[Federal Register Volume 60, Number 17 (Thursday, January 26, 1995)]
[Rules and Regulations]
[Pages 5128-5131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1785]
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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: Interim rule.
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SUMMARY: The Board has adopted an interim rule amending Regulation DD
(Truth in Savings) to permit institutions to disclose an annual
percentage yield (APY) equal to the contract interest rate for time
accounts with maturities greater than one year that do not compound but
require interest distributions at least annually. This interim rule
does not apply to or affect institutions that permit but do not require
(or that bar) interest distributions before maturity. This amendment
resolves questions about the APY disclosure for these accounts during
consideration of public comments on a related proposal published
elsewhere in today's Federal Register.
EFFECTIVE DATE: January 18, 1995.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, Kyung
Cho-Miller, or Obrea Otey Poindexter, 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:
I. 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 calculated under a method prescribed by the
Board. The APY is the primary uniform measurement for comparison
shopping among deposit accounts. The law also contains rules about
advertising, including the advertising of accounts at depository
institutions offered to consumers by deposit brokers. The Board's
Regulation DD (12 CFR part 230), which was adopted in September 1992
and became effective in June 1993, implements the act. (See 57 FR
43337, September 21, 1992, and 58 FR 15077, March 19, 1993.)
In adopting Regulation DD, the Board considered various approaches
for calculating the APY, reflecting several competing interests and
concerns. The current APY formula is simple and easy to use. It assumes
that interest remains on deposit until maturity. This assumption
produces an APY that has the effect of reflecting the time value of
money for accounts that remain on deposit until maturity. It does not
always reflect the time value of money when there are interest payments
prior to maturity.
II. Proposals Affecting the APY
As deposit brokers began complying with the APY formula and
Regulation DD's advertising rules, the Securities Industry Association
(SIA) asked the Board to reconsider how the APY is calculated. The SIA
objected to the fact that, for multi-year certificates of deposit (CDs)
that are noncompounding but pay interest at least annually, the formula
produces an APY that is less than the contract interest rate.
Disclosure of an APY lower than the interest rate did not, according to
the SIA, always allow for meaningful comparison shopping among deposit
accounts. The SIA believed that the APY should at least equal the
contract interest rate.
In December 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, December 6, 1993); an additional internal rate of return formula
would have been added to the regulation. The proposal also offered an
alternative limited change in the APY disclosure for multi-year
noncompounding CDs; under this approach, institutions would disclose an
APY equal to the contract interest rate if the CDs paid interest at
least annually. The proposal was withdrawn in May 1994, based on
considerations of [[Page 5129]] cost and burden at that time (59 FR
24376, May 11, 1994).
Simultaneously with the withdrawal of the December 1993 proposal,
in May 1994 the Board published a related proposal that addressed
depository institutions' compounding and crediting practices. Under the
May proposal, institutions offering accounts that pay interest by check
(or transfer) or by posting interest to the account would have to post
interest at least as often as they pay out interest by check. That is,
for accountholders leaving the interest in the account, interest would
compound on at least as frequent a basis as the interest payments made
to others. For example, if an institution offers a two-year CD, permits
consumers to receive accrued interest in monthly interest checks, and
also permits interest to remain in the account, the institution would
have to credit and compound interest at least monthly. If an
institution sends consumers the interest payments (and does not permit
consumers to leave interest in the account), the institution would
treat the interest payment frequency as compounding in the APY
calculation. For example, for a two-year CD that requires consumers to
receive an annual interest payment, the APY would reflect annual
compounding.
In July, the Board extended the time to provide comments on the
proposed amendments. At the same time, the Board reopened comment on a
limited alternative that had been published in December 1993 and
withdrawn in May 1994; that alternative equates the APY and the
contract interest rate for noncompounding multi-year CDs that pay
interest at least annually. (59 FR 35271, July 11, 1994)
The Board received about 550 comments on the proposal (including
comments on the alternative approach involving noncompounding multi-
year CDs). About 95% of the comments were from financial institutions.
The remaining 5% were from trade associations, data processors and
others. Approximately 450 comments addressed the proposed amendments
affecting the APY formula; about 2% were in favor of the proposal, 98%
were opposed, most of them because of the proposed matching of
compounding and crediting frequencies. About 100 commenters addressed
the alternative that would equate the APY to the interest rate; nearly
60% supported this approach.
On January 4, 1995, the Board adopted one part of the May 1994
proposal. The Board voted to amend the definition of the APY to reflect
the frequency of interest payments; it declined to adopt another
portion of the May proposal that would have affected institutions'
crediting and compounding policies. The Board also declined to adopt
the alternative proposal published in July 1994 that equated the APY
and the interest rate for multi-year, noncompounding certificates of
deposit that make interest payments at least annually. Subsequently,
the Board received petitions for reconsideration from both the major
banking industry trade associations and consumer advocates.
