[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: 94-11154]


[[Page Unknown]]

[Federal Register: May 11, 1994]


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FEDERAL RESERVE SYSTEM
12 CFR Part 230

[Regulation DD; Docket No. R-0836]

 

Truth in Savings; Proposed Regulatory Amendment

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is publishing for comment proposed amendments to 
Regulation DD (Truth in Savings) which clarify that once interest is 
credited to an account, it becomes part of the principal. By defining 
terms such as ``crediting,'' and ``compounding,'' the amendments will 
provide certainty to institutions, better fulfill the purposes of the 
act, and eliminate anomalies that currently occur in the APY 
calculation. The amendments provide that for institutions that pay 
interest (that is, credit interest) to the consumer by check or 
transfer or permit interest to remain in the account, an institution 
must pay interest on funds that remain in the account at the same 
frequency as the institution credits interest by check or transfer. 
Accounts that credit interest solely by posting to the account would 
not be required to send out interest checks or to transfer the interest 
to other accounts. Similarly, institutions offering accounts that 
``credit'' interest solely by paying it out to the consumer by check or 
transfer would not be required to permit credited interest to remain in 
the account for compounding.

DATES: Comments must be received on or before July 5, 1994.

ADDRESSES: Comments should refer to Docket No. R-0836, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551. Comments also may be delivered to room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street NW 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9 a.m. and 5 
p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's rules 
regarding the availability of information.

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

SUPPLEMENTARY INFORMATION:

(1) Background

    The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires 
depository institutions to provide disclosures to consumers about their 
deposit accounts, including an annual percentage yield (APY) on 
interest-bearing accounts. The act is implemented by the Board's 
Regulation DD (12 CFR part 230), which became effective June 21, 1993 
(See 57 FR 43337 and 58 FR 15077).
    Because the current formula for calculating the APY assumes that 
interest remains on deposit until maturity, the resulting APY may--but 
does not always--reflect the time value of money. On December 6, 1993, 
the Board published a proposal that would have factored into the APY 
calculation the specific time intervals for interest paid on the 
account--that is, the time value of money (58 FR 64190). It called for 
adding an additional APY formula. Based on the comments received and 
upon further analysis, the Board has withdrawn the proposed amendments. 
(See Docket R-0812 elsewhere in today's Federal Register.) Compounding 
and crediting issues.
    In the context of deliberations about the APY proposal, the Board 
has considered two related issues regarding depository institutions' 
compounding and crediting practices. This relationship between 
crediting and compounding has not previously been addressed in the 
regulation or in supplementary information. (The resolution of these 
issues, as discussed below, could provide an alternative basis for 
eliminating the anomaly produced by the current formula while requiring 
few changes to the current APY formula.)1
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    \1\If an institution offers a multi-year noncompounding CD, the 
APY produced by the current formula is less than the interest rate, 
even if the institution pays out interest annually or more often.
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    The act requires institutions to pay interest on the full amount of 
the principal in the account each day, and provides that this 
requirement shall not be construed as prohibiting or requiring the use 
of any particular method of compounding or crediting interest. 
Regulation DD states that the requirement to pay interest on the full 
amount of principal does not require institutions to compound or credit 
interest at any particular frequency. Neither the act nor the 
regulation defines ``compounding,'' ``crediting,'' or ``principal.''
    One issue that has arisen is whether interest can be posted to a 
consumer's account and not be treated as part of the principal. Another 
is whether institutions that offer to credit interest to the consumer 
by check or transfer and permit interest to remain in the account must 
credit and compound interest on the same or a more frequent basis for 
those consumers that leave interest in the account. For example, if an 
institution offers a two-year certificate of deposit (CD) and permits 
consumers to receive accrued interest in monthly interest checks, does 
the institution that also permits interest to remain in the account 
have to credit and compound interest in the account on the same or more 
frequent basis (monthly or more often).
    The Board recognizes that institutions may have read the act and 
regulation as permitting practices which compound and credit at 
different intervals. The Board is proposing to amend the regulation to 
clarify that interest cannot be credited to a consumer's account 
without becoming part of the principal. For example, assume a consumer 
earns $5 in interest on a $1,000 balance for the month of January. If 
an institution chooses to credit interest to the account monthly, then 
the institution must accrue interest on that sum. For example, if $5 is 
credited in January to an account with a balance of $1,000, the 
institution must accrue interest on $1,005 for the month of February. 
Simply put, if consumers are given access to earned interest in an 
account, the Board believes the act requires that consumers earn 
interest on those funds at that time.
    The Board also proposes an amendment clarifying that although 
institutions may choose any compounding or crediting frequency for an 
account, institutions that provide for crediting interest either by 
check (or transfer of accrued interest to another account) or by 
posting interest to the account must do so on the same periodic basis. 
That is, if interest can be ``credited'' by check or transfer, an 
institution must credit interest to all such accounts at least as often 
a frequency. For example, an institution offering a one-year CD with 
the option to receive monthly or quarterly interest checks would have 
to credit interest to the account for compounding on at least a monthly 
frequency.
    Of course, an institution need not permit consumers to receive 
interest payments by check or transfer. Similarly, the Board believes 
that if an institution requires consumers to receive interest solely by 
check (or transfer to another account), the institution need not also 
permit consumers to leave interest in the account for compounding.
    The Board notes that this proposed interpretation could require a 
change in the compounding and crediting practices of some depository 
institutions, since institutions that do not currently compound on the 
same basis as they offer interest payments would have to change 
compounding frequencies or reduce payment options. The impact of the 
proposed amendments may be greater for those institutions offering 
consumers many options in crediting frequencies. For example, an 
institution permitting quarterly interest payments must also credit and 
compound at least quarterly for those consumers who choose to leave 
interest in the account. If an institution allows consumers to receive 
monthly interest checks (and can leave interest in the account), the 
institution could not offer this option without offering monthly 
crediting and compounding to other holders of the same account as well. 
The Board requests comment on these matters.
    The Board also solicits comments on whether consumers who use APYs 
to comparison shop may be confused by an APY that reflects monthly 
compounding but pays less interest than if interest had compounded in 
the account. For example, assume two institutions offer a one-year CD 
with a 6.00% interest rate. One mandates monthly interest checks, the 
other permits monthly interest checks or monthly compounding. Both 
could advertise a 6.17% APY, even though a consumer depositing $1,000 
receives $60 if interest checks are paid and $61.70 if money is left in 
the account.

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

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


Sec. 230.2  Definitions.

Paragraph (c)--Annual Percentage Yield

    The act and regulation define the APY as the total amount of 
interest that would be received based on the interest rate and the 
frequency of compounding for a 365-day year. The proposed amendment 
broadens the definition to treat crediting to the consumer's account--
which includes the distribution of interest through interest checks or 
transfer--as the equivalent of compounding. For example, if an 
institution pays a 6.00% interest rate on an account, the same APY 
would result whether an institution compounds monthly or solely sends 
out monthly interest payments and does not permit interest to remain in 
the account.
    The Board solicits comments on whether an exception should be made 
to the definition of APY, and whether the purpose of the regulation--
enabling consumers to make informed decisions about deposit accounts--
is better met if the APY captures the time value of interest received 
as an interest payment during the term of the account, as well as by 
compounding.

Paragraph (h)--Compounding

    The act and regulation require institutions to disclose compounding 
policies for interest-bearing accounts. The Board proposes to define 
the term ``compounding'' as the frequency that earned interest is added 
to the principal in the consumer's account, on which interest then 
accrues. To illustrate, a CD offering monthly compounding adds interest 
to principal each month, and interest then accrues on the new month's 
principal--including the prior month's accrued interest.

