[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16641]


[[Page Unknown]]

[Federal Register: July 11, 1994]


                                                   VOL. 59, NO. 131

                                              Monday, July 11, 1994

FEDERAL RESERVE SYSTEM

12 CFR Part 230

[Regulation DD; Docket No. R-0836]

 

Truth in Savings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule and extension of comment period.

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SUMMARY: On May 11, 1994, the Board requested comment on a proposal to 
amend Regulation DD (Truth in Savings) dealing with crediting and 
compounding practices and having the effect of producing an annual 
percentage yield (APY) that reflects the time value of money. The Board 
is extending the comment period for 60 days to give the public 
additional time to provide comments. In addition, the Board is 
publishing for comment a further alternative for APY calculations that 
would allow institutions to disclose an APY equal to the contract 
interest rate on time accounts with maturities greater than one year 
that do not compound interest but pay interest at least annually. This 
alternative would provide the Board with a more modest option as it 
considers a final resolution to problems with APY calculations.

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

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

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

SUPPLEMENTARY INFORMATION:

(1) Background

    The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires 
depository institutions to provide disclosures to consumers about their 
deposit accounts, including an annual percentage yield (APY) on 
interest-bearing accounts. The act is implemented by the Board's 
Regulation DD (12 CFR part 230), which became effective June 21, 1993 
(see 57 FR 43337 and 58 FR 15077).
    Because the current formula for calculating the APY assumes that 
interest remains on deposit until maturity, the resulting APY may--but 
does not always--reflect the time value of money. The formula produces 
an APY that is less than the contract interest rate for long-term 
certificates of deposit (CDs) that are noncompounding but pay interest 
periodically. On December 6, 1993, the Board published a proposal that 
called for an additional APY formula that would have factored into the 
APY calculation the specific time intervals for interest paid on the 
account--that is, the time value of money (58 FR 64190). The proposal 
was withdrawn on May 11, based on considerations of cost and regulatory 
burden (59 FR 24376).
    In the context of deliberations about the December 1993 proposal, 
the Board considered related issues regarding depository institutions' 
compounding and crediting practices. On May 11, 1994, the Board 
proposed amendments to clarify the relationship between compounding and 
crediting and provide an alternative basis for eliminating anomalies 
produced by the current APY formula (59 FR 24378). The Board has 
received requests for an extension of the proposal's comment period, 
due to end on July 5, 1994; the Board is extending the comment period 
to September 6, 1994.

Alternative APY Resolution

    In addition to extending the comment period on the current 
proposal, the Board has decided to solicit comment on an alternative 
approach for APY calculations. Under this alternative, the only 
institutions affected would be those offering noncompounding multi-year 
CDs that pay interest at least annually. Those institutions would 
disclose an APY equal to the interest rate, regardless of whether 
interest payments were made annually or more frequently. The APY for 
all other accounts would reflect the interest rate paid and any 
compounding. Interest payments by check or transfer would not be 
factored into the APY calculation.
    This alternative (called Approach B in the December 1993 proposal) 
was considered by the Board in its deliberations on adding a new APY 
formula. The Board declined to adopt Approach B at that time, mainly 
based on concerns about the limited resolution of anomalies associated 
with the APY and costs associated with its implementation.
    A number of factors have led the Board to reopen comments on this 
alternative. The Congress chose the APY as the primary uniform 
measurement for comparison shopping among deposit accounts. The Board 
believes the APY formula should produce a mathematical figure that is 
easily understood and readily reveals to consumers an account's 
comparative value. The Board also believes that regulatory compliance 
should be as simple and cost-effective as possible, and that reductions 
in product variety and consumer choice due to regulatory requirements 
should be minimized.
    Taking all these factors into account, and recognizing that all 
formulas contain assumptions that are valid in some circumstances and 
not in others, the Board seeks comment on whether this limited approach 
would achieve a satisfactory resolution of the competing interests for 
accuracy, consumer understanding, product flexibility, and ease of 
compliance.
    The Board also solicits comment on whether adoption of such an 
alternative would reduce the incentive for institutions to offer 
compounding multi-year CDs. For example, assume two institutions offer 
a two-year CD with a 6.00% interest rate; one mandates monthly interest 
checks, the other offers annual compounding. Both could advertise a 
6.00% APY, even though a consumer depositing $1,000 receives $120 if 
interest checks are paid annually and $123.60 if money is left in the 
account.

