[Federal Register Volume 59, Number 90 (Wednesday, May 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11153]


[[Page Unknown]]

[Federal Register: May 11, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 230

[Regulation DD; Docket No. R-0812]

 

Truth in Savings; Proposed Regulatory Amendment

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Withdrawal of proposed rule.

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SUMMARY: The Board is withdrawing proposed amendments to Regulation DD 
(Truth in Savings) to provide for an additional formula to calculate 
the annual percentage yield (APY), based on considerations of cost and 
regulatory burden at this time.

DATES: This proposed rule is withdrawn May 4, 1994.

FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, Kyung 
Cho, or Kurt Schumacher, Staff Attorneys, Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, at 
(202) 452-3667 or 452-2412; for questions associated with the 
regulatory flexibility analysis, Gregory Elliehausen, Economist, Office 
of the Secretary, at (202) 452-2504; for the hearing impaired only, 
Dorothea Thompson, Telecommunications Device for the Deaf, at (202) 
452-3544.

SUPPLEMENTARY INFORMATION:

(1) Background

    The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires 
depository institutions to provide disclosures to consumers about their 
deposit accounts, including an APY on interest-bearing accounts. The 
law also contains rules about advertising deposit accounts, including 
accounts at depository institutions offered to consumers by deposit 
brokers. The act is implemented by the Board's Regulation DD (12 CFR 
part 230), which became effective June 21, 1993. (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 its initial rulemaking, the Board was guided by several general 
principles, such as establishing simple rules that minimize the 
possibility of errors and compliance costs and providing institutions 
with flexibility to promote a variety of product choices for consumers. 
This included designing a simple, easy-to-use formula for calculating 
the APY. As deposit brokers and institutions began complying with the 
new formula, the Board was asked by the Securities Industry Association 
(SIA) and others to reconsider how the APY is calculated. Proposed 
amendments that would provide for an additional APY formula were 
published on December 6, 1993 (58 FR 64190).
    The difficulties associated with the current APY formula stem from 
the formula's assumption that interest paid on an account remains on 
deposit until maturity. For some accounts, the formula produces an APY 
that reflects the time value of interest received.1 For others the 
APY fails to reflect the time value of interest received. This happens 
in cases where institutions offer long-term certificates of deposit 
(CDs) that are noncompounding but pay interest periodically. In this 
case, the formula produces an APY that is less than the contract 
interest rate.2
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    \1\For example, assume $1,000 is deposited in a one-year CD with 
a 6% interest rate that compounds quarterly. Consumers have the 
option to receive quarterly interest checks instead. In both cases, 
the APY is 6.14%, even though the consumer who compounds interest 
receives $61.40, and the consumer who takes quarterly interest 
checks receives $60.00.
    \2\For example, assume $1,000 is deposited in a two-year 
noncompounding CD with a 6.00% interest rate. Some institutions may 
offer the consumer the choice of receiving all interest ($120) at 
maturity, or receiving two interest payments ($60) each year. The 
APY in either case is 5.83%--lower than the 6.00% interest rate--
because the formula looks at the total amount of interest paid, not 
when it is paid out. The SIA states the maturities of CDs purchased 
through deposit brokers range from three months to 10 years but 
average about two years (based on dollar-weighted maturities).
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    In considering whether to propose amendments to the APY formula, 
the Board focused on two issues: a desire for an APY that reflects the 
time value of money, and a concern about the compliance costs and 
impact on depository institutions if changes were made. The Board 
published a proposal that would factor into the APY calculation the 
specific time intervals for interest paid on the account--that is, the 
time value of money (Approach A). However, the Board also requested 
comment on a narrower approach that would affect only noncompounding 
multi-year CDs that pay interest at least annually. For these accounts, 
the APY would never be lower than the interest rate (Approach B). The 
Board also solicited comment on leaving the regulation unchanged 
(Approach C).
    The Board received about 500 comments on its proposal. Nearly 90% 
of the comments were from financial institutions. Considering all 
comments received, approximately 5% supported Approach A; 15% supported 
Approach B; and 75% supported Approach C. The remainder presented other 
alternatives or expressed no opinion on the specific approaches.

