[Federal Register Volume 59, Number 90 (Wednesday, May 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11153]
[[Page Unknown]]
[Federal Register: May 11, 1994]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R-0812]
Truth in Savings; Proposed Regulatory Amendment
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Withdrawal of proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Board is withdrawing proposed amendments to Regulation DD
(Truth in Savings) to provide for an additional formula to calculate
the annual percentage yield (APY), based on considerations of cost and
regulatory burden at this time.
DATES: This proposed rule is withdrawn May 4, 1994.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, Kyung
Cho, or Kurt Schumacher, Staff Attorneys, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System, at
(202) 452-3667 or 452-2412; for questions associated with the
regulatory flexibility analysis, Gregory Elliehausen, Economist, Office
of the Secretary, at (202) 452-2504; for the hearing impaired only,
Dorothea Thompson, Telecommunications Device for the Deaf, at (202)
452-3544.
SUPPLEMENTARY INFORMATION:
(1) Background
The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires
depository institutions to provide disclosures to consumers about their
deposit accounts, including an APY on interest-bearing accounts. The
law also contains rules about advertising deposit accounts, including
accounts at depository institutions offered to consumers by deposit
brokers. The act is implemented by the Board's Regulation DD (12 CFR
part 230), which became effective June 21, 1993. (See final rule
published on September 21, 1992 (57 FR 43337), correction notice
published on October 5, 1992 (57 FR 46480), and amendments published on
March 19, 1993 (58 FR 15077).
In its initial rulemaking, the Board was guided by several general
principles, such as establishing simple rules that minimize the
possibility of errors and compliance costs and providing institutions
with flexibility to promote a variety of product choices for consumers.
This included designing a simple, easy-to-use formula for calculating
the APY. As deposit brokers and institutions began complying with the
new formula, the Board was asked by the Securities Industry Association
(SIA) and others to reconsider how the APY is calculated. Proposed
amendments that would provide for an additional APY formula were
published on December 6, 1993 (58 FR 64190).
The difficulties associated with the current APY formula stem from
the formula's assumption that interest paid on an account remains on
deposit until maturity. For some accounts, the formula produces an APY
that reflects the time value of interest received.1 For others the
APY fails to reflect the time value of interest received. This happens
in cases where institutions offer long-term certificates of deposit
(CDs) that are noncompounding but pay interest periodically. In this
case, the formula produces an APY that is less than the contract
interest rate.2
---------------------------------------------------------------------------
\1\For example, assume $1,000 is deposited in a one-year CD with
a 6% interest rate that compounds quarterly. Consumers have the
option to receive quarterly interest checks instead. In both cases,
the APY is 6.14%, even though the consumer who compounds interest
receives $61.40, and the consumer who takes quarterly interest
checks receives $60.00.
\2\For example, assume $1,000 is deposited in a two-year
noncompounding CD with a 6.00% interest rate. Some institutions may
offer the consumer the choice of receiving all interest ($120) at
maturity, or receiving two interest payments ($60) each year. The
APY in either case is 5.83%--lower than the 6.00% interest rate--
because the formula looks at the total amount of interest paid, not
when it is paid out. The SIA states the maturities of CDs purchased
through deposit brokers range from three months to 10 years but
average about two years (based on dollar-weighted maturities).
---------------------------------------------------------------------------
In considering whether to propose amendments to the APY formula,
the Board focused on two issues: a desire for an APY that reflects the
time value of money, and a concern about the compliance costs and
impact on depository institutions if changes were made. The Board
published a proposal that would factor into the APY calculation the
specific time intervals for interest paid on the account--that is, the
time value of money (Approach A). However, the Board also requested
comment on a narrower approach that would affect only noncompounding
multi-year CDs that pay interest at least annually. For these accounts,
the APY would never be lower than the interest rate (Approach B). The
Board also solicited comment on leaving the regulation unchanged
(Approach C).
The Board received about 500 comments on its proposal. Nearly 90%
of the comments were from financial institutions. Considering all
comments received, approximately 5% supported Approach A; 15% supported
Approach B; and 75% supported Approach C. The remainder presented other
alternatives or expressed no opinion on the specific approaches.
(2) Discussion
Approach A: Proposal of an Additional Formula
Based on the comments received and upon further analysis, the Board
is withdrawing the proposed amendments to the APY formula. Overall, the
Board believes that the proposed formula (Approach A) would be complex
and costly to implement, and the costs would outweigh the benefits
derived from the proposed changes. (See Docket R-0836 elsewhere in
today's Federal Register for proposed amendments which the Board
believes might better capture the intent of the act's purposes in a
less complex way.)
The Board believes the formula proposed in December would correct
the APY anomalies produced by the current formula, and has considered
the view of some commenters that the short-term costs of correcting the
formula might be worthwhile over time. However, the Board is more
persuaded by the commenters--including both consumer groups and
industry associations--that believed the costs of compliance outweigh
the benefits from implementing the proposed APY formula. Commenters
reported that substantial costs recently had been incurred to implement
the regulation, and they believed the distinctions in the APY produced
by the complex formula proposed by Approach A did not warrant the
substantial costs of implementing changes to the regulation--perhaps as
much as 50% of the initial costs to implement the regulation.
