Truth in Savings

SUMMARY: On May 11, 1994, the Board requested comment on a proposal to

amend Regulation DD (Truth in Savings) dealing with crediting and

compounding practices and having the effect of producing an annual

percentage yield (APY) that reflects the time value of money. The Board

is extending the comment period for 60 days to give the public

additional time to provide comments. In addition, the Board is

publishing for comment a further alternative for APY calculations that

would allow institutions to disclose an APY equal to the contract

interest rate on time accounts with maturities greater than one year

that do not compound interest but pay interest at least annually. This

alternative would provide the Board with a more modest option as it

considers a final resolution to problems with APY calculations.

DATES: Comments must be received on or before September 6, 1994.

ADDRESSES: Comments should refer to Docket No. R-0836, and may be

mailed to William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue NW.,

Washington, DC 20551. Comments also may be delivered to Room B-2222 of

the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the

guard station in the Eccles Building courtyard on 20th Street NW.

(between Constitution Avenue and C Street) at any time. Comments may be

inspected in Room MP-500 of the Martin Building between 9 a.m. and 5

p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's rules

regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, Kyung

Cho or Kurt Schumacher, Staff Attorneys, Division of Consumer and

Community Affairs, Board of Governors of the Federal Reserve System, at

(202) 452-3667 or 452-2412; for questions associated with the

regulatory flexibility analysis, Gregory Elliehausen, Economist, Office

of the Secretary, at (202) 452-2504; for the hearing impaired only,

Dorothea Thompson, Telecommunications Device for the Deaf, at (202)

452-3544.

SUPPLEMENTARY INFORMATION:

(1) Background

The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires

depository institutions to provide disclosures to consumers about their

deposit accounts, including an annual percentage yield (APY) on

interest-bearing accounts. The act is implemented by the Board's

Regulation DD (12 CFR part 230), which became effective June 21, 1993

(see 57 FR 43337 and 58 FR 15077).

Because the current formula for calculating the APY assumes that

interest remains on deposit until maturity, the resulting APY may--but

does not always--reflect the time value of money. The formula produces

an APY that is less than the contract interest rate for long-term

certificates of deposit (CDs) that are noncompounding but pay interest

periodically. On December 6, 1993, the Board published a proposal that

called for an additional APY formula that would have factored into the

APY calculation the specific time intervals for interest paid on the

account--that is, the time value of money (58 FR 64190). The proposal

was withdrawn on May 11, based on considerations of cost and regulatory

burden (59 FR 24376).

In the context of deliberations about the December 1993 proposal,

the Board considered related issues regarding depository institutions'

compounding and crediting practices. On May 11, 1994, the Board

proposed amendments to clarify the relationship between compounding and

crediting and provide an alternative basis for eliminating anomalies

produced by the current APY formula (59 FR 24378). The Board has

received requests for an extension of the proposal's comment period,

due to end on July 5, 1994; the Board is extending the comment period

to September 6, 1994.

Alternative APY Resolution

In addition to extending the comment period on the current

proposal, the Board has decided to solicit comment on an alternative

approach for APY calculations. Under this alternative, the only

institutions affected would be those offering noncompounding multi-year

CDs that pay interest at least annually. Those institutions would

disclose an APY equal to the interest rate, regardless of whether

interest payments were made annually or more frequently. The APY for

all other accounts would reflect the interest rate paid and any

compounding. Interest payments by check or transfer would not be

factored into the APY calculation.

This alternative (called Approach B in the December 1993 proposal)

was considered by the Board in its deliberations on adding a new APY

formula. The Board declined to adopt Approach B at that time, mainly

based on concerns about the limited resolution of anomalies associated

with the APY and costs associated with its implementation.

A number of factors have led the Board to reopen comments on this

alternative. The Congress chose the APY as the primary uniform

measurement for comparison shopping among deposit accounts. The Board

believes the APY formula should produce a mathematical figure that is

easily understood and readily reveals to consumers an account's

comparative value. The Board also believes that regulatory compliance

should be as simple and cost-effective as possible, and that reductions

in product variety and consumer choice due to regulatory requirements

should be minimized.

Taking all these factors into account, and recognizing that all

formulas contain assumptions that are valid in some circumstances and

not in others, the Board seeks comment on whether this limited approach

would achieve a satisfactory resolution of the competing interests for

accuracy, consumer understanding, product flexibility, and ease of

compliance.

The Board also solicits comment on whether adoption of such an

alternative would reduce the incentive for institutions to offer

compounding multi-year CDs. For example, assume two institutions offer

a two-year CD with a 6.00% interest rate; one mandates monthly interest

checks, the other offers annual compounding. Both could advertise a

6.00% APY, even though a consumer depositing $1,000 receives $120 if

interest checks are paid annually and $123.60 if money is left in the

account.

