[Federal Register Volume 60, Number 17 (Thursday, January 26, 1995)]
[Proposed Rules]
[Pages 5142-5152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1786]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 /
Proposed Rules
[[Page 5142]]
FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R-0869]
Truth in Savings
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is publishing for public comment proposed amendments
to Regulation DD (Truth in Savings) that would amend the current
formula to factor the frequency of interest payments into the
calculation of the annual percentage yield (APY), along with the
interest rate paid and frequency of compounding. The proposal is
intended to correct an anomaly under the current formula, to avoid
misranking accounts that pay out interest (without compounding). The
Board is also soliciting comment on an alternative approach that would
use an internal rate of return formula to calculate the APY. The Board
believes an APY that reflects the timing of interest payments would
enhance comparison shopping among savings products, and the proposals
provide two approaches for reaching that result. Institutions would not
be required to change the nature of their accounts under either
approach, nor would they be required to compound interest at the same
frequency as they credit interest by check or transfer when consumers
may receive interest payments or leave interest in the account.
Separately published elsewhere in this issue of the Federal Register,
the Board is adopting an interim rule for certain noncompounding multi-
year certificates of deposit that would permit institutions to disclose
an APY equal to the contract interest rate while the public is
commenting on the proposal and the Board is evaluating those comments.
DATES: Comments must be received on or before March 20, 1995.
ADDRESSES: Comments should refer to Docket No. R-0869, 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 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
rules regarding availability of information.
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 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 in cases when interest payments are made at the same frequency as
interest is compounded for funds 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 the
regulation'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 account 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 argued that the APY should at least equal the account interest
rate.
In December 1993, the Board published a proposal that factored into
the APY calculation the specific time intervals for interest paid on
the account--that is, the time value of money--and provided an
additional internal rate of return formula (58 FR 64190, December 6,
1993). 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 account interest rate
if the CDs paid interest at least annually. The proposal was withdrawn
in May, based on considerations of cost and burden at that time (59 FR
24376, May 11, 1994).
Simultaneously with the withdrawal of the December 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 paid 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 offered a two-
[[Page 5143]] year CD, and would permit consumers to receive accrued
interest in monthly interest checks or to permit interest to remain in
the account, the institution would have to credit and compound interest
at least monthly.
The May proposal also would treat the distribution of interest from
the account as the equivalent of compounding. For example, if an
institution sent consumers the interest payments (and did not permit
consumers to leave interest in the account), the institution would
treat the interest payment frequency as compounding in the APY
calculation. Thus, 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
the limited alternative that had been published in December 1993 and
withdrawn in May 1994; that alternative equates the APY and the account
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. The effective
date for the Board's APY rule adopted on January 4 would permit
institutions to comply immediately; compliance became mandatory in
September 1995.
Subsequently, the Board received petitions for reconsideration from
both the major banking industry trade associations and consumer
advocates. The trade associations and consumer groups stated several
reasons in their letters asking for reconsideration and protesting the
Board's action, including that the public should have been given an
opportunity to comment directly on the amendment requiring the APY to
reflect the frequency of interest payments--as modified from the May
proposal--before its adoption by the Board.
On January 17, in order to address the concerns raised by the
petitioners regarding public comment and to ensure a full airing of all
aspects of proposed amendments to the APY calculation and definition,
the Board granted the petitions and decided to publish for further
public comment the proposal adopted on January 4 as well as an
alternative internal rate of return formula affecting the calculation
of the APY. At the same time, the Board adopted an interim rule that
would permit institutions to equate the APY and the contract interest
rate for noncompounding multi-year accounts that mandate interest
payouts at least annually. (See Docket R-0836 elsewhere in today's
Federal Register.)
III. Factoring the Time Value of Interest Payments Into the APY
Based on the comments received and upon further analysis, the Board
is proposing to reflect the frequency of interest payments in the
calculation of the APY, along with the interest rate paid and frequency
of compounding. This proposed amendment would factor the time value of
interest payments into the APY calculation using the current formula.
It is a modified version of the May 1994 proposal. The proposal would
apply to all account types.
This approach could be more helpful to consumers who comparison
shop among deposit accounts and other investment products. For example,
it could allow consumers more easily to compare accounts that require
the distribution of interest payments with those that permit consumers
to receive payments, such as when two institutions offer a two-year CD
with a 6.00% interest rate and semi-annual payouts (mandatory with
Institution A and optional by Institution B). If the APY reflected the
timing of interest payments, both institutions would disclose a 6.09%
APY to a consumer who receives payouts. Currently, the APYs disclosed
may differ. Both institutions would disclose a 5.83% APY if interest
left in the account does not compound. Institution B, however, would
disclose a 6.00% APY if interest left in the account compounds
annually, even though payments are made on the same basis as
Institution A.