(2) Discussion

Approach A: Proposal of an Additional Formula

    Based on the comments received and upon further analysis, the Board 
is withdrawing the proposed amendments to the APY formula. Overall, the 
Board believes that the proposed formula (Approach A) would be complex 
and costly to implement, and the costs would outweigh the benefits 
derived from the proposed changes. (See Docket R-0836 elsewhere in 
today's Federal Register for proposed amendments which the Board 
believes might better capture the intent of the act's purposes in a 
less complex way.)
    The Board believes the formula proposed in December would correct 
the APY anomalies produced by the current formula, and has considered 
the view of some commenters that the short-term costs of correcting the 
formula might be worthwhile over time. However, the Board is more 
persuaded by the commenters--including both consumer groups and 
industry associations--that believed the costs of compliance outweigh 
the benefits from implementing the proposed APY formula. Commenters 
reported that substantial costs recently had been incurred to implement 
the regulation, and they believed the distinctions in the APY produced 
by the complex formula proposed by Approach A did not warrant the 
substantial costs of implementing changes to the regulation--perhaps as 
much as 50% of the initial costs to implement the regulation.
    The Board concurs with the commenters that voiced concern about the 
complexity of the proposed formula. These commenters noted that the 
formula was complex for both consumers and institutions. Many 
commenters stated that although an internal rate of return formula is a 
standard mathematical tool in the financial markets, its introduction 
in APY calculations would eliminate, as a practical matter, the use of 
many handheld calculators for preparing disclosures or quoting APYs to 
consumers. Commenters also noted due to the complexity of the APY 
calculation there would be an increased risk of error and potential 
civil liability in making this calculation for a wide variety of 
accounts.
    The Board also notes the views of commenters that believed that in 
adopting Approach A, the Board would merely be trading one set of 
assumptions for another set of assumptions. Many commenters concurred 
with the Board that the current APY does not always reflect the value 
of periodic interest distributions, for example. But they also believed 
that the proposed APY also would not be factually accurate in all 
circumstances. For example, commenters remarked that the proposed APY 
would fail to reflect the fact that interest payments cannot always be 
immediately reinvested at the same rate as the account from which the 
interest was paid. They also believed it would be inappropriate to 
assume such a reinvestment rate for small monthly interest checks, for 
example, since rates typically rise based on the length of maturity and 
amount of principal. They noted that elderly consumers who hold multi-
year CDs and who rely on periodic interest payments for living expenses 
would be particularly affected by the assumption.
    Commenters noted that returns on deposit accounts traditionally 
have been based on the rate of interest paid and any compounding 
frequency. Higher yields historically have been equated with higher 
dollar interest payments--not more frequent interest payments--and 
commenters believed that consumers expect an APY to reflect those 
factors. Many commenters believed that the underlying premise of 
Approach A--the time value of money--is inappropriate for deposit 
account disclosures. Many believed an assumption based on potential 
earnings outside the account relationship was misleading for the APY 
calculation. They believed the purposes of Truth in Savings are not 
best served by an APY disclosure based on the timing of interest 
payments that is higher for consumers who receive less interest 
overall.
    Due to concerns about costs and questions about the benefits 
provided, the Board believes this approach would not be the best 
solution.

Approach B: Noncompounding Multi-Year CDs

    The Board also is not adopting Approach B, based on the combination 
of the limited scope of the problem Approach B seeks to address, the 
creation of new anomalies, and the cost to the industry of reviewing 
and implementing new calculation and disclosure requirements.
    On the one hand, the Board believes Approach B is a simple, direct 
approach to correct one anomaly produced by the current APY formula. 
The Board also recognizes that the disclosure of an APY that is lower 
than the interest rate on a noncompounding multi-year CD that pays 
interest at least annually may be confusing to some consumers.3
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    \3\The Board notes, however, that even if Approach B were 
adopted, institutions would still disclose an APY lower than the 
interest rate, such as for a multi-year CD that does not compound 
and pays interest only at maturity.
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    Overall, however, the Board is more persuaded by commenters that 
voiced concern about the accuracy of the APY disclosed under Approach 
B. For example, commenters echoed concerns expressed about the proposed 
formula in Approach A. They remarked that the APY permitted under 
Approach B assumed the interest payments received during the term would 
be reinvested at the same rate as the account from which the interest 
was paid. Others believed it would be anomalous to disclose the same 
APY is disclosed for two multi-year accounts, one compounding annually 
and the other not compounding at all.
    The Board also notes the commenters' concerns about the cost to the 
industry of reviewing and implementing new calculation and disclosure 
requirements. They noted the costs of implementing Approach B would be 
less significant, compared to Approach A. Although the change would 
affect a single class of accounts, commenters reported that some 
computer programming changes would be required and additional 
disclosures would be appropriate. Commenters stated that since 
consumers would see the same APY for compounding and noncompounding 
CDs, a statement might be necessary in advertisements and account 
disclosures to help consumers understand the terms of the account. (For 
example, assume two institutions offer a two-year CD with a 6.00% 
interest rate. One compounds annually, the other offers annual interest 
payments. Both could advertise a 6.00% APY, even though a consumer 
depositing $1,000 receives $120 if interest checks are paid and $123.60 
if interest is compounded.) Finally, the Board notes some commenters 
remarked that institutions could easily remedy the current anomaly with 
a simple change to their product. They noted institutions could 
advertise and disclose an APY equal to the contract interest rate under 
the current formula by offering CDs that have annual compounding, 
regardless of any payment options.
    Due to the limited problem Approach B seeks to address, the limited 
resolution of anomalies produced by the current APY formula, and the 
costs associated with adopting the approach, the Board has determined 
not to adopt Approach B.

(3) Regulatory flexibility analysis and Paperwork Reduction Act

    The Board solicited comment on the potential cost of implementing 
the proposed APY formula, such as the proportion of existing accounts 
would require the new formula for computing APYs, the changes 
institutions would have to make to implement the new formula, the cost 
to make these changes, and the likelihood of changes in the number of 
different account terms and types of accounts offered would result if 
the new formula were adopted.
    In accordance with section 3507 of the Paperwork Reduction Act of 
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions were 
reviewed by the Board under the authority delegated to the Board by the 
Office of Management and Budget after consideration of comments 
received during the public comment period. The Board's Office of the 
Secretary has prepared an economic impact statement on the proposed 
revisions to Regulation DD, a copy of which may be obtained from 
Publications Services, Board of Governors of the Federal Reserve 
System, Washington, DC 20551, at (202) 452-3245.

Board of Governors of the Federal Reserve System, May 4, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-11153 Filed 5-10-94; 8:45 am]
BILLING CODE 6210-01-P