(2) Proposed Regulatory Revisions: Section-by-Section Analysis

A section-by-section description of proposed amendments follows.

Section 230.4--Account Disclosures

Paragraph (b)(6)--Features of Time Accounts

The regulation requires a disclosure for institutions offering time

accounts that compound interest and permit a consumer to withdraw

accrued interest during the account term. The disclosure states that

the APY assumes interest remains on deposit until maturity and that a

withdrawal of interest will reduce earnings. The Board request comments

on whether a similar disclosure would be helpful to consumers

purchasing noncompounding multi-year CDs that pay interest at least

annually and disclose an APY equal to the interest rate. For example,

the disclosure would alert consumers that dollar earnings will be less

than for a multi-year CD with the same maturity (and disclosing the

same APY) that compounds annually. The Board solicits suggestions for

text that would be most helpful to consumers.

Section 230.8--Advertising

Paragraph (c)(6)--Features of Time Accounts

The regulation requires institutions advertising APYs to disclose

other key features about the account. The Board solicits comment on

whether institutions advertising an APY equal to the interest rate on

noncompounding multi-year accounts that make interest payments annually

should be required also to make a disclosure like the one discussed

above. If so, the Board solicits suggestions for text that would be

helpful to consumers and take into account the constraints of

advertising media.

Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising

Purposes

A. General rules. Under the alternative approach, the proposed

amendments to Appendix A only affect institutions that offer

noncompounding multi-year CDs that pay interest at least annually. A

new paragraph E is added to clarify how APYs shall be determined for

such accounts. The Board requests comment on the proposed paragraph and

accompanying example.

Appendix B--Model Clauses and Sample Forms

The Board solicits comments on model clauses or additional sample

forms that may be appropriate if the amendments are adopted.

(3) Form of Comment Letters

Comment letters should refer to Docket No. R-0836, and, when

possible, should use a standard typeface with a type size of 10 or 12

characters per inch. This will enable the Board to convert the text

into machine-readable form through electronic scanning, and will

facilitate automated retrieval of comments for review. Also, if

accompanied by an original document in paper form, comments may be

submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-

compatible DOS-based format.

(4) Regulatory Flexibility Analysis and Paperwork Reduction Act

The Board's Office of the Secretary previously prepared an economic

impact statement on the proposed alternative dealing with

noncompounding multi-year CDs that pay interest at least annually. A

copy of the analysis may be obtained from Publications Services, Board

of Governors of the Federal Reserve System, Washington, DC 20551, at

(202) 452-3245.

In accordance with section 3507 of the Paperwork Reduction Act of

1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be

reviewed by the Board under the authority delegated to the Board by the

Office of Management and Budget after consideration of comments

received during the public comment period.

List of Subjects in 12 CFR Part 230

Advertising, Banks, Banking, Consumer protection, Deposit accounts,

Interest, Interest rates, Truth in savings.

Certain conventions have been used to highlight the proposed

revisions to the regulation. New language is shown inside bold-faced

arrows, while language that would be deleted is set off with bold-faced

brackets.

For the reasons set forth in the preamble, the Board proposes to

amend 12 CFR part 230 as follows:

PART 230--TRUTH IN SAVINGS (REGULATION DD)

1. The authority citation for part 230 would continue to read as

follows:

Authority: 12 U.S.C. 4301, et seq.

2. In Part 230 Appendix A would be amended by revising the second

sentence in the introductory text to Part I and the first sentence of

paragraph A, and by adding a new paragraph E as follows:

Appendix A to Part 230--Annual Percentage Yield Calculation

* * * * *

Part I. Annual Percentage Yield for Account Disclosures and Advertising

Purposes

* * * Special rules apply to accounts with tiered and stepped

interest rates, and to certain time accounts with a

stated maturity greater than one year.

A. General Rules

Except as provided in Part I.E. of this appendix, the

[The] annual percentage yield shall be calculated by the

formula shown below. * * *

* * * * *

E. Time accounts with a stated maturity greater than one

year that compound interest less often than annually

For time accounts with a stated maturity greater than one year

that do not compound interest on an annual or more frequent basis,

and that require (or permit) the consumer to withdraw interest at

least annually, the annual percentage yield shall be equal to the

interest rate.

Example:

(1) If an institution offers a $1,000 two-year certificate of

deposit that credits interest semi-annually solely by check or

transfer, and there is no compounding at a 6.00% interest rate, the

annual percentage yield is 6.00%.

* * * * *

Board of Governors of the Federal Reserve System, July 5, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-16641 Filed 7-8-94; 8:45 am]

BILLING CODE 6210-01-P