On January 17, the Board granted the petitions and decided to
publish for public comment a modified version of the May 1994 proposal,
which would factor the time value of interest payments into the APY
calculation using the current formula, but would not require
institutions to match crediting and compounding policies for accounts
where consumers may receive interest payments or leave interest in the
account. The Board is also soliciting comment on a second approach that
would factor the time value of interest payments into the APY
calculation using an additional internal rate of return formula. (See
Docket R-0869 elsewhere in today's Federal Register.)
In order to address immediately one anomaly created by the current
rule, the Board is adopting as an interim rule an APY disclosure for
noncompounding multi-year CDs.
III. Equating the APY and Interest Rate for Multi-Year Noncompounding
CDs
The interim rule represents a modified version of the July
proposal: Institutions may disclose an APY equal to the contract
interest rate for noncompounding multi-year CDs that require interest
distributions at least annually. Institutions that prohibit withdrawal
of interest or that permit (but do not require) interest distributions
are not affected. The Board believes that this narrow rule provides a
targeted response to questions about the APY disclosure for the class
of accounts that currently must disclose an APY that is lower than the
stated interest rate. The Board believes adopting the interim rule is
necessary to limit any consumer confusion and to allow more effective
comparison shopping by consumers.
The interim rule is based on concerns expressed by commenters in
the earlier rulemakings and upon further analysis by the Board. For
example, commenters voiced concern that under the July 1994 proposal,
which covered noncompounding multi-year CDs that paid--or offered to
pay--interest at least annually, the same APY could be disclosed for
compounding and noncompounding CDs (such as a noncompounding two-year
CD with annual interest checks and a two-year CD that also offers
annual interest checks or annual compounding) and this might discourage
compounding. The Board believes the interim rule responds to these
concerns. The interim rule does not apply to a multi-year CD that
provides optional periodic withdrawals of interest. That account must
compound at least annually to quote an APY equal to the contract
interest rate. Under the existing rules, for example, if a consumer
invests $1,000 in a two-year CD and Institution A offers a
noncompounding two-year CD at a 6% interest rate and permits interest
withdrawals or requires interest payouts only at maturity, the APY is
5.83%. Under the interim rule, if Institution B offers a noncompounding
two-year CD at the same interest rate and requires annual interest
checks, the APY is 6.00%.
In addition to narrowing the scope of the amendment, the Board is
requiring a brief narrative for account disclosures and advertisements
if institutions choose to comply with the interim rule and state an APY
equal to the contract interest rate. The Board believes this narrative
will further minimize possible consumer confusion about the effect of
interest payments on the APY and earnings from the account.
The interim rule being adopted by the Board will permit new APY
disclosures to be made in certain circumstances pending final
resolution of this matter. As the Board moves toward a permanent
resolution of this issue, it will consider commenters' views on
retaining the interim rule.
IV. Regulatory Revisions: Section-by-Section Analysis
Section 230.4--Account Disclosures
4(b) Content of account disclosures
4(b)(6) Features of time accounts
4(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 of interest will reduce earnings. Under the interim rule,
the Board is adding a brief narrative for institutions that state an
APY equal to the contract interest rate for noncompounding multi-year
CDs that require interest payouts at least annually. The Board believes
a [[Page 5130]] statement alerting customers to the fact that interest
cannot remain in the account will assist consumers in comparison
shopping between multi-year CDs with annual compounding and multi-year
CDs that do not compound but require interest payouts during the
account term, without adding an undue burden on institutions.
Section 230.8--Advertising
8(c) When additional disclosures are required
8(c)(6) Features of time accounts
The regulation requires institutions advertising APYs to disclose
other key features about the account. Under the interim rule, the Board
is adding a brief narrative that parallels the disclosure required by
Sec. 230.4(b)(6)(iii). If an institution states an APY equal to the
contract interest rate in advertising a noncompounding multi-year CD
that requires interest payments, the fact that interest payouts are
mandatory and that interest cannot remain in the account must be
stated. The Board believes that the disclosure will assist consumers in
comparison shopping between multi-year CDs that compound annually and
multi-year CDs that do not compound but require interest payouts at
least annually, without adding undue burden on institutions.
Appendix A to Part 230--Annual Percentage Yield Calculation
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
E. Time Accounts With a Stated Maturity Greater Than One Year That Pay
Interest at Least Annually
Under the interim rule, the amendments to Appendix A affect
institutions offering noncompounding multi-year CDs that require
interest payouts at least annually. A new paragraph E is added to
clarify how APYs may be determined for such accounts. Two examples are
added, including an example calculating the APY for a stepped-rate
account covered by the amendments.
The statute provides that the APY shall be calculated under a
method prescribed by the Board in regulations, and authorizes the Board
to provide for adjustments and exceptions for any class of accounts
that, in the Board's judgment, are necessary or proper to carry out the
purposes of the act, prevent circumvention of the act's requirements,
or facilitate compliance. Based on the comments received and further
analysis, the Board finds that an interim rule permitting institutions
to disclosure an APY equal to the contract interest rate for
noncompounding multi-year CDs that require interest distributions at
least annually is necessary to carry out the purposes of the act--
enabling consumers to make informed decisions about deposit accounts.
The exception is narrowly drawn, and reflects the value of receiving
payments at least annually on accounts that do not permit
accountholders to keep interest on deposit until maturity.