The Board is also soliciting comment on an alternative approach to
factor the time value of money into the APY. It would require an
additional formula to calculate the APY--the internal rate of return
formula proposed in December 1993. Both proposals would reflect the
time value of money, and, as the table below illustrates, the APY would
reflect this value. The example illustrates the effect of receiving
interest payments during the term for a noncompounding 2-year CD at a
6% interest rate.
------------------------------------------------------------------------
APY under APY under
current proposed
Frequency of interest pay outs rule rules
(percent) (percent)
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Annual............................................ 5.83 6.00
Semi-annual....................................... 5.83 6.09
Quarterly......................................... 5.83 6.14
Monthly........................................... 5.83 6.17
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Under this proposal, the amendments to Regulation DD adopted in the
interim rule would be replaced, if the final rule adopts either of the
proposed amendments using the current APY formula or the alternative
APY calculation method using an internal rate of return formula.
May 1994 Proposal Affecting Compounding and Crediting Frequencies
One part of the May 1994 proposal would have required institutions
to match crediting and compounding policies for accounts where
consumers may receive interest payments or leave interest in the
account. It also would have clarified when interest becomes principal
and defined ``crediting'' and ``compounding.'' The Board recognizes
that the commenters raised valid concerns about this approach, and
because of these concerns the Board is not considering those aspects of
the May proposal in this proposed rule. Neither of the proposals under
consideration would require institutions to compound interest at the
same frequency as the institution credits interest by check or transfer
for accounts where consumers may receive interest payments or leave
interest in the account.
IV. Proposed Regulatory Revisions: Section-by-Section Analysis
Section 230.2--Definitions
2(c) Annual Percentage Yield
The act and regulation define the APY as the total amount of
interest that [[Page 5144]] would be received based on the interest
rate and the frequency of compounding for a 365-day year. The proposed
amendment would broaden the definition to treat the distribution of
interest from the account (through interest checks or transfer) as the
equivalent of compounding. For instance, if an institution pays a 6.00%
interest rate on an account, the same APY of 6.17% would result whether
an institution compounds monthly or sends out monthly interest
payments. The Board is concerned that the current formula misranks
certain alternatives, and is seeking comment about whether the proposed
changes would better accomplish the Congressional purpose.
The Board solicits comment on whether an exception should be made
to the definition of APY to factor in the timing of interest
distributions, 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.
Section 230.3--General Disclosure Requirements
3(e) Oral Response to Inquiries
The regulation requires institutions to state the annual percentage
yield in an oral response to a consumer's inquiry about interest rates
payable on its accounts. The proposal would add a brief disclosure
about the APY, to assist consumers in understanding the earnings and
APY for the account. When responding orally to a consumer's inquiry
about interest rates, institutions would be required to state the APY
and the corresponding frequency of compounding or interest
distribution. For example, if an institution offers a two-year CD with
a 6.00% interest rate and compounds interest semi-annually but permits
monthly interest checks, the oral response to a consumer who inquires
about interest rates for a two-year CD could be ``6.17%, based on
monthly checks'' (or ``6.09%, based on semi-annual compounding,'' or
both).
Section 230.4--Account Disclosures
4(b) Content of Account Disclosures
4(b)(1) Rate Information
4(b)(1)(iii) Effect of Interest Payments
The act and regulation require institutions to disclose the APY and
interest rate before an account is opened or upon request. A brief
disclosure for APYs is proposed, to assist consumer understanding of an
APY based on the frequency of interest payments in addition to
compounding. The disclosure requirement would apply to all account
types (money market deposit accounts as well as CDs, for example). If
the annual percentage yield is based (in whole or in part) on interest
distributions, institutions would be required to disclose the interest
distribution frequency and include a statement that the annual
percentage yield assumes interest payments are immediately reinvested
at the account's interest rate. If an institution offers a two-year CD
with a 6.00% interest rate and compounds interest semi-annually but
permits monthly interest checks, for example, consumers choosing to
receive interest by check each month would receive a disclosure such as
``You will earn a 6.17% APY, based on monthly checks. The annual
percentage yield assumes you immediately reinvest your interest payment
at the account interest rate.'' (Consumers choosing semi-annual
compounding would receive disclosures about the compounding frequency
under Sec. 230.4(b)(2).) The new disclosure would also apply to
accounts where interest compounds prior to the distribution of
interest. For example, if an institution offers an account with a 6.00%
interest rate, monthly compounding, and quarterly interest checks, the
APY would be 6.17%, based on the assumption that the quarterly checks
(which reflect monthly compounding) are reinvested at the account
interest rate and compounding frequency. Consumers would receive a
disclosure such as ``You will earn a 6.17% APY, based on monthly
compounding. The annual percentage yield assumes you immediately
reinvest your interest payment at the account interest rate.''
4(b)(6) Features of Time Accounts
4(b)(6)(iii) Withdrawal of Interest Prior to Maturity
The regulation currently 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 proposal would
eliminate the disclosure, since the APY would no longer reflect the
assumption that interest remains on deposit until maturity. Further,
under the proposal, consumers would receive transaction-specific
disclosures reflecting their interest payment choice.
