Truth in Savings

FEDERAL RESERVE SYSTEM

12 CFR Part 230

[Regulation DD; Docket No. R-0824]

Truth in Savings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed official staff interpretation.

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SUMMARY: The Board is publishing for comment a proposed official staff

commentary to Regulation DD (Truth in Savings). The commentary applies

and interprets the requirements of Regulation DD and is a substitute

for individual staff interpretations. The proposed commentary

incorporates much of the guidance provided when the regulation was

adopted, and addresses additional questions that have been raised about

the application of its requirements.

DATES: Comments must be received on or before April 1, 1994.

ADDRESSES: Comments should refer to Docket No. R-0824, 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, Kyung Cho, Kurt

Schumacher or Mary Jane Seebach, Staff Attorneys, Division of Consumer

and Community Affairs, Board of Governors of the Federal Reserve

System, at (202) 452-3667 or 452-2412; for the hearing impaired only,

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

452-3544.

SUPPLEMENTARY INFORMATION:

(1) Background

The purpose of the Truth in Savings Act (12 U.S.C. 4301 et seq.) is

to assist consumers in comparing deposit accounts offered by depository

institutions. The act requires institutions to disclose fees, the

interest rate, the annual percentage yield, and other account terms

whenever a consumer requests the information and before an account is

opened. Fees and other information also must be provided on any

periodic statement the institution sends to the consumer. Rules are set

forth for deposit account advertisements and advance notices to account

holders of adverse changes in terms. The act restricts how institutions

must determine the account balance on which interest is calculated. The

act is implemented by the Board's Regulation DD (12 CFR part 230),

which became effective on June 21, 1993. The regulation authorizes the

issuance of official staff interpretations of the regulation. (See

Appendix D to Regulation DD.)

The Board is publishing a proposed commentary to Regulation DD. The

proposal is designed to provide guidance to depository institutions in

applying the regulation to specific transactions and is a substitute

for individual staff interpretations. The Board contemplates updating

the commentary periodically to address significant questions that

arise. It is expected that this commentary will be adopted in final

form in June 1994 with a six-month time period for optional compliance

until the effective date, estimated in December 1994.

(2) Proposed Commentary

The Federal Register documents containing the regulation that

implemented the act and documents for subsequent amendments set forth a

large amount of supplementary material interpreting the new regulation.

(See final rule published on September 21, 1992 (57 FR 43337),

correction notice published on October 5, 1992 (57 FR 46480), and

amendments published on March 19, 1993 (58 FR 15077).) In large

measure, the proposed commentary incorporates the supplementary

material from those rulemakings, and reflects the views expressed

therein without substantive change. A number of issues that have arisen

since the publication of the regulation have also been addressed.

Proposed interpretations of new issues are noted below.

On December 6, 1993, the Board published a proposal to amend the

regulation's rules for calculating the annual percentage yield for

accounts that pay interest prior to maturity (58 FR 64190). (See also

the notice extending the comment period published on January 13, 1994,

59 FR 1921.) The Board has deferred proposing commentary on provisions

of the regulation affected by the proposal, pending final action by the

Board.

The scope of the discussion that follows is limited so that, for

instance, examples listed in the commentary are not repeated below.

Section 230.1--Authority, Purpose, Coverage, and Effect on State Laws

(c) Coverage

Comment 1(c)-1 clarifies that the scope of the regulation is all

depository institutions (except credit unions) that offer accounts to

residents of a ``state,'' such as accounts held in the United States,

even though funds may be transferred periodically into an account held

at a location outside the United States. An account located outside the

United States is not covered, even if the funds are held by a U.S.

resident.

Section 230.2--Definitions

(a) Account

Comment 2(a)-1 provides examples of accounts subject to the

regulation, including the example of a deposit account required as a

condition of obtaining a credit card account (often referred to as a

``secured'' credit card account). The Board believes it is important

for consumers to receive disclosures about the terms, monthly fees, or

other charges that may apply to such accounts, since such information

may not appear on disclosures given to card holders under the Truth in

Lending Act and its implementing Regulation Z (12 CFR part 226).

The proposed comment also includes examples of accounts not subject

to the regulation. The Board's proposed comment narrows the scope of

trust accounts covered by the regulation, a difference from guidance

provided in supplementary material to the September 1992 rulemaking.

The comment provides that trust accounts are not subject to the

regulation with the exception of individual retirement accounts (IRAs)

and simplified employee pension (SEP) accounts. (See proposed

commentary to paragraph 2(h) of this section.) The ``trust'' for which

the account is established is not a natural person, even though the

trustee and beneficiary might be. In addition, the law of trusts

imposes duties and responsibilities upon all trustees that the Board

believes distinguish trust accounts from other accounts held by one

individual for another solely for personal, family or household

purposes. Finally, the Board believes that requiring an institution to

identify both the purpose of the trust and whether the account has been

established by someone in a professional capacity would present an

undue compliance burden, with minimal benefits. The Board requests

comment on whether any accounts established for trusts (other than IRAs

and SEP accounts) should be subject to the regulation, particularly

when both the beneficiary and the trustee are natural persons.

(b) Advertisement

Comment 2(b)-1 provides examples of commercial messages considered

to be advertisements, such as messages on computer screens in bank

lobbies and accompanying printouts. The Board believes these messages

are similar to messages in traditional advertising media such as

televisions and newspapers.

The comment also provides examples of messages not considered to be

advertisements, including direct oral discussions conducted in person--

but not telephone conversations--regarding the negotiation of a

specific account. The Board believes that the purpose of advertising

disclosures--ensuring that prospective customers of consumer accounts

know basic terms about the account--is adequately served by face-to-

face discussions between employees of the institution and consumers

seeking information about accounts. Also, this interpretation is

similar to the approach taken in the Official Staff Commentary to the

Board's Regulation Z (12 CFR part 226, Supp. I, 2(a)(2)-1).

(f) Bonus

Comment 2(f)-1 provides examples of bonuses. The comment also

provides an example of an item that is not considered a bonus for

purposes of the regulation--discount coupons offered by institutions

for use at restaurants and stores.

Comment 2(f)-2 clarifies the application of the de minimis rule

($10 value or less) by defining the calendar year as the time frame for

determining whether the bonus requirements are triggered, to ease

compliance. The comment also provides that institutions must aggregate

per account the value of items contemplated to be given during the

calendar year, even though an item's individual value is less than $10.

Thus, if an institution offers in January to give a consumer an item

valued at $7.00 each calendar quarter during the year if account

balances in a NOW account exceed $10,000 for each calendar quarter, the

bonus rules would be triggered. On the other hand, if the items are

given for opening separate accounts--such as a $7.00 item for renewing

a time account and another for opening a savings account--the value

given for each account remains within the de minimis exception, and the

bonus rules would not be triggered.

Comment 2(f)-3 clarifies that the waiver or reduction of a fee or

absorption of expenses is not a bonus. The Board solicits comment on

this approach.

(h) Consumer

Comment 2(h)-3 clarifies coverage issues for retirement plans. For

example, the proposed comment states that SEP accounts and IRAs are

considered consumer accounts for purposes of the regulation. The Board

believes that although institutions are named as trustees, SEP accounts

and IRAs are equivalent to other accounts opened for consumer purposes.

On the other hand, the proposed comment would exclude from coverage

accounts held in a Keogh plan, which is established by a self-employed

individual. The Board believes Keogh accounts are similar to accounts

held by a sole proprietor, which Congress intended not to cover.

Comment 2(h)-4 provides factors to consider in determining whether

an account is held by an unincorporated nonbusiness association of

natural persons. Associations with paid staff are likely to be more

sophisticated in their investment decisions and are not as likely to

need disclosures. The Board solicits comment on whether the use of

factors is appropriate for providing guidance in this area. In

addition, the Board solicits comment on the proposed factors and on

what additional factors might indicate an account is held by or offered

to an unincorporated association of natural persons.

(p) Passbook Savings Account

Comment 2(p)-1 clarifies that institutions may consider accounts as

``passbook savings,'' even if direct deposits such as social security

payments are made to the account without the use of the passbook. The

proposed comment is consistent with the requirements of Regulation E

(12 CFR 205.9). Accounts that permit other electronic fund transfers--

whether or not called ``passbook''--and thus trigger Regulation E's

requirement to send statements at least quarterly are not passbook

savings accounts, and institutions must comply with the periodic

statement disclosures in Sec. 230.6 of this part.

(t) Tiered-rate Account

Comment 2(t)-1 clarifies that time accounts that pay different

rates based solely on the amount of the initial deposit are not

considered tiered-rate accounts. In this case, advertisements and

account disclosures would not reflect tiered-rate disclosures for the

account.

Section 230.3--General Disclosure Requirements

(b) General

Comment 3(b)-1 provides guidance on the specificity required for

the disclosures of the compounding and crediting frequencies. The Board

believes slight variations in cycles are consistent with the notion of

``monthly'' cycles, which are often not based on an actual calendar

month.