The Board concurs with the commenters that voiced concern about the
complexity of the proposed formula. These commenters noted that the
formula was complex for both consumers and institutions. Many
commenters stated that although an internal rate of return formula is a
standard mathematical tool in the financial markets, its introduction
in APY calculations would eliminate, as a practical matter, the use of
many handheld calculators for preparing disclosures or quoting APYs to
consumers. Commenters also noted due to the complexity of the APY
calculation there would be an increased risk of error and potential
civil liability in making this calculation for a wide variety of
accounts.
The Board also notes the views of commenters that believed that in
adopting Approach A, the Board would merely be trading one set of
assumptions for another set of assumptions. Many commenters concurred
with the Board that the current APY does not always reflect the value
of periodic interest distributions, for example. But they also believed
that the proposed APY also would not be factually accurate in all
circumstances. For example, commenters remarked that the proposed APY
would fail to reflect the fact that interest payments cannot always be
immediately reinvested at the same rate as the account from which the
interest was paid. They also believed it would be inappropriate to
assume such a reinvestment rate for small monthly interest checks, for
example, since rates typically rise based on the length of maturity and
amount of principal. They noted that elderly consumers who hold multi-
year CDs and who rely on periodic interest payments for living expenses
would be particularly affected by the assumption.
Commenters noted that returns on deposit accounts traditionally
have been based on the rate of interest paid and any compounding
frequency. Higher yields historically have been equated with higher
dollar interest payments--not more frequent interest payments--and
commenters believed that consumers expect an APY to reflect those
factors. Many commenters believed that the underlying premise of
Approach A--the time value of money--is inappropriate for deposit
account disclosures. Many believed an assumption based on potential
earnings outside the account relationship was misleading for the APY
calculation. They believed the purposes of Truth in Savings are not
best served by an APY disclosure based on the timing of interest
payments that is higher for consumers who receive less interest
overall.
Due to concerns about costs and questions about the benefits
provided, the Board believes this approach would not be the best
solution.
Approach B: Noncompounding Multi-Year CDs
The Board also is not adopting Approach B, based on the combination
of the limited scope of the problem Approach B seeks to address, the
creation of new anomalies, and the cost to the industry of reviewing
and implementing new calculation and disclosure requirements.
On the one hand, the Board believes Approach B is a simple, direct
approach to correct one anomaly produced by the current APY formula.
The Board also recognizes that the disclosure of an APY that is lower
than the interest rate on a noncompounding multi-year CD that pays
interest at least annually may be confusing to some consumers.3
---------------------------------------------------------------------------
\3\The Board notes, however, that even if Approach B were
adopted, institutions would still disclose an APY lower than the
interest rate, such as for a multi-year CD that does not compound
and pays interest only at maturity.
---------------------------------------------------------------------------
Overall, however, the Board is more persuaded by commenters that
voiced concern about the accuracy of the APY disclosed under Approach
B. For example, commenters echoed concerns expressed about the proposed
formula in Approach A. They remarked that the APY permitted under
Approach B assumed the interest payments received during the term would
be reinvested at the same rate as the account from which the interest
was paid. Others believed it would be anomalous to disclose the same
APY is disclosed for two multi-year accounts, one compounding annually
and the other not compounding at all.
The Board also notes the commenters' concerns about the cost to the
industry of reviewing and implementing new calculation and disclosure
requirements. They noted the costs of implementing Approach B would be
less significant, compared to Approach A. Although the change would
affect a single class of accounts, commenters reported that some
computer programming changes would be required and additional
disclosures would be appropriate. Commenters stated that since
consumers would see the same APY for compounding and noncompounding
CDs, a statement might be necessary in advertisements and account
disclosures to help consumers understand the terms of the account. (For
example, assume two institutions offer a two-year CD with a 6.00%
interest rate. One compounds annually, the other offers annual interest
payments. Both could advertise a 6.00% APY, even though a consumer
depositing $1,000 receives $120 if interest checks are paid and $123.60
if interest is compounded.) Finally, the Board notes some commenters
remarked that institutions could easily remedy the current anomaly with
a simple change to their product. They noted institutions could
advertise and disclose an APY equal to the contract interest rate under
the current formula by offering CDs that have annual compounding,
regardless of any payment options.
Due to the limited problem Approach B seeks to address, the limited
resolution of anomalies produced by the current APY formula, and the
costs associated with adopting the approach, the Board has determined
not to adopt Approach B.
(3) Regulatory flexibility analysis and Paperwork Reduction Act
The Board solicited comment on the potential cost of implementing
the proposed APY formula, such as the proportion of existing accounts
would require the new formula for computing APYs, the changes
institutions would have to make to implement the new formula, the cost
to make these changes, and the likelihood of changes in the number of
different account terms and types of accounts offered would result if
the new formula were adopted.
In accordance with section 3507 of the Paperwork Reduction Act of
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed 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 Board's Office of the
Secretary has prepared an economic impact statement on the proposed
revisions to Regulation DD, a copy of which may be obtained from
Publications Services, Board of Governors of the Federal Reserve
System, Washington, DC 20551, at (202) 452-3245.
Board of Governors of the Federal Reserve System, May 4, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-11153 Filed 5-10-94; 8:45 am]
BILLING CODE 6210-01-P