Section 230.5--Subsequent Disclosures
5(a) Change in Terms
5(a)(2) No Notice Required
5(a)(2)(iv) Changes to the Frequency of Interest Payments Initiated by
the Consumer
The act and regulation require institutions to give 30-days'
advance notice of any change in the account disclosures if the change
might reduce the APY or adversely affect the consumer. The proposal
would create an exception for changes to the interest-payment intervals
that are initiated by the consumer. For example, if a consumer receives
monthly interest payments on an account and prior to maturity requests
the institution to start making payments semi-annually, no advance
notice would be required. However, if an institution that permits
interest payments monthly eliminates that payment option during the
term of an account, advance notice of the change would be required for
consumers who are receiving monthly payments.
Section 269 of the act authorizes the Board to make adjustments and
exceptions that are necessary or proper to carry out the purposes of
the act. The Board solicits comment on whether the proposed exception
to the change-in-terms notice requirements should be made.
Section 230.8--Advertising
8(c) When Additional Disclosures Are Required
8(c)(7) Effect of Compounding or Interest Distributions
The act and regulation provide that when an APY is stated in an
advertisement, additional disclosures are required. For the same
reasons as discussed for account disclosures requirements, institutions
that advertise an APY would be required to indicate whether the APY is
based on the frequency of interest checks or compounding. The Board
believes it is important that consumers who use advertisements to
comparison-shop are alerted to this assumption, to avoid potential
confusion or misunderstanding. Similarly, if an APY is based in whole
or in part on interest distributions, the advertisement would have to
alert consumers that the APY assumes that interest received is
reinvested at the account interest rate. For example, if an institution
advertises a two-year CD with a 6.00% interest rate, monthly
compounding, and quarterly interest checks, the institution must
include in the advertisement a [[Page 5145]] disclosure such as ``You
will earn a 6.17% APY, based on monthly compounding and quarterly
checks. The annual percentage yield assumes you immediately reinvest
your interest payment at the account interest rate.'' The Board also
proposes to amend paragraph (e) of this section, which exempts certain
types of advertisements from some disclosure requirements.
Appendix A to Part 230--Annual Percentage Yield Calculation
The proposed amendment that would factor the time value of interest
payments into the APY calculation using the current formula (the
modified version of the May 1994 proposal) is discussed below as
``Alternative 1.'' The alternative approach that would use an internal
rate of return formula to calculate the APY (proposed in December 1993)
is discussed as ``Alternative 2.''
Both approaches would incorporate two assumptions to provide
greater flexibility and to ease compliance. First, institutions could
calculate the APY by assuming an initial deposit amount of $1,000. Or,
institutions could factor in the actual dollar amount of a deposit,
although the Board notes that the effects of rounding interest paid on
a very small deposit amount such as $25 can produce a skewed APY.
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 A
permits institutions to use a similar assumption for determining the
number of days in the term of a ``three-month'' or ``six-month'' time
account, for example. (Of course, if the institution chooses to use 91
days as the number of days for each quarter, it must also use 91 days
to compute interest for those quarters. And see Sec. 230.7, which
requires institutions to pay interest on the full principal balance in
the account each day.) To illustrate, assume the institution sends
interest payments at the end of each calendar month to consumers with
six-month CDs. If the institution bases its APY calculation on an
assumed term of 183 days, the institution could calculate the effect of
monthly interest payments by using the actual days in each calendar
month or assuming five 30-day intervals and one 33-day interval.
Also, footnote 3 would be deleted as unnecessary, since both
alternatives specifically factor in when interest payments are made on
an account.
The following illustrates the differences in the two calculation
methods under Alternative 1 and Alternative 2. If an institution offers
a noncompounding two-year stepped-rate CD that pays a 5.00% interest
rate in the first year and a 10.00% interest rate the second year and
sends annual interest checks of $50 and $100 on a $1,000 deposit, the
APY would be 7.47% under Alternative 1 (the proposed amendment using
the current formula), and 7.41% using the internal rate of return
formula (Alternative 2). If a noncompounding two-year stepped-rate CD
paid a 10.00% interest rate in the first year and a 5.00% interest rate
the second year and the institution sends annual interest checks of
$100 and $50 on a $1,000 deposit, the APY would be 7.47% under
Alternative 1 and 7.59% under Alternative 2.