(c) Relation to Regulation E

Comment 3(c)-1 provides examples of disclosures under Regulation E

that also comply with this regulation.

The comment clarifies that an institution may rely on Regulation

E's disclosure rules regarding fees imposed at ATMs and limitations on

the frequency and amount of electronic fund transfers, including

security-related exceptions. But any fees assessed for--or any

limitations placed on the number or amount of--``intra-institutional

transfers'' from other accounts at the institution must be disclosed

under this regulation, even though those transactions are exempt from

Regulation E. (See Sec. 230.4(b) of this part.)

Section 230.4--Account Disclosures

(a) Delivery of Account Disclosures

(a)(1) Account Opening

The regulation requires institutions to provide account disclosures

before an account is opened. Comment 4(a)(1)-1 provides examples of

events that do and do not trigger the delivery of new account

disclosures. Comment 4(a)(1)-1 provides guidance to institutions that

deem an account to be closed, then receive a deposit from the consumer.

The circumstances under which an institution may deem an account closed

is governed by state or other law. However, the Board believes that if

an institution accepts a deposit from a consumer on an account the

institution has deemed to be ``closed'' (such as with a balance of $0)

opening account disclosures are required.

The proposed comment also provides that an account acquired in a

merger or acquisition is not a new account. Comment is solicited on

whether the rules for acquisitions involving the Resolution Trust

Corporation and the Federal Deposit Insurance Corporation should be

distinguished from the rules for other acquisitions, since they may

involve the acquisition of deposits, not accounts.

(a)(2) Requests

Paragraph (a)(2)(i)

Comment 4(a)(2)(i)-3 clarifies that ten business days (a period

consistent with other timing rules for providing disclosure to

consumers that open accounts by telephone, for example) is a reasonable

time for responding to requests for disclosures.

(b) Content of Account Disclosures

Paragraph (b)(1) Rate Information

Paragraph (b)(1)(i) Annual Percentage Yield and Interest Rate

Comment 4(b)(1)(i)-1 provides that no rate or yield other than the

interest rate and annual percentage yield may be stated in account

disclosures, with the exception of a periodic rate corresponding to the

interest rate (since it is easily understood by consumers).

(b)(2) Compounding and Crediting

(b)(2)(i) Frequency

Interpretation of this paragraph is deferred pending the Board's

final action on proposed amendments to Regulation DD.

(b)(2)(ii) Effect of Closing an Account

Proposed comment 4(b)(2)(ii)-1 explains that institutions may

include in their contract specific consumer actions that will be

considered by the institution to be a request to close the account, and

that may result in the nonpayment of accrued but uncredited interest.

(See Sec. 230.7(b) of this part.) The Board solicits comment on this

approach.

(b)(4) Fees

Comments 4(b)(4)-1 through -3 provide guidance for disclosing the

amount of fees that may be assessed in connection with the account and

the conditions under which they may be imposed. The Board believes that

attempting to list in the commentary all fees imposed by institutions

would produce a list that would become both lengthy and outdated.

(b)(5) Transaction Limitations

Comment 4(b)(5)-1 clarifies that institutions need not disclose

their right to require seven-day advance notice for withdrawals from an

account. (See 12 CFR part 204.)

(b)(6) Features of Time Accounts

(b)(6)(i) Time Requirements

Comment 4(b)(6)(i)-1 provides that institutions offering

``callable'' time accounts must state the date or the circumstances

under which the account may be redeemed, in addition to the maturity

date. The Board believes the disclosure is a component of the maturity

date--informing the consumer when the funds in the account may become

available for reinvestment.

(b)(6)(ii) Early Withdrawal Penalties

Comment 4(b)(6)(ii)-2 provides examples of early withdrawal

penalties, and clarifies that early withdrawal penalties include

bonuses that may be reclaimed if funds are withdrawn prior to maturity.

Comment 4(b)(6)(ii)-3 clarifies that institutions are not required

to disclose as early withdrawal penalties potential income taxation

consequences for consumers who withdraw funds held in IRAs or similar

plans.

Section 230.5--Subsequent Disclosures

(a) Change in Terms

Paragraph (a)(1) Advance Notice Required

Comment 5(a)(1)-3 provides guidance on an institution's

responsibilities to provide change in terms notices when account

disclosures reflect that a term may change upon the occurrence of an

event, such as a fee waiver for employees during their employment.

However, the Board believes that a change in terms notice does not

extend to changes in the type of account held. (See proposed commentary

to Sec. 230.4(a)(1) of this part, which clarifies that transferring

funds held in an MMDA to open a NOW account must be treated as the

opening of a new account.)

Paragraph (a)(2)(ii) Check Printing Fees

The regulation's exception to providing a change in terms notice

for increases to check printing charges is based on the consumer's

control over the style and quantity of checks ordered. The Board

solicits comment on other products, if any, that should be similarly

treated.

(b) Notice Before Maturity for Time Accounts Longer Than One Month That

Renew Automatically

Comments 5(b)-1 through -5 address questions about notices that

must be sent for automatically renewing time accounts. Comment 5(b)-1

provides guidance regarding a time account that may, in fact, have a

term longer than the stated maturity date because the maturity date

falls on a weekend or holiday. The Board has received questions asking

whether this delay on a one-year time deposit would make the term

longer than one year (thus requiring the full account disclosures under

paragraph 5(b)(1) of this section prior to renewal rather than the

abbreviated disclosures permitted by paragraph 5(b)(2)). The same issue

arises for time accounts with a stated term of one month that may be

extended beyond 31 days. The Board believes these short extensions due

to the maturity date's falling on a weekend or holiday do not affect

the classification of the account for purposes of the type of

disclosures institutions are required to provide.

Comment 5(b)-2 clarifies that when disclosing the date when the

interest rate and annual percentage yield can be determined,

institutions may use general disclosures of that date if the date is

easily discerned.

The Board has received many questions about ``club accounts.''

Comment 5(b)-4 makes clear that club accounts that otherwise meet the

definition of a time account (Sec. 230.2(u)) must follow the

requirements of this section, even if the consumer withdraws funds at

maturity rather than ``rolling over'' the principal amount for another

term. The proposed comment also clarifies that if the consumer has

previously agreed to make payments into the account for the next club

cycle (for example, by direct deposit or by transfers from another

account), the club account should be treated as an automatically

renewable time account.

Comment 5(b)-5 clarifies disclosure requirements for a changed term

for the subsequent renewal of a rollover time account. If the notice

required by this paragraph has been provided to the consumer about the

renewing time account, institutions may provide new account disclosures

or a disclosure that reflects the consumer's request and the new term.

The regulation states that if disclosures have previously been given

and the terms remain the same, institutions need not provide the

disclosures a second time. (See Sec. 230.4(a) of this part.) Since

consumers receive disclosures about their renewing time account, this

approach provides consumers with essential information and eases

compliance for institutions. The Board requests comment on this

approach.

Paragraph (b)(1) Maturities of Longer Than One Year

Comment 5(b)(1)-1 clarifies that institutions need not highlight

the new terms reflected in the disclosures.

(c) Notice for Time Accounts One Month or Less That Renew Automatically

Institutions have limited disclosure responsibilities for rollover

time accounts with maturities of one month or less. If a term

previously disclosed (other than the interest rate and annual

percentage yield) is changed at renewal, institutions must send a brief

notice describing the change ``within a reasonable time'' after the

renewal of the account. Comment 5(c)-1 provides that 10 calendar days

after the renewal is a reasonable time except for accounts shorter than

10 days, which should receive disclosures before any subsequent

renewal.

(d) Notice Before Maturity for Time Accounts Longer Than One Year That

Do Not Renew Automatically

Comment 5(d)-1 clarifies that institutions need not provide new

account disclosures when funds are subsequently transferred following

the maturity of a nonrollover time account, unless a new account is

established. The Board solicits comments on how institutions treat

funds held in a nonrollover time account following maturity, and

whether new account disclosures are appropriate in cases where funds

remain with institutions. For example, is a check sent to the consumer

automatically, or within a certain number of days of maturity? Are

funds transferred to an account, and if so, how long are the funds

typically held in that account?

Section 230.6--Periodic Statement Disclosures

(a) General Rule

Comment 6(a)-2 provides guidance to institutions when quarterly

periodic statements are normally sent for the account but a consumer's

electronic fund transfer triggers the institution's duty under

Regulation E to send a statement that month. Institutions need not

treat interim monthly statements as periodic statements subject to the

requirements of this regulation; if they choose not to do so, they must

provide the disclosures (such as the interest earned and annual

percentage yield earned) on subsequent quarterly statements.

Comment 6(a)-3 clarifies that institutions may include limited

account information for one account (an MMDA, for example) on the

periodic statement of another account. However, disclosing interest or

rate information would trigger the duty to state the annual percentage

yield and other disclosure requirements on that statement.

Comment 6(a)-4 provides guidance on additional information that may

appear on periodic statements.