Paragraph (j)--Crediting

    The act and regulation also require institutions to disclose 
crediting policies for interest-bearing accounts. The Board proposes to 
define the term ``crediting'' to include the frequency that earned 
interest is paid to the account, or provided to the consumer by check 
or transfer to another account. Thus, for example, an institution that 
sends a consumer a monthly check of accrued interest would be crediting 
interest monthly, even if interest were not permitted to remain in the 
account to earn additional interest.


Sec. 230.4  Account Disclosures.

Paragraph (b)(6)(iii)--Withdrawal of Interest Prior to Maturity

    The regulation requires a disclosure for institutions offering time 
accounts that compound interest and permit a consumer to withdraw 
accrued interest during the account term. The disclosure states that 
the APY assumes interest remains on deposit until maturity and that a 
withdrawal will reduce earnings. The Board requests comment on whether 
the disclosure would continue to be helpful to consumers in the current 
form if the proposed amendments are adopted.


Sec. 230.7  Payment of Interest.

Paragraph (b)--Compounding and Crediting Policies

    The act requires institutions to pay interest on the full amount of 
the principal in the account each day, and provides that this 
requirement shall not be construed as prohibiting or requiring the use 
of any particular method of compounding or crediting interest. 
Regulation DD states that the requirement to pay interest on the full 
amount of principal does not require institutions to compound or credit 
interest at any particular frequency.
    As discussed above, the Board believes institutions may choose any 
compounding or crediting frequency. However, once interest is credited 
to an account it becomes part of the principal, and if interest remains 
in the account, interest must be paid on those funds. The Board 
believes institutions may choose to offer accounts that credit interest 
solely by posting interest to the account, or by sending interest 
checks or transferring the interest to another account. But the Board 
also believes institutions offering accounts that provide consumers 
with the option to have interest credited by check (or transfer to 
another account) or by posting interest to the account provide at least 
as frequent a crediting frequency to all holders of the same account. 
That is, institutions must compound interest on funds remaining in the 
account at a frequency no less often than interest is offered to be 
credited--by check or transfer--to other consumers holding such 
accounts. For example, institutions may offer a one-year CD with 
monthly compounding and the option to receive monthly or quarterly 
interest checks, but they may not combine quarterly compounding with 
the option to receive monthly interest checks. The Board requests 
comment on the proposal.

Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
Purposes

A. General Rules
    The proposed amendments to Appendix A only affect institutions that 
credit interest solely by check or transfer to another account (and 
that do not permit the consumer to leave interest in the account). The 
Board proposes two amendments to Appendix A to address the calculation 
of the APY for these accounts. First, the Board proposes to delete 
footnote 3 as unnecessary. Second, the definition of ``Interest'' in 
the APY formula would be amended to provide that for such accounts, 
institutions would factor in the timing of interest payments as if 
interest were being compounded. For example, if an institution offers a 
two-year CD with a 6.00% interest rate and credits interest semi-
annually to the consumer by check or transfer to another account, the 
``Interest'' figure used in the APY formula would be $125.51 on a 
$1,000 deposit. This would be the dollar amount of interest earned for 
a two-year CD with a 6.00% interest rate that compounds semi-annually. 
The APY would be 6.09%.
    Finally, the Board also provides guidance on two assumptions for 
calculating the APY that provide greater flexibility and ease 
compliance with the APY formula. First, institutions could calculate 
the APY by assuming an initial deposit amount of $1,000. Second, if 
interest is paid out monthly, quarterly, or semi-annually, institutions 
could base the number of days either on the actual number of days for 
those intervals or on an assumed number of days (30 days for monthly 
distributions, 91 days for quarterly distributions, and 182 days for 
semiannual distributions).

Appendix B--Model Clauses and Sample Forms

    The Board solicits comments on model clauses or additional sample 
forms that may be appropriate if the amendments are adopted.