Alternative 1: Modifying the Current APY Formula
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
A. General Rules
Under Alternative 1, the Board would amend the definition of
``interest'' in the APY formula to provide that institutions must
factor in the timing of interest payments, if interest payments occur
more frequently than any compounding. In effect, the interest payment
would be treated as if the interest were compounded. For example, if an
institution offers a two-year CD with a 6.00% interest rate and annual
compounding and offers interest payments 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 for the
consumer who chooses semi-annual interest payments. This is the dollar
amount of interest earned for a two-year CD with a 6.00% interest rate
that compounds semi-annually. The APY for the account with semi-annual
interest payments would be 6.09%. For the consumer who leaves interest
in the account for annual compounding, the ``interest'' figure would be
$123.60 and the APY 6.00%. On the other hand, if the same CD offered
daily compounding and monthly interest checks (with daily compounding),
the imputed interest figure would be $127.49, which reflects daily
compounding and the assumption that the monthly interest checks are
reinvested at the daily compounding rate. The APY would be 6.18% for
consumers who leave interest in the account and for those who receive
monthly interest checks. In this case (when interest compounds more
frequently than interest is distributed), the APY would be based on the
compounding frequency. On the other hand, if the institution offers
daily compounding to those consumers who leave interest in the account
and does not compound interest if consumers choose to receive monthly
interest checks, the APY would be 6.17% for the ``monthly check''
account. In another example, if an institution compounds monthly but
offers consumers the option of receiving interest checks quarterly or
semi-annually, the APY would be based on monthly compounding. The APY
would be 6.17%. Two examples would be added to illustrate the new rule.
Alternative 2: Adding an Internal Rate of Return Formula
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
A. General Rules
2. Formula for all Accounts
Under Alternative 2, the Board would add a standard internal rate
of return formula which produces an APY that reflects the timing of
interest payments. The new formula could be used for all accounts. It
would have to be used for accounts that pay interest prior to the
maturity of the account. For example, institutions would use the
formula to calculate the APY for a one-year time account that compounds
semi-annually and for which the consumer receives interest payments
during the year.
The APY is determined directly from the proposed formula. For an
internal rate of return program that is standard for most calculators
and software, calculations would consider the amount and days at which
payments are made in relation to the amount and day of the deposit.
Using standard programs, the calculation will result in a daily yield,
which is annualized to produce the APY.1
\1\Annual percentage yield = ((daily yield/100 +
1)365-1) x 100.
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3. Formula for Certain Accounts
Institutions could continue to use the APY formulas currently in
Appendix A for accounts with a single interest payment made at maturity
(whether or not compounding occurs prior to maturity). [[Page 5146]]
B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)
An additional example is proposed to illustrate the use of the new
formula.
C. Variable-Rate Accounts
The proposal modifies the example in this paragraph to illustrate
the use of the proposed new formula.
Appendix B to Part 230--Model Clauses and Sample Forms
The proposed amendments to model clauses and sample forms would
address disclosure issues raised by factoring the timing of interest
payments into the APY, under the proposed amendments using the current
APY formula or an internal rate of return formula.
B-1 Model Clauses for Account Disclosures
An additional model clause (a)(v) is proposed to describe the
effect of interest payments on the APY.
Clause (b)(i) provides model language that may be used to disclose
the frequency of an institution's compounding and crediting practices.
The proposal adds a new sentence providing model language to use when
interest is credited by check payments or transfer to another account.
In accord with the proposed removal of paragraph 4(b)(6)(iii), the
Board also proposes to remove clause (h)(iii), and to redesignate
clause (h)(iv) as (h)(iii).
B-7 Sample Form
Given the proposed removal of paragraph 4(b)(6)(iii) and model
clause B-1(h)(iii), the proposal would remove the last two sentences in
the first paragraph of the sample form.
B-10 Sample Form
The proposed new sample form illustrates a disclosure for a CD that
offers consumers the options to compound interest or to receive
interest on a more frequent basis. The form discloses which interest
payment option was chosen, and an APY reflecting that choice.
V. Interpretive Guidance
APY Disclosures for Accounts Offering Multiple Payment and Compounding
Options
In addition to disclosing the APY before an account is opened,
institutions must state an APY when responding to consumers' requests
for written information about an account or to an oral inquiry about
rates. (See 12 CFR 230.4(a) and 12 CFR 230.3(e).) In a consumer account
advertisement, institutions must disclose any rate stated as the APY
(see 12 CFR 230.8(b)) and may also state the interest rate. Also, the
regulation requires institutions to provide disclosures, including the
APY, prior to maturity of automatically renewing time accounts. (12 CFR
230.5(b)) The Board solicits comment on how institutions offering
accounts with multiple payment and compounding options may comply with
the regulation's requirements under Sec. 230.4(a) (requests for account
disclosures), Sec. 230.3(e) (oral inquiries), Sec. 230.8(b)
(advertisements), and Sec. 230.5(b) (disclosures for maturing rollover
CDs) in a manner that best serves consumers who are comparison
shopping. For example, comment is requested on whether an institution
could state, along with any compounding and crediting frequency: (1)
any currently available APY, such as, ``An annual percentage yield of
6.17% assumes you receive monthly interest payments,'' (2) the lowest
and highest APYs for a given maturity, or (3) all APYs for the account.