Paragraph (a)(3) Fees Imposed

Comment 6(a)(3)-2 provides examples of similar types of fees that

can be grouped together if they are disclosed with the same name or

description. It also makes clear that all other account fees, including

those related to electronic services that are not fund transfers, must

be disclosed in accordance with Sec. 230.6 of this part.

Comment 6(a)(3)-4 clarifies that institutions may comply with the

requirements of Regulation E for disclosing electronic funds transfer

fees on periodic statements.

Paragraph (a)(4) Length of Period

Comment 6(a)(4)-2 provides that if a consumer opens or closes an

account during a period, the annual percentage yield earned and the

other disclosures for the consumer's account must reflect only those

days the account was open, such as when a consumer changes from an

interest-bearing account to a noninterest-bearing account in the middle

of a period.

(b) Special Rule for Average Daily Balance Method

When an institution uses the average daily balance method for

monthly periods and provides a quarterly statement, the literal

language of the regulation suggests that institutions should provide

three interest figures with three corresponding annual percentage yield

earned figures. Comment 6(b)-3 would permit institutions to show either

separate figures for each month or a figure for the whole quarter. The

Board believes consumers may receive more useful information if

institutions provide one interest figure and one corresponding annual

percentage yield earned figure for the period.

Section 230.7--Payment of Interest

(a) Permissible Methods

Comment 7(a)-5 clarifies that the regulation does not require

institutions to pay interest after a time account matures and provides

examples to illustrate the rule.

Comment 7(a)-6 addresses ``dormant'' accounts. The Board solicits

comment on whether an institution should or should not be permitted to

withhold the payment of interest for dormant accounts. (See comment

7(b)-4, regarding the forfeiture of accrued but uncredited interest for

dormant accounts.) The Board also solicits comment on whether providing

further guidance on the definition of a dormant account would be

preferable to reliance on state or other law. And, if a uniform time

period were to be adopted, what period of time would be appropriate to

consider an account dormant?

Paragraph (a)(2) Determination of Minimum Balance to Earn Interest

Comment 7(a)(2)-5 clarifies that when a consumer's account has a

negative balance, institutions must use zero, and not a negative

number, to determine the balance on which the institution pays interest

and whether any minimum balance requirement has been met. The Board

believes that the regulation prohibits institutions from using negative

balance amounts for these purposes, regardless of whether a daily

balance or an average daily balance requirement method is used. (See

commentary to Appendix A, Part II, which prohibits the use of negative

balances for calculating the interest figure for the annual percentage

yield earned.)

Comment 7(a)(2)-6 clarifies that for club accounts, such as

``holiday'' and ``vacation'' clubs, institutions cannot impose a

minimum balance that could result in the nonpayment of interest for the

entire club period. The Board believes a minimum balance that requires

consumers to make the total number of payments or dollar amounts

required under the club plan at the maturity of the account is

tantamount to the ending balance method of calculating interest--a

balance calculation method not permitted under the regulation.

(b) Compounding and Crediting Policies

Comment 7(b)-3 clarifies that institutions may, by agreement with

the consumer, specify circumstances in which the institution deems an

account to be closed by the consumer. If an account is closed by the

consumer, Regulation DD does not require an institution to pay accrued

but uncredited interest, as long as this fact is disclosed. (See

Sec. 230.4(b)(2)(ii).) For example, institutions may provide in a

checking account agreement that by writing a check which reduces the

account balance to $0, a consumer is deemed to have closed an account,

or that the account will be deemed closed if no activity occurs within

60 days of that transaction. (See proposed comment 230.4(a)(1)-1, which

requires institutions to treat the acceptance of a deposit subsequently

made by the consumer to that account as the opening of a new account.)

Section 230.8--Advertising

(a) Misleading or Inaccurate Advertisements

In response to concerns expressed about the potential for

misleading or inaccurate advertising on indoor signs, comment 8(a)-2

provides guidance regarding time accounts and tiered-rate accounts. The

Board solicits comment on the approach taken.

The regulation prohibits institutions from using the terms ``free''

or ``no cost'' (or terms of similar meaning) to advertise accounts or

account services if ``maintenance and activity fees'' can be imposed.

The Board has received many questions about which fees trigger the

prohibition. The Board believes that it is not possible to identify by

name all fees that trigger this limitation. (See discussion for

proposed comment 4(b)(4)-1.) Instead, comments 8(a)-3 through -7

provide general principles institutions may use, regardless of what a

fee may be named. The Board solicits comment on the proposed approach

to provide guidance in this area.

In defining the scope of ``maintenance and activity'' fees, comment

8(a)-3 addresses advertisements for ``free'' accounts with optional

electronic services such as home banking. The Board believes many

consumers consider electronic services such as ATM access to be an

integral part of their accounts. Therefore, in its September 1992

rulemaking, the Board stated that institutions could not advertise an

account as ``free'' if a fee is imposed for transactions at ATMs owned

by the institution. Some institutions have questioned this approach

arguing that ATM access is provided only upon a consumer's request and

that consumers will receive information--including the cost of ATM

access--before obtaining the service. The Board solicits comment on

this approach.

The Board believes consumers are not mislead by advertisements for

``free'' accounts, if certain electronic services, such as home banking

services, are available for a fee. The Board believes that (unlike ATM

access) consumers do not have a reasonable expectation that services

such as home banking would be included as part of an account advertised

as free. Of course, if optional features that impose fees are

advertised with a free account, the advertisement must make clear that

charges are assessed for the optional feature. The Board solicits

comment on this approach, and requests comment on whether ATM services

should be distinguished from other optional electronic services, and

whether consumers would be mislead by an advertisement for an account

that is described as ``free'' even though the institution may charge

for ATM activity at ATMs owned by the institution.

Comment 8(a)-4 specifies that the term ``fees waived'' is similar

to the terms ``free'' or ``no cost'' for the purposes of this section.

(b) Permissible Rates

The Board has received many questions about advertising accounts

for which institutions offer a number of versions (certificates of

deposits, for example). Comment 8(b)-3 clarifies that institutions may

state an annual percentage yield for each version of an account.

Alternatively, the proposed comment would permit institutions to state

a representative example as long as the advertisement makes clear that,

for instance, the advertised yield is for a time account with a 30-day

maturity and does not apply to all time accounts. Similarly, the

comment illustrates that institutions could advertise selected versions

of time accounts. The Board solicits comment on this approach, which

the Board believes would effectively minimize compliance burdens for

institutions while still providing meaningful information to consumers.

(c) When Additional Disclosures are Required

The regulation requires institutions to disclose additional

information when the annual percentage yield is advertised. Comment

8(c)-1 provides examples of information that does and does not trigger

the additional disclosures. In response to questions about the effect

of advertising a ``bonus'' rate, the proposed comment illustrates that

stating ``bonus rates are available'' does not trigger additional

disclosures. However, stating a ``bonus rate of 1%'' over an

institution's current interest rate for one-year certificates of

deposit is equivalent to stating an interest rate.

Paragraph (c)(2) Time Annual Percentage Yield Is Offered

Comment 8(c)(2)-1 clarifies the regulation's disclosure

requirements for advertisements that state an annual percentage yield

as of a specified ``recent'' date. The proposed comment provides that

when an advertisement is published, the specified ``recent date'' must

be recent in relation to the publication frequency of the media used

for the advertisement (taking into account established production

deadlines for the media involved). For example, annual percentage

yields as of the printing date of a brochure printed once for a deposit

account promotion that will run for six months would be considered

``recent,'' even though rates may be expected to change during the six-

month period. Annual percentage yields published in a daily newspaper

or broadcast on television must be ``recent'' as of the daily

publishing or broadcasting deadline date, even though the

advertisements may appear less frequently (such as once a month). The

Board solicits comment on this approach.

Paragraph (c)(6) Features of Time Accounts

Paragraph (c)(6)(i) Time Requirements

Comment 8(c)(6)(i)-1 addresses questions regarding ``club''

accounts in which there is a fixed maturity date but the term of the

account may vary, depending on when the account is opened. The proposed

comment provides that institutions adequately disclose the term of the

account by stating the established maturity date and the fact that the

actual term may vary.

Appendix A--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising

Purposes

With one exception, the interpretation of Appendix A, Part 1 is

deferred pending the Board's final action on proposed amendments to

Regulation DD. Proposed comment app. A.I.-1 clarifies rounding rules

which may be used in calculating interest and the annual percentage

yield. The Board believes that rounding to five decimals results in a

more precise figure and is in accordance with industry practices. The

Board requests comment on whether further guidance on rounding

principles would be appropriate.

Part II. Annual Percentage Yield Earned for Periodic Statements

Comment app. A.II.A-1 clarifies when institutions should or should

not include accrued but uncredited interest in the balances used to

calculate the annual percentage yield earned. The Board believes that

it would be misleading to include accrued interest in the balance

figure when statements are sent less frequently than interest is

credited.