(4) Proposed Additional Guidance

    The proposed regulatory amendments associated with a new APY 
formula raise other interpretive issues. The Board solicits comments on 
the issues addressed below:
    1. Comparing accounts that disclose the same APY but earn different 
dollar amounts of interest. Under the proposal, consumers may receive 
the same APY disclosure but different dollar amounts of interest.2 
The Board solicits comment on whether consumers who are comparison 
shopping would be better served if the specific manner in which 
interest is credited (such as, ``An annual percentage yield of 6.17% 
with monthly interest checks'') should be stated along with the APY. 
(See Secs. 230.3(e), 4(a)(ii), 4(b)(1)(i), 5(b), 8(b).)
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    \2\For example, assume a one-year CD that pays an interest rate 
of 6.00%. Consumers would receive an APY of 6.17% if the institution 
requires monthly interest payments. Or, if the institution permits 
interest to be withdrawn monthly instead, the proposed amendments 
would also require institutions to permit interest to remain in the 
account for monthly compounding. Consumers holding this account 
would also receive an APY of 6.17% whether the consumer chooses to 
take monthly interest checks or to have interest remain in the 
account. However, based on a $1,000 deposit consumers who receive 
interest checks will earn $60.00, while those who compound interest 
will earn $61.70.
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    2. Compounding and crediting frequencies. The regulation requires 
institutions to disclose the frequency with which interest is 
compounded and credited. This standard would require institutions also 
to specify the crediting frequency for interest payments sent directly 
to the consumer or to another account, whether by check or other means, 
as well as when interest is credited to the account. The Board solicits 
comment on the proposed disclosure and on whether stating the frequency 
of crediting by interest payments or transfers to other accounts is 
likely to help consumers compare and understand differences in account 
terms. (See Sec. 230.4(b)(2).)

(5) Form of Comment Letters

    Comment letters should refer to Docket No. R-0836, and, when 
possible, should use a standard typeface with a type size of 10 or 12 
characters per inch. This will enable the Board to convert the text 
into machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, if 
accompanied by an original document in paper form, comments may be 
submitted on 3 1/2 inch or 5 1/4 inch computer diskettes in any IBM-
compatible DOS-based format.

(6) Regulatory Flexibility Analysis and Paperwork Reduction Act

    The Board's Office of the Secretary has prepared an economic impact 
statement on the proposed revisions to Regulation DD. The analysis 
expresses concern about the desirability of amending the regulation 
regarding the linkage of compounding and crediting frequencies at this 
time. A copy of the analysis may be obtained from Publications 
Services, Board of Governors of the Federal Reserve System, Washington, 
DC 20551, at (202) 452-3245.
    The Board solicits information regarding the likely costs for 
complying with the proposed changes to the regulation. In particular, 
the Board solicits comments on the following:
     What proportion of existing accounts would be affected by 
the proposed new rule requiring institutions to offer compounding on 
the same frequency as they permit interest payouts?
     What changes would institutions have to make to implement 
the proposed new compounding and crediting rule, and what would it cost 
institutions to make these changes?
     What changes in the number of different account terms and 
types of accounts offered would result if the proposal were adopted? 
For example, would institutions reduce the number of products offered? 
What effect would the amendments have on ``private banking'' 
relationships? Would institutions change from compounding to 
distributing the interest paid on accounts without compounding?
    In accordance with section 3507 of the Paperwork Reduction Act of 
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be 
reviewed by the Board under the authority delegated to the Board by the 
Office of Management and Budget after consideration of comments 
received during the public comment period.

List of Subjects in 12 CFR Part 230

    Advertising, Banks, Banking, Consumer protection, Deposit accounts, 
Interest, Interest rates, Truth in savings.

    Certain conventions have been used to highlight the proposed 
revisions to the regulation. New language is shown inside bold-faced 
arrows, while language that would be deleted is set off with bold-faced 
brackets.
    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 230 as follows:

PART 230--TRUTH IN SAVINGS (REGULATION DD)

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

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

    2. Part 230.2 would be amended by revising paragraph (c), by 
redesignating paragraph (h) and paragraphs (i) through (v) as paragraph 
(i) and paragraphs (k) through (w), respectively, and by adding new 
paragraphs (h) and (j) to read as follows:


Sec. 230.2  Definitions.