VI. Form of Comment Letters
Comment letters should refer to Docket No. R-0869, and, when
possible, should use a standard courier typeface with a type size of 10
or 12 characters per inch. This will enable the Board to convert the
text in 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.
VII. Regulatory Flexibility Analysis and Paperwork Reduction Act
The Board's Office of the Secretary has previously prepared
regulatory analyses on proposals to factor the timing of interest
payments into the APY. Copies may be obtained from Publication
Services, Board of Governors of the Federal Reserve System, Washington,
D.C. 20551, at (202) 452-3245.
The proposed amendments would require institutions to disclose an
APY that reflects the timing of interest payments as well as
compounding. Either alternative would likely require one-time software
modifications and changes to account disclosures and advertisements.
The Board solicits comments on the likely costs for complying with the
proposed amendments, and whether the costs to implement Alternative 1
(modifying the current formula) would differ significantly from those
required to implement Alternative 2 (adding an internal rate of return
formula).
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 considering comments received
during the public comment period.
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 proposes to
amend 12 CFR part 230 as set forth below:
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. Section 230.2 would be amended by revising paragraph (c) to read
as follows:
Sec. 230.2 Definitions.
* * * * *
(c) Annual percentage yield means a percentage rate reflecting the
total amount of interest earned or imputed on an account, based on the
interest rate and the frequency of compounding, or interest
distributions from the account, for a 365-day period and calculated
according to the provisions in Appendix A of this part.
* * * * *
3. Section 230.3 would be amended by revising the first sentence of
paragraph (e) to read as follows:
Sec. 230.3 General disclosure requirements.
* * * * *
(e) Oral response to inquiries. In an oral response to a consumer's
inquiry about interest rates payable on its accounts, the depository
institution shall state the annual percentage yield, accompanied by the
corresponding frequency of compounding or interest distribution.* * *
* * * * *
4. Section 230.4 would be amended as follows:
a. A new paragraph (b)(1)(iii) would be added,
b. Paragraph (b)(6)(iii) would be removed, and
c. Paragraph (b)(6)(iv) would be redesignated as paragraph
(b)(6)(iii).
The addition would read as follows: [[Page 5147]]
Sec. 230.4 Account disclosures.
* * * * *
(b) * * *
(1) * * *
(iii) Effect of interest payments. If the annual percentage yield
is based in whole or in part on interest distributions:
(A) The interest distribution frequency.
(B) A statement that the annual percentage yield assumes the
consumer immediately reinvests interest payments at the account's
interest rate.
* * * * *
5. Section 230.5 would be amended by adding a new paragraph
(a)(2)(iv) to read as follows:
Sec. 230.5 Subsequent disclosures.
(a) * * *
(2) * * *
(iv) Changes to the frequency of interest payments initiated by the
consumer. Changes initiated by the consumer to the frequency of
interest payments.
* * * * *
6. Section 230.8 would be amended as follows:
a. Paragraph (c)(6)(iii) would be removed;
b. A new paragraph (c)(7) would be added; and
c. Paragraph (e)(1) introductory text would be revised.
The addition and revision would read as follows:
Sec. 230.8 Advertising.
* * * * *
(c) * * *
(7) Effect of compounding or interest distributions. The frequency
of compounding or interest distributions. If the annual percentage
yield is based (in whole or in part) on interest distributions, a
statement that the annual percentage yield assumes the consumer
immediately reinvests interest payments at the account's interest rate.
* * * * *
(e) Exemption for certain advertisements--(1) Certain media. If an
advertisement is made through one of the following media, it need not
contain the information in paragraphs (c)(1), (c)(2), (c)(4), (c)(5),
(c)(6)(ii), (c)(7), (d)(4), and (d)(5) of this section:
* * * * *
7. In Part 230, Appendix A would be amended under one of the two
following alternatives:
a. Under the first alternative, Appendix A would be amended to read
as follows:
i. The introductory text would be revised;
ii. The introductory text to Part I would be revised;
iii. In Part I, A. General Rules the text preceding Examples would
be revised;
iv. In Part I, A. General Rules, under Examples, new paragraphs (3)
and (4) would be added; and
v. In Part I, A. section E would be removed.
b. Under the second alternative, Appendix A would be amended as
follows:
i. The introductory text to Appendix A would be revised;
ii. The introductory text to Part I would be removed;
iii. In Part I, A. General Rules would be revised;
iv. In Part I, B. Stepped Rate Accounts (Different Rates Apply in
Succeeding Periods), the Examples would be revised;
v. In Part I, C. Variable-Rate Accounts would be revised; and
vi. In Part I, section E would be removed.
The revisions and additions under the first alternative would read
as follows:
Appendix A to Part 230--Annual Percentage Yield Calculation
The annual percentage yield measures the total amount of interest
earned or imputed on an account based on the interest rate and the
frequency of compounding or interest distributions.\1\ The annual
percentage yield is expressed as an annualized rate, based on a 365-day
year.\2\ Part I of this appendix discusses the annual percentage yield
calculations for account disclosures and advertisements, while Part II
discusses annual percentage yield earned calculations for periodic
statements.