When periodic statements are issued more frequently than interest

is credited, accrued interest would be included in the balance figure

in succeeding statements. This is necessary so that the beginning

balance can properly reflect the principal on which interest will

accrue for the succeeding statement period. The Board solicits comment

on these calculation principles.

Comment app. A.II.A.-2 clarifies rounding rules for calculating

interest earned and the annual percentage yield earned. The Board

believes flexibility in rounding is appropriate when statements are

sent more frequently than interest is compounded and credited, since

the interest earned figure does not reflect the amount which will

actually be paid by an institution.

B. Special Formula for Use Where Periodic Statements Are Sent More

Often Than the Period for Which Interest Is Compounded

Comment app. A.II.B.-1 provides guidance to institutions that issue

quarterly periodic statements but are required by Regulation E to send

a monthly statement during the quarter. (See proposed comment 230.6(a)-

2, which discusses an institution's option to comply with the

disclosure requirements for such monthly statements.) The comment

clarifies that institutions complying with Sec. 230.6 for monthly

statements triggered by Regulation E must use the special formula in

part II.B. of this appendix. Institutions could use this formula for a

quarterly statement whether or not a monthly statement is triggered by

Regulation E during the quarter. The Board believes such a rule would

significantly reduce compliance burdens for institutions. However, in

some cases, the use of the special formula may result in an understated

annual percentage yield earned. The Board solicits comment on whether

the purposes of the act are best served by this approach.

Comment app. A.II.B.-2 clarifies that the special formula requires

institutions to use the actual number of days in the compounding period

in calculating the annual percentage yield earned. In the supplementary

material that accompanied the March 19, 1993 amendments to the

regulation (58 FR 15077), the calculation used average numbers of days

in the compounding period to calculate the annual percentage yield

earned for a statement period. The Board believes that using actual

days in a compounding period is more appropriate and corresponds to the

annual percentage yield earned for a specific consumer's account. The

Board solicits comment on the proposed comment.

(3) Form of Comment Letters

Comment letters should refer to Docket No. R-0824, 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. Comments may

also be submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in

any IBM-compatible DOS-based format, if accompanied by an original

document in paper form.

List of Subjects in 12 CFR Part 230

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

Interest, Interest rates, Truth in savings.

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. Part 230 would be amended by adding a new Supplement I at the

end of the appendixes to the Part to read as follows:

Supplement I to Part 230--Official Staff Interpretations

INTRODUCTION

1. Official status. This commentary is the vehicle by which the

staff of the Division of Consumer and Community Affairs of the

Federal Reserve Board issues official staff interpretations of

Regulation DD. Good faith compliance with this commentary affords

protection from liability under section 271(f) of the Truth in

Savings Act.

Section 230.1--Authority, Purpose, Coverage, and Effect on State Laws

(c) Coverage

1. Foreign applicability. Regulation DD applies to all

depository institutions, except credit unions, that offer deposit

accounts to residents (including resident aliens) of any state as

defined in Sec. 230.2(r).

2. Persons who advertise accounts. Persons who advertise

accounts are subject to the advertising rules. For example, if a

deposit broker places an advertisement that offers consumers an

interest in an account at a depository institution, the advertising

rules apply to the advertisement, whether the account is held by the

broker or directly by the consumer.

Section 230.2--Definitions

(a) Account

1. Covered accounts. Examples of accounts subject to the

regulation are:

Interest-bearing and noninterest-bearing accounts

Accounts opened as a condition of obtaining a credit

card

Examples of accounts not subject to the regulation are:

Mortgage escrow accounts for collecting taxes and

property insurance premiums

Accounts established to make periodic disbursements on

construction loans

Trust accounts other than individual retirement

accounts (IRAs) and simplified employee pension (SEP) accounts

Accounts opened by an executor in the name of a

decedent's estate

Accounts of individuals operating businesses as sole

proprietors

2. Other investments. The term ``account'' does not apply to all

products of a depository institution. Examples of products not

covered are:

Government securities

Mutual funds

Annuities

Securities or obligations of a depository institution

Contractual arrangements such as repurchase agreements,

interest rate swaps, and bankers acceptances

(b) Advertisement

1. Coverage. Advertisements include commercial messages in

visual, oral, or print media that invite, offer, or otherwise

announce generally to prospective customers the availability of

consumer accounts such as:

Telephone solicitations

Messages on automated teller machine (ATM) screens

Messages on a computer screen in an institution's lobby

(including any printout)

Messages in a newspaper, magazine, or promotional flyer

or on radio

Messages promoting an account that are provided along

with information about the consumer's existing account at an

institution

Examples of messages that are not advertisements are:

Rate sheets published in newspapers, periodicals, or

trade journals provided the depository institution (or deposit

broker that offers accounts at the institution) does not pay a fee

to have the information included

An in-person discussion with a consumer about the terms

for a specific account

Information provided to consumers about their existing

accounts, such as on IRA disbursements or notices for automatically

renewable time accounts sent before renewal

(f) Bonus

1. Examples. Bonuses include items of value, other than

interest, offered as incentives to consumers, such as an offer to

pay the final installment deposit for a holiday club account.

The following is an example of an item that is not a bonus:

Discount coupons distributed by institutions for use at

restaurants or stores

2. De minimis rule. Items with a de minimis value of $10 or less

are not bonuses. Institutions may rely on the valuation standard

used by the Internal Revenue Service (IRS) to determine if the value

of the item is de minimus. (See 26 CFR Sec. 1.6049-5(a)(2), which

discusses the fair market value of property received.) Items

required to be reported by the institution under IRS rules are

bonuses under this regulation. Examples of items that are not

bonuses are:

Disability insurance premiums paid by the institution

in an amount less than $10 per year

Coffee mugs, T-shirts or other merchandise with a

market value of less than $10 per year

Institutions must aggregate per account per calendar year any

items given to a consumer that are individually valued at less than

$10 and must consider them to be a bonus if their aggregate value

exceeds $10.

3. Waiver or reduction of a fee or absorption of expenses.

Bonuses do not include value received by consumers through the

waiver or reduction of fees for banking-related services (even if

the fees waived exceed $10), such as the following:

Waiving a safe deposit box rental fee for one year for

consumers who open a new account

Waiving fees for travelers checks for account holders

Discounts on interest rates charged for loans at the

institution

(h) Consumer

1. Professional capacity. Examples of accounts held by a natural

person in a professional capacity for another are:

Attorney-client trust accounts

Landlord-tenant security accounts

2. Nonprofessional capacity. Examples of accounts not held in a

professional capacity are:

Accounts held by parents for a child under the Uniform

Gifts to Minors Act

Accounts established by a tenant for apartment lease

payments pending resolution of a landlord-tenant dispute

3. Retirement plans. Individual retirement accounts (IRAs) and

simplified employee pension (SEP) accounts are consumer accounts to

the extent that funds are invested in accounts subject to the

regulation. Keogh accounts, like sole proprietor accounts, are not

subject to the regulation.

4. Unincorporated associations. An account held by or offered to

an unincorporated association of natural persons is a consumer

account if the account is primarily for a nonbusiness purpose.

The following factors may be considered:

The institution may rely on the declaration of the

person representing the association as to whether the account is

held for a business or nonbusiness purpose.

Whether the association has paid employees, which would

indicate a business purpose for the account. For example, an account

held by a religious organization that has payroll obligations is not

covered by the regulation.

(j) Depository Institution and Institution

1. Foreign institutions. Branches of foreign institutions

located in the United States are subject to the regulation if they

offer consumer accounts. Edge Act and Agreement corporations, and

agencies of foreign institutions, are not depository institutions.

(k) Deposit Broker

1. General. A deposit broker is any person in the business of

placing or facilitating the placement of deposits in an institution,

as defined by the Federal Deposit Insurance Act (12 U.S.C. 29(g)).

(n) Interest

1. Relation to Regulation Q. While bonuses are not interest for

purposes of this regulation, other regulations may require that

bonuses be treated as the equivalent of interest. For example,

Regulation Q identifies payments of cash or merchandise that violate

the prohibition against paying interest on demand accounts. (See 12

CFR Sec. 217.2(d).)

(p) Passbook Savings Account

1. Relation to Regulation E. Passbook savings accounts include

accounts accessed by preauthorized electronic fund transfers to the

account (as defined in 12 CFR 205.2(j)), such as an account credited

by direct deposit of social security payments. Accounts that permit

access by other electronic means are not ``passbook saving

accounts,'' and any statements that are sent four or more times a

year must comply with the requirements of Sec. 230.6.

(q) Periodic Statement

1. Examples. Periodic statements do not include:

Additional statements provided solely upon request

Information provided by computer through home banking

services

General service information such as a quarterly

newsletter or other correspondence that describes available services

and products

(r) State

1. General. Territories and possessions include Guam, the

Mariana Islands, and the Marshall Islands.

(t) Tiered-rate Account

1. Time accounts. Time accounts that pay different rates based

solely on the amount of the initial deposit are not tiered-rate

accounts.