Appendix B to Part 230--Model Clauses and Sample Forms
B-1 Model Clauses for Account Disclosures
(h) Disclosures relating to time accounts
(h)(v) Required interest distribution
Under the interim rule, the Board is adding a model clause to
describe the effect of interest payments on earnings.
V. Regulatory Flexibility Analysis and Paperwork Reduction Act
The Board's Office of the Secretary has prepared a regulatory
analysis on the interim rule. A copy of the analysis may be obtained
from Publications Services, Board of Governors of the Federal Reserve
System, Washington, D.C. 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 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 interim rule revises the APY that may be disclosed for
noncompounding CDs greater than one year that require interest payouts
at least annually. It also adds a brief narrative for account
disclosures and advertisements for accounts that disclose the contract
interest rate as the APY. The Board believes the burden associated with
the amendment affects a narrow class of accounts and is likely to be
minimal. New calculations are permissive, and the Board believes only a
small number of institutions will be affected. Based on its analysis of
the impact of the amended regulation, the Board believes that there is
no net change in the Board's current estimate of paperwork burden
associated with Regulation DD. The annual information disclosure burden
for state member banks is estimated to be 1.7 million hours.
List of Subjects in 12 CFR Part 230
Advertising, Banks, banking, Consumer protection, Federal Reserve
System, Reporting and recordkeeping requirements, Truth in savings.
For the reasons set forth in the preamble, the Board amends 12 CFR
part 230 as set forth below:
PART 230--TRUTH IN SAVINGS (REGULATION DD)
1. The authority citation for part 230 continues to read as
follows:
Authority: 12 U.S.C. 4301, et seq.
2. Section 230.4 is amended by adding a new sentence at the end of
paragraph (b)(6)(iii) to read as follows:
Sec. 230.4 Account disclosures.
* * * * *
(b) * * *
(6) * * *
(iii) * * * For accounts that do not compound interest on an annual
or more frequent basis, with a stated maturity greater than one year
that require interest payouts at least annually and that disclose an
APY determined in accordance with section E of Appendix A of this part,
a statement that interest cannot remain on deposit and that payout of
interest is mandatory.
* * * * *
3. Section 230.8 is amended by adding a new paragraph (c)(6)(iii)
to read as follows:
Sec. 230.8 Advertising.
* * * * *
(c) * * *
(6) * * *
(iii) Required interest payouts. For noncompounding time accounts
with a stated maturity greater than one year that do not compound
interest on an annual or more frequent basis, that require interest
payouts at least annually, and that disclose an APY determined in
accordance with section E of Appendix A of this part, a statement that
interest cannot remain on deposit and that payout of interest is
mandatory.
* * * * *
4. In Part 230, Appendix A is amended as follows:
a. The second sentence in the introductory text to Part I is
revised;
b. The first sentence of the introductory text to Part I, A.
General Rules is revised; and
c. A new section E is added to Part I.
The revisions and addition read as follows:
Appendix A to Part 230--Annual Percentage Yield Calculation
* * * * * [[Page 5131]]
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 annual
percentage yield shall be calculated by the formula shown below.* *
*
* * * * *
E. Time Accounts with a Stated Maturity Greater than One Year that Pay
Interest At Least Annually
1. 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 the consumer to withdraw interest at least
annually, the annual percentage yield may be disclosed as equal to
the interest rate.
Example
(1) If an institution offers a $1,000 two-year certificate of
deposit that does not compound and that pays out interest semi-
annually solely by check or transfer, at a 6.00% interest rate the
annual percentage yield may be disclosed as 6.00%.
2. For time accounts covered by this paragraph that are also
stepped-rate accounts, the annual percentage yield may be disclosed
as equal to the composite interest rate.
Example
(1) If an institution offers a $1,000 three-year certificate of
deposit that does not compound and that pays out interest annually
solely by check or transfer, at a 5.00% interest rate for the first
year, 6.00% interest rate for the second year, and 7.00% interest
rate for the third year, the institution may compute the composite
interest rate and APY as follows:
(a) Multiply each interest rate by the number of days it will be
in effect;
(b) Add these figures together; and
(c) Divide by the total number of days in the term.
(2) Applied to the example, the products of the interest rates
and days the rates are in effect are (5.00% x 365 days) 1825,
(6.00% x 365 days) 2190, and (7.00% x 365 days) 2555 days,
respectively. The sum of these products, 6570 days, is divided by
1095, the total number of days in the term. The composite interest
rate and APY are both 6.00%.
* * * * *
5. In Part 230, Appendix B, under B-1 Model Clauses For Account
Disclosures, a new paragraph (h)(v) is added to read as follows:
Appendix B to Part 230--Model Clauses and Sample Forms
* * * * *
B-1--Model Clauses for Account Disclosures
* * * * *
(h) * * *
(v) Required interest distribution.
This account requires the distribution of interest and does not
allow interest to remain in the account.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, January 18, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-1785 Filed 1-25-95; 8:45am]
BILLING CODE 6210-01-P