\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.
\2\Institutions may calculate the annual percentage yield based
on a 365-day or a 366-day year in a leap year.
---------------------------------------------------------------------------
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 and for advertising under Sec. 230.8 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 (taking into account the frequency of interest distributions or
compounding) and the amount of principal used to calculate that
interest. Special rules apply to accounts with tiered and stepped
interest rates.
A. General Rules
1. The annual percentage yield shall be calculated by the formula
shown in paragraph 2 of Part I.A. of this appendix. Institutions shall
calculate the annual percentage yield based on the actual number of
days in the term of the account. For accounts without a stated maturity
date (such as a typical savings or transaction account), the
calculation shall be based on an assumed term of 365 days. In
determining the total interest figure to be used in the formula,
institutions shall assume that no withdrawals or deposits of principal
occur during the term. For time accounts that are offered in multiples
of months, institutions may base the number of days on either the
actual number of days during the applicable period, or the number of
days that would occur for any actual sequence of that many calendar
months. If institutions choose to use the latter rule, they must use
the same number of days to calculate the dollar amount of interest
earned on the account that is used in the annual percentage yield
formula (where ``Interest'' is divided by ``Principal'').
2. 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]
a. ``Principal'' is the amount of funds assumed to have been
deposited at the beginning of the account.
b. ``Interest'' is the total dollar amount of interest earned on
the Principal for the term of the account in which interest remains in
the account. If interest is distributed by check or transfer at the
same frequency or more frequently than interest is compounded,
``Interest'' is imputed to be the amount that would result if it were
compounded at the same frequency interest is distributed. If interest
is distributed by check or transfer and that interest is based in part
on compounding, ``Interest'' is imputed to be the amount that would
result if the distributed interest based on that compounding frequency
had remained in the account.
c. ``Days in term'' is the actual number of days in the term of the
account. When the ``days in term'' is 365 (that is, when the stated
maturity is 365 days or when the account does not have a stated
maturity), the annual percentage yield can be calculated by use of the
following simple formula:
[[Page 5148]] APY=100 (Interest/Principal)
Examples
* * * * *
(3) If an institution offers a $1,000 two-year certificate of
deposit that distributes interest semi-annually by check or transfer,
and there is annual compounding at a 6.00% interest rate, using the
general formula above, the annual percentage yield is 6.09% for an
account with semi-annual checks, and 6.00% for an account where
interest is left in the account for compounding.
APY=100[(1+(125.51/1,000))(365/730)-1]
APY=6.09%
APY=100[(1+(123.60/1,000))(365/730)-1]
APY=6.00%
(4) If an institution offers a $1,000 two-year certificate of
deposit that compounds daily and distributes monthly interest checks at
a 6.00% interest rate, using the general formula above, the annual
percentage yield is 6.18%, for consumers who leave interest in the
account and for those who receive monthly checks:
APY=100[(1+(127.49/1,000))(365/730)-1]
APY=6.18%
* * * * *
The revisions and additions under the first alternative would read
as follows:
Appendix A to Part 230--Annual Percentage Yield Calculation
The annual percentage yield measures the total amount of interest
earned or imputed on an account based on the interest rate and the
frequency of compounding or interest distributions.1 The annual
percentage yield is expressed as an annualized rate, based on a 365-day
year.2 Part I of this appendix discusses the annual percentage
yield calculations for account disclosures and advertisements, while
Part II discusses annual percentage yield earned calculations for
periodic statements.
\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.
\2\Institutions may calculate the annual percentage yield based
on a 365-day or a 366-day year in a leap year.
---------------------------------------------------------------------------
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
A. General Rules
1. General. In general, the annual percentage yield for account
disclosures under Secs. 230.4 and 230.5 and for advertising under
Sec. 230.8 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 (taking into account the frequency of interest
distributions or compounding) and the amount of principal used to
calculate that interest. Special rules apply to accounts with tiered
and stepped interest rates. The annual percentage yield shall be
calculated by the formula shown in paragraph 2. of Part I.A. of this
appendix. Institutions shall calculate the annual percentage yield
based on the actual number of days in the term of the account. For
accounts without a stated maturity date (such as a typical savings or
transaction account), the calculation shall be based on an assumed term
of 365 days. In determining the total interest figure to be used in the
formula, institutions shall assume that no withdrawals or deposits of
principal occur during the term. For time accounts that are offered in
multiples of months, institutions may base the number of days on either
the actual number of days during the applicable period, or the number
of days that would occur for any actual sequence of that many calendar
months. If institutions choose to use the latter rule, they must use
the same number of days to calculate the dollar amount of interest
earned on the account that is used in the annual percentage yield
formulas. If interest is paid to the account or to the consumer from
the account by check or transfer monthly, quarterly or semi-annually,
institutions may base the number of days on either the actual number of
days for those intervals, or the following assumed intervals: monthly,
30 days; quarterly, 91 days; and semi-annually, 182 days. If
institutions choose to use the latter rule, they must use the same
number of days to calculate the dollar amount of interest earned on the
account that is used to determine when interest was paid to the account
or to the consumer from the account. Institutions may base the dollar
amount of a deposit on either the actual amount of the deposit or an
assumed deposit of $1,000.