(u) Time Account

1. Relation to Regulation D. Regulation D permits in limited

circumstances the withdrawal of funds without penalty during the

first six days after a ``time deposit'' is opened. (See 12 CFR

Sec. 204.2(c)(1)(i).) Withdrawals without penalty from a time

account made in accordance with Regulation D do not disqualify the

account from being a time account for purposes of this regulation.

(v) Variable-rate Account

1. General. A certificate of deposit that permits one or more

rate adjustments prior to maturity at the consumer's option is a

variable-rate account.

Section 230.3--General Disclosure Requirements

(a) Form

1. Design requirements. Disclosures must be presented in a

format that allows consumers to readily understand the terms of

their account. Disclosures may be made:

In any order

In combination with other disclosures or account terms

On more than one page and on the front and reverse

sides

By using inserts to a document or filling in blanks

On more than one document, as long as the documents are

provided at the same time

2. Multiple account disclosures. Institutions may prepare

combined disclosures for all accounts offered, or prepare different

documents for different types of accounts. If an institution

provides one document for several types of accounts, consumers must

be able to understand clearly which disclosures apply to their

account.

3. Consistent terminology. An institution must use the same

terminology to describe terms or features that are required to be

disclosed. For example, if an institution describes a monthly fee

(regardless of account activity) as a ``monthly service fee'' in

account-opening disclosures, the same terminology must be used in

its periodic statements and change-in-term notices.

(b) General

1. Specificity of legal obligation. An institution may use the

term ``monthly'' to describe its compounding or crediting policy

when interest is compounded or paid at the end of each calendar

month or for twelve periods during the year even if the actual days

in each period vary between 28 and 33 days.

(c) Relation to Regulation E

1. General rule. Compliance with Regulation E (12 CFR part 205)

is deemed to satisfy the disclosure requirements of this regulation,

such as when:

An institution changes a term that triggers a notice

under Regulation E, and the timing and disclosure rules of

Regulation E are used for sending change-in-term notices.

A consumer adds an ATM access feature to an account,

and the institution provides disclosures pursuant to Regulation E,

including disclosure of fees before the consumer receives ATM

access. (See 12 CFR Sec. 205.7.) If the institution complies with

the timing rules of Regulation E, fees related to electronic

services (such as balance inquiry fees imposed if the inquiry is

made at an ATM) that are required to be disclosed by this regulation

but not by Regulation E may also be provided at that time.

An institution relies on Regulation E's disclosure

rules regarding limitations on the frequency and amount of

electronic fund transfers, including security-related exceptions.

But any limitation on the number of ``intra-institutional

transfers'' from other accounts at the institution during a given

time period must be disclosed, even though those transfers are

exempt from Regulation E.

(e) Oral Response to Inquiries

1. Application of rule. Institutions need not provide rate

information orally.

2. Relation to advertising. An oral response to a question about

rates is not covered by the advertising rules.

(f) Rounding and Accuracy Rules for Rates and Yields (f)(2)

Accuracy

1. Annual percentage yield and annual percentage yield earned.

The tolerance for annual percentage yield and annual percentage

yield earned calculations is designed to accommodate inadvertent

errors. Institutions may not purposely incorporate the tolerance

into their calculation of yields.

2. Interest rate. There is no tolerance for an inaccuracy in the

interest rate.

Section 230.4--Account Disclosures

(a) Delivery of Account Disclosures

(a)(1) Account Opening

1. New accounts. New account disclosures must be provided when:

A time account that does not automatically rollover is

renewed by a consumer

A consumer changes the term for a renewable time

account (from a one-year time account to a six-month time account,

for instance)

Funds in an MMDA account are transferred by an

institution to open a new account for the consumer, such as a NOW

account, because the consumer exceeded transaction limitations on

the MMDA account

An institution accepts a deposit from a consumer to an

account the institution previously deemed to be ``closed'' by the

consumer

New account disclosures are not required when an institution

acquires an account through an acquisition of or merger with another

institution (but see Sec. 230.5(a) regarding advance notice

requirements if terms are changed).

(a)(2) Requests

(a)(2)(i)

1. Inquiries versus requests. A response to an oral inquiry (by

telephone or in person) about rates and yields or fees does not

trigger the duty to provide account disclosures. However, when a

consumer asks for written information about an account (whether by

telephone, in person, or by other means), the institution must

provide disclosures.

2. General requests. When a consumer generally asks for

information about a type of account (a NOW account, for example), an

institution that offers several variations may provide disclosures

for any one of them.

3. Timing for response. Ten business days is a reasonable time

for responding to a request for account information that a consumer

does not make in person.

(a)(2)(ii)(B)

1. Term. Describing the maturity of a time account as ``1 year''

or ``6 months,'' for example, illustrates a response stating the

maturity of a time account as a term rather than a date (``January

10, 1995'').

(b) Content of Account Disclosures

(b)(1) Rate information

(b)(1)(i) Annual Percentage Yield and Interest Rate

1. Rate disclosures. In addition to the interest rate and annual

percentage yield, a periodic rate corresponding to the interest rate

may be disclosed. No other rate or yield (such as ``tax effective

yield'') is permitted. If the annual percentage yield is the same as

the interest rate, institutions may disclose a single figure but

must use both terms.

2. Fixed-rate accounts. To disclose the period of time the

interest rate will be in effect, institutions may state the maturity

date for fixed-rate time accounts that pay the opening rate until

maturity. (See Appendix B, B-7--Sample Form.) For other fixed-rate

accounts, institutions may disclose a date (such as ``This rate will

be in effect through June 30, 1994'') or a period (such as ``This

rate will be in effect for at least 30 days'').

3. Tiered-rate accounts. Each interest rate, along with the

corresponding annual percentage yield for each specified balance

level (or range of annual percentage yields, if appropriate), must

be disclosed for tiered-rate accounts. (See Appendix A, Part I,

Paragraph D.)

4. Stepped-rate accounts. A single annual percentage yield must

be disclosed for stepped-rate accounts. (See Appendix A, Part I,

Paragraph B.) However, the interest rates and the period of time

each will be in effect also must be provided. When the initial rate

offered on a variable-rate account is higher or lower than the rate

that would otherwise be paid on the account, the calculation of the

annual percentage yield must be made as if for a stepped-rate

account. (See Appendix A, Part I, Paragraph C.)

(b)(1)(ii) Variable Rates

(b)(1)(ii)(B)

1. Determining interest rates. To disclose how the interest rate

is determined, institutions must:

Identify the index and specific margin, if the interest

rate is tied to an index

State that rate changes are solely within the

institution's discretion, if the institution does not tie changes to

an index

(b)(1)(ii)(C)

1. Frequency of rate changes. Institutions that reserve the

right to change rates at any time must state that fact.

(b)(1)(ii)(D)

1. Limitations. A floor or ceiling on rates or on the amount the

rate may decrease or increase during any time period must be

disclosed. Institutions need not disclose the absence of limitations

on rate changes.

(b)(2) Compounding and Crediting

(b)(2)(ii) Effect of Closing an Account

1. Deeming an account closed. Institutions may provide in their

deposit contract the actions by consumers that the institution will

treat as closing the account and that will result in the forfeiture

of accrued but uncredited interest, such as when a consumer

withdraws all funds from the account prior to the date interest is

credited.

(b)(3) Balance Information

(b)(3)(ii) Balance Computation Method

1. Methods and periods. Institutions may use different methods

or periods to calculate minimum balances for purposes of imposing a

fee (daily balance for a calendar month, for example) and accruing

interest (average daily balance for a statement period, for

example). Each method and period must be disclosed.

(b)(3)(iii) When Interest Begins to Accrue

1. Additional information. Institutions may disclose additional

information such as the time of day after which deposits are treated

as having been received the following business day, and may use

additional descriptive terms such as ``ledger'' or ``collected''

balances to disclose when interest begins to accrue.

(b)(4) Fees

1. Types of fees. The following are types of fees that must be

disclosed in connection with an account:

Maintenance fees, such as monthly service fees

Fees related to deposits or withdrawals, such as fees

for use of the institution's ATMs

Fees for special services, such as stop payment fees,

fees for balance inquiries or verification of deposits, and fees

associated with checks returned unpaid

Fees to open or to close accounts Institutions need not

disclose fees such as the following:

Fees assessed for services offered to account and

nonaccount holders alike, such as fees for travelers checks and wire

transfers (even if different for nonaccount holders)

Incidental fees, such as fees associated with state

escheat laws, garnishment or attorneys fees, and fees for

photocopying forms

2. Amount of fees. Institutions must state the amount and

conditions under which a fee may be imposed. Naming and describing

the fee typically satisfies this requirement. Some examples are:

``$4.00 monthly service fee''

``$7.00 and up'' or ``fee depend on style of checks

ordered'' for check printing fees

3. Tied-accounts. Institutions must state if fees that may be

assessed against an account are tied to other accounts at the

institution. For example, if an institution ties the fees payable on

a NOW account to balances held in the NOW account and in a savings

account, the NOW account disclosures must state that fact and

explain how the fee is determined.

