are made into checking accounts which are otherwise
				  lawfully maintained.
In connection with this issue, a question has been raised
				  about the meaning of the language added to section 238.5 by chapter 225 of the
				  Laws of 1976, the chapter which authorized savings banks to accept demand
				  deposits. Section 238.5 provides, as follows:
"A savings bank may accept deposits, other than demand
				  deposits and deposits held pursuant to subdivision one-a of section two hundred
				  thirty-four of this chapter, from an employer or an employee group, to be
				  credited to the individual accounts of the members of a group of employees
				  having a common employer, without the issuance of a passbook in connection
				  therewith, and may pay to any one of the members of such group, or to his
				  authorized agent, in person, the whole or any part of such deposits credited to
				  his account together with the dividends credited thereon, without requiring the
				  production of a passbook."
It is the department's opinion that the exclusion of demand
				  deposits from the authority granted by section 238.5 was not intended to and in
				  fact did not prohibit savings banks from accepting payroll funds from employers
				  for deposit into the checking accounts maintained by their employees at a
				  savings bank. Until 1947, all savings bank accounts required a passbook because
				  section 238.3 required that all interest credited and withdrawals charged be
				  entered in the passbook. In 1947, section 238.5 was added to create an
				  exception from the strict passbook rule of section 238.3 by permitting savings
				  banks to maintain no-passbook (savings) accounts for the purpose of receiving
				  from employers of savings bank depositors direct deposits of all or a part of
				  the depositors' wages. Only in 1965, with the addition of section 238.6 were
				  savings banks granted general authority to accept no-passbook accounts. Even
				  then, however, savings banks were still restricted to the acceptance of savings
				  deposits.
Section 238.5 is but one of a series of restrictions which
				  the Banking Law had imposed upon savings accounts. Each of these restrictions
				  was amended by chapter 225 of the Laws of 1976 to make it clear that its
				  limitation did not apply to demand accounts. For example, section 238.2 --the
				  requirement of 60 days' notice prior to withdrawal--and section 238.4
				  --dividend crediting provisions--were amended to exclude demand accounts from
				  their restraints. Section 238.5 was amended in the same fashion. The purpose of
				  the amendment, then, was not to prohibit direct deposit of payroll funds by
				  employers into their employees' checking accounts, but rather to make it clear
				  that section 238.5 applies only to savings deposits.