* * * * *
    (c) Annual percentage yield means a percentage rate reflecting the 
total amount of interest paid on an account, based on the interest rate 
and the frequency of crediting or compounding, for a 
365-day period and calculated according to the rules in Appendix A of 
this part.
* * * * *
    (h) Compounding means the frequency that earned interest 
is added to the principal in the account on which interest then 
accrues.
* * * * *
    (j) Crediting means the frequency that earned interest is 
paid to the account, or provided to the consumer by check or transfer 
to another account.
* * * * *
    3. Section 230.7 would be amended by redesignating paragraph (b) as 
paragraph (b)(1) and by adding a new paragraph (b)(2) to read as 
follows:


Sec. 230.7  Payment of interest.

* * * * *
    (b) * * * 
    (2) Equivalent compounding and crediting frequencies. 
Institutions offering accounts that permit consumers to receive 
interest by check or transfer to another account and that permit 
consumers to leave interest in the account, must compound interest on 
funds left in the account at a frequency no less often than interest is 
offered to be credited to any consumer holding such an 
account.
* * * * *
    4. Appendix A of part 230 would be amended by revising the first 
sentence in the introductory paragraph, the introductory text to Part 
I, and amending paragraph A, and by removing footnote 3 in Part I of 
Appendix A to read as follows:

Appendix A to Part 230--Annual Percentage Yield Calculation

    The annual percentage yield measures the total amount of interest 
[paid] earned on an account based on the interest 
rate, and the frequency of compounding[,] or 
crediting.1 * * *
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    \1\ The annual percentage yield reflects only interest and does 
not include the value of any bonus (or other consideration worth $10 
or less) that may be provided to the consumer to open, maintain, 
increase or renew an account. Interest or other earnings are not to 
be included in the annual percentage yield if such amounts are 
determined by circumstances that may or may not occur in the future.
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Part I. Annual Percentage Yield for Account Disclosures and Advertising 
Purposes

    In general, the annual percentage yield for account disclosures 
under Secs. 230.4 and 230.5 of this part and for advertising under 
Sec. 230.8 of this part is an annualized rate that reflects the 
relationship between the amount of interest that would be earned by the 
consumer for the term of the account (and taking into account 
the frequency of crediting) and the amount of principal used 
to calculate that interest. Special rules apply to accounts with tiered 
and stepped interest rates.

A. General Rules

    * * * In determining the total interest figure to be used in the 
formula, institutions shall assume that all principal and interest 
remain on deposit for the entire term and that no other transactions 
(deposits or withdrawals) occur during the term.[3] * * *
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    \3\[This assumption shall not be used if an institution 
requires, as a condition of the account, that consumers withdraw 
interest during the term. In such a case, the interest (and annual 
percentage yield calculation) shall reflect that requirement.]
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    The annual percentage yield is calculated by use of the following 
general formula (``APY'' is used for convenience in the formulas):

APY=100 [(1+(Interest/Principal))(365/Days in term)-1]

    ``Principal'' is the amount of funds assumed to have been deposited 
at the beginning of the account.
    ``Interest'' is the total dollar amount of interest earned on the 
Principal for the term of the account in which credited 
interest remains in the account. If interest is required to be credited 
solely by check or transfer, the total dollar amount of interest earned 
on the Principal for the term of the account is the amount of interest 
that would result if it were compounded at the same frequency interest 
is credited.
    ``Days in term'' is the actual number of days in the term of the 
account.
* * * * *
    Examples:
* * * * *
    (3) If an institution offers a $1,000 two-year certificate 
of deposit that credits interest semi-annually solely by check or 
transfer, and there is no compounding at a 6.00% interest rate, using 
the general formula above, the annual percentage yield is 6.09%:

APY=100 [(1+(125.51/1,000))(365/730)-1]
APY=6.09%
* * * * *
Board of Governors of the Federal Reserve System, May 4, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-11154 Filed 5-10-94; 8:45 am]
BILLING CODE 6210-01-P