(b)(5) Transaction Limitations

1. General rule. Examples of limitations on the number or dollar

amount of deposits or withdrawals that institutions must disclose

are:

Limits on the number of checks that may be written on

an account for a given time period

Limits on withdrawals or deposits during the term of a

time account

Limitations required by Regulation D, such as the

number of withdrawals permitted from money market deposit accounts

by check to third parties each month (but they need not disclose

that the institution reserves the right to require a seven-day

notice for a withdrawal from an account).

(b)(6) Features of Time Accounts

(b)(6)(i) Time Requirements

1. ``Callable'' time accounts. In addition to the maturity date,

institutions must state the date or the circumstances under which

the institution may redeem a time account at the institution's

option (a ``callable'' time account).

(b)(6)(ii) Early Withdrawal Penalties

1. General. The term ``penalty'' need not be used to describe

the loss that may be incurred by consumers for early withdrawal of

funds from time accounts.

2. Examples. Examples of early withdrawal penalties are:

Monetary penalties, such as ``$10.00'' or ``seven days'

interest plus accrued but uncredited interest''

Adverse changes to terms such as the interest rate,

annual percentage yield, or compounding frequency for funds

remaining on deposit

Reclamation of bonuses

3. Relation to rules for IRAs or similar plans. Penalties

imposed by the Internal Revenue Code for certain withdrawals from

IRAs or similar pension or savings plans are not early withdrawal

penalties.

(b)(6)(iv) Renewal Policies

1. Rollover time accounts. Institutions offering a grace period

on rollover time accounts that automatically renew need not state

whether interest will be paid if the funds are withdrawn during the

grace period.

2. Nonrollover time accounts. Institutions that pay interest on

funds following the maturity of time accounts that do not renew

automatically need not state the rate (or annual percentage yield)

that may be paid.

Section 230.5--Subsequent Disclosures

(a) Change in Terms

(a)(1) Advance Notice Required

1. Form of notice. Institutions may provide a change-in-term

notice on or with a regular periodic statement or in another

mailing. If an institution provides notice through revised account

disclosures, the changed term must be highlighted in some manner.

For example, institutions may state that a particular fee has been

changed (also specifying the new amount) or use an accompanying

letter that refers to the changed term.

2. Effective date. An example of a disclosure that complies is:

``As of May 11, 1994''

3. Terms that change upon the occurrence of an event.

Institutions that offer terms such as a fee waiver for employee

account holders during their employment or for students enrolled at

a local university need not send advance notice of a change

resulting from termination of employment or enrollment if:

The account-opening disclosures given (to the employee,

for example) describe the term and the event that would cause the

term to change (such as the consumer's leaving the institution's

employment), and

Notices are sent when the term is changed for other

account holders, even though the term remains unchanged for the

consumer while employment or enrollment continues.

(a)(2) No Notice Required

(a)(2)(ii) Check Printing Fees

1. Increase in fees. A notice is not required even if an

increase in check printing fees includes an amount added by the

institution to the price charged by a vendor.

(b) Notice Before Maturity for Time Accounts Longer Than One Month

That Renew Automatically

1. Maturity dates on nonbusiness days. For determining the term,

institutions may ignore the fact that the disclosed maturity falls

on a nonbusiness day and the term is extended beyond the disclosed

number of days. For example, a holiday or weekend may cause a ``one-

year'' time account to extend beyond 365 days (or 366, in a leap

year), or a ``one-month'' time account to extend beyond 31 days.

2. Disclosing when rates will be determined. Disclosures that

illustrate when the annual percentage yield will be available

include:

A specific date, such as ``October 28''

A date that is easily discernable, such as ``the

Tuesday prior to the maturity date stated on the notice'' or ``as of

the maturity date stated on this notice''

Institutions must indicate when the rate will be available if

the date falls on a nonbusiness day.

3. Alternative timing rule. To illustrate the alternative timing

rule: An institution that offers a 10-day grace period must provide

the disclosures at least 10 days prior to the scheduled maturity

date.

4. Club accounts. Club accounts that are time accounts are

covered by this paragraph, even though funds may be withdrawn at the

end of the current club period. For example, if the consumer has

agreed to the transfer of payments from another account to the time

account for the next club period, the institution must comply with

the requirements for automatically renewable time accounts.

5. Renewal of a time account. The following applies to a change

in a term that becomes effective if a rollover time account is

subsequently renewed:

If the change is initiated by the institution, the

disclosure requirements of this paragraph. (Paragraph 5(a) applies

if the change becomes effective prior to the maturity of the

existing time account.)

If initiated by the consumer, the account-opening

disclosure requirements of Sec. 230.4(b). (If the notice required by

this paragraph has been provided, institutions may give new account

disclosures or disclosures that reflect the new term.)

For example, if a consumer who receives a prematurity notice on

a one-year time account requests a rollover to a six-month account,

the institution must provide either account-opening disclosures that

reflect the new maturity date or, if all other terms previously

disclosed in the prematurity notice remain the same, only the new

maturity date.

(b)(1) Maturities of Longer Than One Year

1. Highlighting changed terms. Institutions need not highlight

terms that have changed since the last account disclosures were

provided.

(c) Notice for Time Accounts One Month or Less That Renew

Automatically

1. Providing disclosures within a reasonable time. Generally, 10

calendar days after an account renews is a reasonable time for

providing disclosures. For time accounts shorter than 10 days,

disclosures should be given prior to the next-scheduled renewal

date.

(d) Notice Before Maturity for Time Accounts Longer Than One Year That

Do Not Renew Automatically

1. Subsequent account. When funds are transferred following

maturity of a nonrollover time account, institutions need not

provide account disclosures unless a new account is established.

Section 230.6--Periodic Statement Disclosures

(a) General Rule

1. General. Institutions are not required to provide periodic

statements. If they provide periodic statements, disclosures need

only be furnished to the extent applicable. For example, if no

interest is earned for a statement period, institutions need not

disclose ``$0'' interest earned and ``0%'' annual percentage yield

earned.

2. Regulation E interim statements. When an institution provides

regular quarterly statements, and in addition provides a monthly

interim statement to comply with Regulation E, the interim statement

need not comply with this section unless it states interest or rate

information. (See 12 CFR 205.9.)

3. Combined statements. Institutions may provide certain

information about an account (such as an MMDA) on the periodic

statement for another account (such as a NOW account) without

triggering the disclosures required by this section, as long as:

The information is limited to the account number, the

type of account, or balance information, and

The institution also provides consumers a periodic

statement that complies with this section for the account (the MMDA,

in the example).

4. Other information. Institutions may include additional

information on or with a periodic statement, such as:

Interest rates and periodic rates corresponding to the

interest rate applied to balances during the statement period

The dollar amount of interest earned year-to-date

Bonuses paid (or any de minimis consideration of $10 or

less)

Fees for other products, such as safe deposit boxes

(a)(1) Annual Percentage Yield Earned

1. Ledger and collected balances. Institutions that accrue

interest using the collected balance method may use either the

ledger or the collected balance in determining the annual percentage

yield earned.

(a)(2) Amount of Interest

1. Accrued interest. Institutions must state the amount of

interest that accrued during the statement period, even if it was

not credited. For interest not credited, institutions may disclose

when funds will become available for the consumer's use.

2. Terminology. In disclosing interest earned for the period,

institutions must use the term ``interest'' or terminology such as:

``Interest paid,'' to describe interest that has been

credited

``Interest accrued'' or ``interest earned,'' to

indicate that interest is not yet credited

3. Closed accounts. If a consumer closes an account between

crediting periods and forfeits accrued interest, the institution may

not show any figures for ``interest earned'' or annual percentage

yield earned for the period.

(a)(3) Fees Imposed

1. General. Periodic statements must state fees debited to the

account during the statement period even if assessed for an earlier

period.

2. Itemizing fees by type. In itemizing fees by type,

institutions may group together fees of the same type that are

imposed more than once in the period. If fees are grouped, the

description must make clear that the dollar figure represents more

than a single fee, for example, ``total fees for checks written this

period.'' Examples of fees that may not be grouped together are:

Monthly maintenance and excess activity fees

``Transfer'' fees, if different dollar amounts are

imposed--such as $.50 for deposits and $1.00 for withdrawals

Fees for electronic fund transfers and fees for other

services, such as balance inquiry or maintenance fees

3. Identifying fees. Statement details must enable the consumer

to identify the specific fee. For example:

Institutions may use a code to identify a particular

fee if the code is explained on the periodic statement or in

documents accompanying the statement.

Institutions using debit slips may disclose the date

the fee was debited on the periodic statement and show the amount

and type of fee on the dated debit slip.

4. Relation to Regulation E. Compliance with Regulation E

complies with this section for the disclosure of fees related to

electronic fund transfers on periodic statements (for example,

totaling all electronic funds transfer fees in a single figure).

