[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