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

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

Section 230.4--Account Disclosures

Paragraph (b)(6)--Features of Time Accounts
    The regulation requires a disclosure for institutions offering time 
accounts that compound interest and permit a consumer to withdraw 
accrued interest during the account term. The disclosure states that 
the APY assumes interest remains on deposit until maturity and that a 
withdrawal of interest will reduce earnings. The Board request comments 
on whether a similar disclosure would be helpful to consumers 
purchasing noncompounding multi-year CDs that pay interest at least 
annually and disclose an APY equal to the interest rate. For example, 
the disclosure would alert consumers that dollar earnings will be less 
than for a multi-year CD with the same maturity (and disclosing the 
same APY) that compounds annually. The Board solicits suggestions for 
text that would be most helpful to consumers.

Section 230.8--Advertising

Paragraph (c)(6)--Features of Time Accounts
    The regulation requires institutions advertising APYs to disclose 
other key features about the account. The Board solicits comment on 
whether institutions advertising an APY equal to the interest rate on 
noncompounding multi-year accounts that make interest payments annually 
should be required also to make a disclosure like the one discussed 
above. If so, the Board solicits suggestions for text that would be 
helpful to consumers and take into account the constraints of 
advertising media.

Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
Purposes
    A. General rules. Under the alternative approach, the proposed 
amendments to Appendix A only affect institutions that offer 
noncompounding multi-year CDs that pay interest at least annually. A 
new paragraph E is added to clarify how APYs shall be determined for 
such accounts. The Board requests comment on the proposed paragraph and 
accompanying example.

Appendix B--Model Clauses and Sample Forms

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

(3) Form of Comment Letters

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

(4) Regulatory Flexibility Analysis and Paperwork Reduction Act

    The Board's Office of the Secretary previously prepared an economic 
impact statement on the proposed alternative dealing with 
noncompounding multi-year CDs that pay interest at least annually. A 
copy of the analysis may be obtained from Publications Services, Board 
of Governors of the Federal Reserve System, Washington, DC 20551, at 
(202) 452-3245.
    In accordance with section 3507 of the Paperwork Reduction Act of 
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be 
reviewed by the Board under the authority delegated to the Board by the 
Office of Management and Budget after consideration of comments 
received during the public comment period.

List of Subjects in 12 CFR Part 230

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

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

PART 230--TRUTH IN SAVINGS (REGULATION DD)

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

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

    2. In Part 230 Appendix A would be amended by revising the second 
sentence in the introductory text to Part I and the first sentence of 
paragraph A, and by adding a new paragraph E as follows:

Appendix A to Part 230--Annual Percentage Yield Calculation

* * * * *

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

* * * Special rules apply to accounts with tiered and stepped 
interest rates, and to certain time accounts with a 
stated maturity greater than one year.

A. General Rules

Except as provided in Part I.E. of this appendix, the 
 [The] annual percentage yield shall be calculated by the 
formula shown below. * * *
* * * * *
E. Time accounts with a stated maturity greater than one 
year that compound interest less often than annually
    For time accounts with a stated maturity greater than one year 
that do not compound interest on an annual or more frequent basis, 
and that require (or permit) the consumer to withdraw interest at 
least annually, the annual percentage yield shall be equal to the 
interest rate.
    Example:
    (1) If an institution offers a $1,000 two-year certificate of 
deposit that credits interest semi-annually solely by check or 
transfer, and there is no compounding at a 6.00% interest rate, the 
annual percentage yield is 6.00%.
* * * * *
    Board of Governors of the Federal Reserve System, July 5, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-16641 Filed 7-8-94; 8:45 am]
BILLING CODE 6210-01-P