(a)(4) Length of Period

1. General. Institutions that provide the beginning and ending

dates of the period must make clear whether both dates are included

in the period.

2. Opening or closing an account mid-cycle. If an account is

opened or closed during the period for which a statement is sent,

institutions must calculate the annual percentage yield earned based

on account balances for each day the account was open.

(b) Special Rule for Average Daily Balance Method

1. General. To illustrate, this rule applies when an institution

calculates interest on a quarterly average daily balance and sends

monthly statements. The first two monthly statements may not state

annual percentage yield earned and interest earned figures; the

third ``monthly'' statement will reflect the interest earned and the

annual percentage yield earned for the entire quarter.

2. Length of the period. Institutions must disclose the length

of both the interest calculation period and the statement period.

For example, a statement could disclose a statement period of April

16 through May 15 and further state that ``the interest earned and

the annual percentage yield earned are based on your average daily

balance for the period April 1 through April 30.''

3. Quarterly statements and monthly compounding. Institutions

that use the average daily balance method to calculate interest on a

monthly basis, but send statements on a quarterly basis, may

disclose a single interest (and annual percentage yield earned)

figure. Alternatively, an institution may disclose three interest

earned and three annual percentage earned figures, one for each

month in the quarter, as long as the institution states the number

of days (or beginning and ending date) in the interest period if it

is different from the statement period.

Section 230.7--Payment of Interest

(a) Permissible Methods

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:

The ``ending balance'' method, where institutions pay

interest on the balance in the account at the end of the period

The ``investable balance'' method, where institutions

pay interest on a percentage of the balance, excluding an amount

institutions set aside for reserve requirements

2. Use of 365-day basis. Institutions may apply a daily periodic

rate that is 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 that are equal to \1/12\ of the

amount of interest that will be earned for a 365-day period, or 11

uniform monthly payments and a final payment that accounts for the

total 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, such as:

During any grace period offered by an institution for

an automatically renewable time account, if the consumer decides

during that period not to renew the account

Following the maturity of nonrollover time accounts

When the maturity date falls on a holiday, and the

consumer must wait until the next business day to obtain the funds

(See 12 CFR part 217, the Board's Regulation Q, for limitations on

duration of interest payments.)

6. Dormant accounts. Institutions may contract with a consumer

not to pay interest if the account becomes ``dormant,'' as defined

by applicable state or other law.

(a)(2) Determination of Minimum Balance To Earn Interest

1. Daily balance accounts. Institutions that use the daily

balance method to calculate interest and require a minimum balance

to earn interest may choose not to pay interest for days when the

balance drops below the required daily minimum balance.

2. Average daily balance accounts. Institutions that use the

average daily balance method to calculate interest and require a

minimum balance to earn interest may choose not to pay interest for

the period in which the average daily balance does not meet the

required minimum.

3. Beneficial method. Institutions may not require consumers to

maintain both a minimum daily balance and a minimum average daily

balance to earn interest, such as by requiring the consumer to

maintain a $500 daily balance and an average daily balance that is

higher or lower. But an institution could determine the minimum

balance to earn interest by using a method that is ``unequivocally

beneficial'' to the consumer such as the following: An institution

using the daily balance method to calculate interest and requiring a

$500 minimum daily balance could choose to pay interest on the

account (for those days the minimum balance is not met) as long as

the consumer maintained 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 once a consumer has met the required

minimum balance. For example, if an institution sets $300 as its

minimum daily balance requirement 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:

The daily or average daily balance on which interest

will be paid

Whether any minimum balance to earn interest is met

(See commentary to Appendix A, Part II, which prohibits institutions

from using negative balances in calculating the interest figure for

the annual percentage yield earned.)

6. Club accounts. Institutions offering club accounts (such as a

``holiday'' or ``vacation'' club) cannot impose a minimum balance

that is 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 only if the consumer makes all 50

payments.

7. Minimum balances not affecting interest. Institutions may use

the daily balance, average daily balance, or 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

1. General. Institutions that choose 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. If consumers close accounts prior to the

date accrued interest is credited, institutions may choose not to

pay accrued interest as long as they have disclosed that fact to the

consumer. Whether (and the conditions under which) institutions are

permitted to deem an account closed by a consumer is determined by

state or other law, if any.

4. Dormant accounts. Subject to state or other law defining when

an account becomes dormant, an institution may contract with a

consumer not to pay accrued but uncredited interest if the account

becomes dormant prior to the regular interest crediting date.

(c) Date Interest Begins To Accrue

1. Relation to Regulation CC. Institutions may rely on the

Expedited Funds Availability Act (EFAA) and Regulation CC (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'' balance or ``collected'' balance

method, as long as the crediting requirements of the EFAA are met.

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.

Section 230.8--Advertising

(a) Misleading or Inaccurate Advertisements

1. General. All advertisements must comply with the rule against

misleading or inaccurate advertisements, even though the disclosures

applicable to various media differ.

2. Indoor signs. An indoor sign advertising an annual percentage

yield is not misleading or inaccurate if:

For a tiered-rate account, it also provides the upper

and lower dollar amounts of the advertised tier corresponding to the

annual percentage yield

For a time account, it also provides the term required

to obtain the advertised yield

3. ``Free'' or ``no cost'' accounts. For purposes of determining

whether an account can be advertised as ``free'' or ``no cost,''

maintenance and activity fees include:

Any fee imposed if a minimum balance requirement is not

met, or if the consumer exceeds a specified number of transactions

Transaction and service fees that consumers reasonably

expect to be regularly imposed on an account

Examples of maintenance and activity fees include:

A flat fee, such as a monthly service fee

Fees imposed to deposit, withdraw or transfer funds,

including per-check or per-transaction charges (for example, $.25

for each withdrawal, whether by check, in person or at an ATM owned

by the institution)

Examples of fees that are not maintenance or activity fees

include:

Fees that are not required to be disclosed under

Sec. 230.4(b)(4)

Check printing fees of any type

Fees for obtaining copies of checks, whether the

original checks have been truncated or returned to the consumer

periodically

Balance inquiry fees

Fees assessed against a dormant account

Fees for using an ATM not owned by the account-issuing

institution

Fees for electronic transfer services that are not

required to obtain an account, such as preauthorized transfers or

home banking services

4. Similar terms. An advertisement may not use a term such as

``fees waived'' if a maintenance or activity fee may be imposed

because it is similar to the terms ``free'' or ``no cost.''

5. Specific account services. Institutions may advertise a

specific account service or feature as free as long as no fee is

imposed for that service or feature. For example, institutions that

provide free access to their ATMs could advertise that fact.

6. Free for limited time. If an account or a specific account

service is free only for a limited period of time--for example, for

one year following the account opening--the account or service may

be advertised as free as long as the time period is stated.

7. Conditions not related to deposit accounts. Institutions may

advertise accounts as ``free'' for consumers that meet conditions

not related to deposit accounts such as age. For example,

institutions may advertise a NOW account as ``free for persons over

65 years old,'' even though a maintenance or activity fee may be

assessed on accounts held by consumers that are 65 or younger.

(b) Permissible Rates

1. Tiered-rate accounts. An advertisement for a tiered-rate

account that states an annual percentage yield must also state the

annual percentage yield for each tier, along with corresponding

minimum balance requirements. Any interest rates stated must appear

in conjunction with the annual percentage yields for the applicable

tier.

2. Stepped-rate accounts. An advertisement that states an

interest rate for a stepped-rate account must state each interest

rate and the time period each rate is in effect.

3. Representative examples. An advertisement that states an

annual percentage yield for a type of account (such as a time

account) need not state the annual percentage yield applicable to

every variation offered by the institution. For example, if rates

vary depending on the amount of the initial deposit and term of a

time account, institutions need not list each balance level and term

offered. Instead, the advertisement may:

Provide a representative example of the annual

percentage yields offered, clearly described as such. For example,

if an institution offers a $25 bonus on all time accounts and the

annual percentage yield will vary depending on the term selected,

the institution may provide a disclosure of the annual percentage

yield as follows: ``For example, our 6-month certificate of deposit

currently pays a 3.15% annual percentage yield.''

Indicate that various rates are available, such as by

stating short-term and longer-term maturities along with the

applicable annual percentage yields: ``We offer certificates of

deposit with annual percentage yields that depend on the maturity

you choose. For example, our one-month CD earns a 2.75% APY. Or,

earn a 5.25% APY for a three-year CD.''

(c) When Additional Disclosures Are Required

1. Trigger terms. Disclosures are triggered by statements such

as ``We will pay a bonus of 1% over our current rate for one-year

certificates of deposit opened before April 15, 1995.'' The

following are examples of information stated in advertisements that

are not ``trigger'' terms:

``One, three, and five year CDs available''

``Bonus rates available''

(c)(2) Time Annual Percentage Yield Is Offered

1. Specified recent date. If an advertisement discloses an

annual percentage yield as of a specified date, that date must be

recent in relation to the publication or broadcast frequency of the

media used. For example, the printing date of a brochure printed

once for a deposit account promotion that will be in effect for six

months would be considered ``recent,'' even though rates change

during the six-month period. Rates published in a daily newspaper or

on television must be a rate offered shortly before (or on) the date

the rates are published or broadcast.