2. Formula for all accounts. The following formula may be used for
all accounts. It shall be used for all accounts where interest is paid
prior to the maturity of the account. This formula reflects the
specific frequency of interest payments to the consumer.
Deposit=First payment/(1+APY/100)Day of deposit to day of first
payment/365
+Succeeding payment/(1+APY/100)Day of deposit to succeeding
payment/365
+...
+Final Payment/(1+APY/100)Day of deposit to day of final payment/
365
a. ``APY'' is the annual percentage yield paid on the deposit.
b. ``Deposit'' is the initial deposit.
c. ``First payment'' is the amount of the first interest payment
made during the term of the account.
d. ``Succeeding payment'' is the amount of each succeeding interest
payment, excluding the first and final payments, made during the term
of the account.
e. ``Final payment'' is the amount of the final payment including
principal made at the end of the account.
f. ``Day of deposit to day of first payment'' is the number of days
between the day of the initial deposit and the first payment.
g. ``Day of deposit to succeeding payment'' is the number of days
between the day of the initial deposit and each succeeding payment.
h. ``Day of deposit to day of final payment'' is the actual number
of days in the term of the account.
Examples
(1) For a $1,000 two-year CD (with a 6.00% interest rate and a
.01644% daily periodic rate, and no compounding but semi-annual
interest payments), an institution makes two midyear interest payments
of $29.92 on day 182 of each year (days 182 and 547) and two interest
payments of $30.08 at each year's end (days 365 and 730). Using the
formula in paragraph 2. of Part I.A. of this appendix, the annual
percentage yield is 6.09%:
1,000=29.92/(1+APY/100)182/365+30.08/(1+APY/100)365/
365+29.92/(1+APY/100)547/365+1030.08/(1+APY/100)730/365
Daily yield=.01619%
APY=6.09%
(2) For a $1,000 one-year CD (with a 6.00% interest rate and a
.01644% daily periodic rate, compounded semi-annually), an institution
which allows the consumer to elect quarterly interest payments assumes
three quarterly interest payments of $14.96 at 91-day intervals (days
91, 182 and 273), and a final payment of $1015.12 on day 365. Using the
formula in paragraph 2. of Part I.A. of this appendix, the annual
percentage yield for the quarterly payment option is 6.14%:
1,000=14.96/(1+APY/100)91/365+14.96/(1+APY/100)182/365+14.96/
(1+APY/100)273/365+1015.12/(1+APY/100)365/365
Daily yield=.01632%
APY=6.14%
3. Formula for certain accounts. The formula under this paragraph
may be [[Page 5149]] used for accounts that make a single interest
payment at maturity. When using the formula, institutions shall
determine the total interest figure to be used in the formula by
assuming that all principal and interest remain on deposit for the
entire term and that no other transactions (deposits or withdrawals)
occur during the term. The annual percentage yield is calculated by use
of the following formula (``APY'' is used for convenience in the
formulas):
APY=100 [(1+(Interest/Principal))(365/Days in term)-1]
a. ``Principal'' is the amount of funds assumed to have been
deposited at the beginning of the account.
b. ``Interest'' is the total dollar amount of interest earned on
the Principal for the term of the account.
c. ``Days in term'' is the actual number of days in the term of the
account. When the ``days in term'' is 365 (that is, where the stated
maturity is 365 days or where the account does not have a stated
maturity), the annual percentage yield may be calculated by use of the
following simple formula:
APY=100 (Interest/Principal)
Examples
(1) If an institution pays $61.83 in interest in a single payment
at maturity for a 365-day year on $1,000 deposited into a one-year CD
(with a 6.00% interest rate and daily compounding), using the formula
shown in paragraph 3. of Part I.A. of this appendix, the annual
percentage yield is 6.18%:
APY=100 [(1+(61.83/1,000))(365/365)-1]
APY=6.18%.