(c)(5) Effect of Fees

1. Scope. This requirement applies only to maintenance or

activity fees as described in paragraph 8(a).

(c)(6) Features of Time Accounts

(c)(6)(i) Time Requirements

1. Club accounts. If the maturity date of a club account is set

but the term may vary depending on when the account is opened,

institutions may use a phrase such as: ``The term of the account

varies depending on when the account is opened. However, the

maturity date is November 15.''

(c)(6)(ii) Early Withdrawal Penalties

1. Discretionary penalties. Institutions that impose early

withdrawal penalties on a case-by-case basis may disclose that they

``may'' (rather than ``will'') impose a penalty if that accurately

describes the account terms.

(d) Bonuses

1. General reference to ``bonus.'' General statements such as

``bonus checking'' or ``get a bonus when you open a checking

account'' do not trigger the bonus disclosures.

(e) Exemption for Certain Advertisements

(e)(1) Certain Media

(e)(1)(iii)

1. Tiered-rate accounts. Solicitations for tiered-rate accounts

made through telephone response machines must provide all annual

percentage yields and the balance requirements applicable to each

tier.

(e)(2) Indoor Signs

(e)(2)(i)

1. General. Indoor signs include advertisements displayed on

computer screens, banners, preprinted posters, and chalk or peg

boards. Any advertisement inside the premises that can be retained

by a consumer (such as a brochure or a printout from a computer) is

not an indoor sign.

2. Consumers outside the premises. Advertisements may be

``indoor signs'' even though they may be viewed by consumers from

outside. An example is a banner in an institution's glass-enclosed

branch office, that is located behind a teller facing customers but

also may be seen by passersby.

Section 230.9--Enforcement and Record Retention

(c) Record Retention

1. Evidence of required actions. Institutions comply with the

regulation by demonstrating they have done the following:

Established and maintained procedures for paying

interest and providing timely disclosures as required by the

regulation, and

Retained sample disclosures for each type account

offered to consumers, such as account-opening disclosures, copies of

advertisements, and change-in-term notices; and information

regarding the interest rates and annual percentage yields offered.

2. Methods of retaining evidence. Institutions must retain

information needed to reconstruct the required disclosures or other

actions. They need not keep disclosures or other business records in

hard copy. Records evidencing compliance may be retained on

microfilm, microfiche, or by other methods that reproduce records

accurately (including computer files).

3. Payment of interest. Sufficient rate and balance information

must be retained to permit the verification of interest paid on an

account, including the payment of interest on the full principal

balance.

Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and

Advertising Purposes

1. Rounding for calculations. The following are examples of

permissible rounding rules for calculating interest and the annual

percentage yield:

The daily rate applied to a balance rounded to five or

more decimals

The daily interest earned rounded to five or more

decimals

Part II. Annual Percentage Yield Earned for Periodic Statements

1. Balance method. The interest figure used in the calculation

of the annual percentage yield earned may be derived from the daily

balance method or the average daily balance method. The balance used

in the annual percentage yield earned formula is the sum of the

balances for each day in the period divided by the number of days in

the period.

2. Negative balances prohibited. Institutions must treat a

negative account balance as zero to determine the balance on which

the annual percentage yield earned is calculated. (See commentary to

Sec. 230.7(a)(2).)

A. General Formula

1. Accrued but uncredited interest. To calculate the annual

percentage yield earned, accrued but uncredited interest:

Shall not be included in the balance for statements

that are issued at the same time or less frequently than the

account's compounding and crediting frequency. For example, if

monthly statements are sent for an account that compounds interest

daily and credits interest monthly, the balance may not be increased

each day to reflect the effect of daily compounding.

Shall be included in the balance for succeeding

statements if a statement is issued more frequently than compounded

interest is credited on an account. For example, if monthly

statements are sent for an account that compounds interest daily and

credits interest quarterly, the balance for the second monthly

statement would include interest that had accrued for the prior

month.

2. Rounding. The interest earned figure used to calculate the

annual percentage yield earned must be rounded to two decimals to

reflect the amount actually paid. For example, if the interest

earned for a statement period is $20.074 and the institution pays

the consumer $20.07, the institution must use $20.07 (not $20.074)

to calculate the annual percentage yield earned. For accounts that

pay interest based on the daily balance method, compound and credit

interest quarterly, and send monthly statements, the institution

may, but need not, round accrued interest to two decimals for

calculating the annual percentage yield earned on the first two

monthly statements issued during the quarter. However, on the

quarterly statement the interest earned figure must reflect the

amount actually paid.

B. Special Formula for Use Where Periodic Statement Is Sent More

Often Than the Period for Which Interest Is Compounded

1. Statements triggered by Regulation E. Institutions may, but

need not, use this formula to calculate the annual percentage yield

earned for accounts that receive quarterly statements and that are

subject to Regulation E's rule calling for monthly statements when

an electronic fund transfer has occurred. They may do so even though

no monthly statement was issued during a specific quarter. This

formula must be used for accounts that compound and credit interest

quarterly and that receive monthly statements, triggered by

Regulation E, which comply with the provisions of Sec. 230.6.

2. Days in compounding period. Institutions using the special

annual percentage yield earned formula must use the actual number of

days in the compounding period.

Appendix B to Part 230--Model Clauses and Sample Forms

1. Modifications. Institutions that modify the model clauses

will be deemed in compliance as long as they do not delete

information required by the act or regulation or rearrange the

format so as to affect the substance or clarity of the disclosures.

2. Format. Institutions may use inserts to a document (see

Sample Form B-4) or fill-in blanks (see Sample Forms B-5, B-6 and B-

7, which use double underlining to indicate terms that have been

filled in) to show current rates, fees or other terms.

3. Disclosures for opening accounts. The sample forms illustrate

the information that must be provided to a consumer when an account

is opened, as required by Sec. 230.4(a)(1). (See Sec. 230.4(a)(2),

which states the requirements for disclosing the annual percentage

yield, the interest rate, and the maturity of a time account in

responding to a consumer's request.)

4. Compliance with Regulation E. Institutions may satisfy

certain requirements under Regulation DD with disclosures that meet

the requirements of Regulation E. (See Sec. 230.3(c).) The model

clauses and sample forms do not give examples of disclosures that

would be covered by both this regulation and Regulation E (such as

disclosing the amount of a fee for ATM usage). Institutions should

consult appendix A to Regulation E for appropriate model clauses.

5. Duplicate disclosures. If a requirement such as a minimum

balance applies to more than one account term (to obtain a bonus and

determine the annual percentage yield, for example), institutions

need not repeat the requirement for each term, as long as it is

clear which terms the requirement applies to.

6. Guide to model clauses. In the model clauses, italicized

words indicate the type of disclosure an institution should insert

in the space provided (for example, an institution might insert

``March 25, 1993'' in the blank for ``(date)'' disclosure). Brackets

and diagonals (``/'') indicate an institution must choose the

alternative that describes its practice (for example, [daily

balance/average daily balance]).

7. Sample forms. The sample forms (B-4 through B-8) serve a

purpose different from the model clauses. They illustrate various

ways of adapting the model clauses to specific accounts. The clauses

shown relate only to the specific transactions described.

B-1 Model Clauses for Account Disclosures

B-1(h) Disclosures Relating to Time Accounts

1. Maturity. The disclosure in Clause (h)(i) stating a specific

date may be used in all cases. The statement describing a time

period is appropriate only when providing disclosures in response to

a consumer's request.

B-2 Model Clauses for Change in Terms

1. General. The second clause, describing a future decrease in

the interest rate and annual percentage yield, applies to fixed-rate

accounts only.

B-4 Sample Form (Multiple Accounts)

1. Format. The sample form has been marked with an ``X'' to

indicate it is for a NOW account and provides for both a fee

schedule insert and a rate sheet insert.

2. Rate sheet insert. In the rate sheet insert, the calculations

of the annual percentage yield for the three-month and six-month

certificates are based on 92 days and 181 days respectively.

B-6 Sample Form (Tiered-Rate Money Market Account)

1. General. Sample Form B-6 uses Tiering Method A (discussed in

Appendix A and Clause (a)(iv)) to calculate interest. It gives a

narrative description of a tiered-rate account; institutions may use

a different format (for example, a chart similar to the one in

Sample Form B-4), as long as all required information for each tier

is clearly presented. The form does not contain a separate

disclosure of the minimum balance required to obtain the annual

percentage yield; the tiered-rate disclosure provides that

information.

B-9 Sample Form (Money Market Account Advertisement)

1. General. The advertisement is for a tiered-rate money market

account that uses Tiering Method A.

By order of the Board of Governors of the Federal Reserve

System, January 28, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-2505 Filed 2-4-94; 8:45 am]

BILLING CODE 6210-01-P