(2) If an institution offers a $1,000 six-month certificate of
deposit (where the six-month period used by the institution contains
182 days, interest is paid at maturity, and there is daily compounding
at a 6.00% interest rate), using the formula shown in paragraph 3. of
Part I.A. of this appendix, the annual percentage yield is 6.18%:
APY=100 [(1+(30.37/1,000))(365/182)-1]
APY=6.18%
B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)
* * * * *
Examples
(1) If an institution offers a $1,000 6-month certificate of
deposit on which it pays a 5.00% interest rate, compounded daily, for
the first three months (which contain 91 days), and a 5.50% interest
rate, compounded daily, for the next three months (which contain 92
days), the total interest paid in a single payment at maturity for six
months is $26.68, and using the formula in paragraph 3. of Part I.A. of
this appendix, the annual percentage yield is 5.39%:
APY=100 [(1+(26.68/1,000))(365/183)-1]
APY=5.39%
(2) If an institution offers a $1,000 two-year certificate of
deposit on which it pays a 6.00% interest rate, compounded daily, for
the first year, and a 6.50% interest rate, compounded daily, for the
next year, the total interest paid in a single payment at maturity is
$133.13 and, using the formula in paragraph 3. of Part I.A. of this
appendix, the annual percentage yield is 6.45%:
APY=100 [(1+133.13/1,000)(365/730)-1]
APY=6.45%
(3) For a $1,000 two-year certificate of deposit (with an interest
rate of 6.00% and a daily periodic rate of .01644% the first year, and
an interest rate of 6.50% and a daily periodic rate of .01781% the
second year, no compounding but semi-annual interest payments), an
institution makes two payments during the first year, a midyear
interest payment of $29.92 on day 182 and a year-end interest payment
of $30.08 on day 365, and two payments during the second year, a
midyear interest payment of $32.41 on day 547 and a final payment of
$1032.59 on day 730. Using the formula in paragraph 3. of Part I.A. of
this appendix, the annual percentage yield is 6.34%:
1,000=29.92/(1+APY/100)182/365+30.08/(1+APY/100)365/365
+32.41/(1+APY/100)547/365+1032.59/(1+APY/100)730/365
Daily yield=.01684%
APY=6.34%
C. Variable-Rate Accounts
1. For variable-rate accounts without an introductory premium or
discounted rate, an institution must base the calculation only on the
initial interest rate in effect when the account is opened (or
advertised), and assume that this rate will not change during the year.
2. Variable-rate accounts with an introductory premium (or
discount) rate must be calculated like a stepped-rate account. Thus, an
institution shall assume that: (i) The introductory interest rate is in
effect for the length of time provided for in the deposit contract; and
(ii) the variable interest rate that would have been in effect when the
account is opened or advertised (but for the introductory rate) is in
effect for the remainder of the year. If the variable rate is tied to
an index, the index-based rate in effect at the time of disclosure must
be used for the remainder of the year. If the rate is not tied to an
index, the rate in effect for existing consumers holding the same
account (who are not receiving the introductory interest rate) must be
used for the remainder of the year.
3. For example, assume an institution offers an account on which it
pays quarterly interest payments at an introductory 7.00% interest rate
and a .01934% daily periodic rate, compounded daily, for the first
three months (which, for example, contain 91 days), while the variable
interest rate that would have been in effect when the account was
opened was 5.00% with a daily periodic rate of .01378%. For a 365-day
year on a $1,000 deposit an institution would make one quarterly
interest payment on day 91 of $17.60 (based on 91 days at 7.00%),
followed by two interest payments of $12.54 on days 182 and 273, and a
final payment of $1012.68 on day 365 (based on 274 days at 5.00%).
Using the formula in paragraph 2. of Part I. A. of this appendix, the
annual percentage yield is 5.66%:
1,000=17.60/(1+APY/100)91/365+12.54/(1+APY/100)182/365
+12.54/(1+APY/100)273/365+1012.68/(1+APY/100)365/365
Daily yield=.01508%
APY=5.66%
* * * * *
8. In Part 230, Appendix B would be amended as follows:
a. Under B-1--Model Clauses For Account Disclosures:
i. A new paragraph (a)(v) would be added following the text under
Tiering Method B;
ii. Paragraph (b)(i) would be revised;
iii. Paragraphs (h)(iii) and (h)(v) would be removed; and
iv. Paragraph (h)(iv) would be redesignated as paragraph (h)(iii),
b. The last two sentences in the first paragraph of B-7--Sample
Form would be removed; and
c. A new B-10--Sample Form would be added.
The additions and revisions would read as follows:
Appendix B to Part 230--Model Clauses and Sample Forms
* * * * *
B-1--Model Clauses For Account Disclosures
(a) * * *
(v) Effect of interest payments
Your annual percentage yield is based on __________(time period)
payments/checks, and assumes you immediately reinvest interest payments
at the account interest rate.
* * * * *
(b) Compounding and crediting [[Page 5150]]
(i) Frequency
Interest will be compounded [on a __________ basis/every
__________(time period)].
Interest will be credited to your account [on a __________ basis/
every __________(time period)].
Interest for your account will be paid [by check/to another
account] [(time period)].
* * * * *
BILLING CODE 6210-01-P
[[Page 5151]]
[GRAPHIC][TIFF OMITTED]TP26JA95.021
BILLING CODE 6210-01-C [[Page 5152]]
By order of the Board of Governors of the Federal Reserve
System, January 18, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-1786 Filed 1-25-95; 8:45 am]
BILLING CODE 6210-01-P
