[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16641]
[[Page Unknown]]
[Federal Register: July 11, 1994]
VOL. 59, NO. 131
Monday, July 11, 1994
FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R-0836]
Truth in Savings
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule and extension of comment period.
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SUMMARY: On May 11, 1994, the Board requested comment on a proposal to
amend Regulation DD (Truth in Savings) dealing with crediting and
compounding practices and having the effect of producing an annual
percentage yield (APY) that reflects the time value of money. The Board
is extending the comment period for 60 days to give the public
additional time to provide comments. In addition, the Board is
publishing for comment a further alternative for APY calculations that
would allow institutions to disclose an APY equal to the contract
interest rate on time accounts with maturities greater than one year
that do not compound interest but pay interest at least annually. This
alternative would provide the Board with a more modest option as it
considers a final resolution to problems with APY calculations.
DATES: Comments must be received on or before September 6, 1994.
ADDRESSES: Comments should refer to Docket No. R-0836, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551. Comments also may be delivered to Room B-2222 of
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the
guard station in the Eccles Building courtyard on 20th Street NW.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9 a.m. and 5
p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's rules
regarding the availability of information.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, Kyung
Cho or Kurt Schumacher, Staff Attorneys, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System, at
(202) 452-3667 or 452-2412; for questions associated with the
regulatory flexibility analysis, Gregory Elliehausen, Economist, Office
of the Secretary, at (202) 452-2504; for the hearing impaired only,
Dorothea Thompson, Telecommunications Device for the Deaf, at (202)
452-3544.
SUPPLEMENTARY INFORMATION:
(1) Background
The Truth in Savings Act (12 U.S.C. 4301 et seq.) requires
depository institutions to provide disclosures to consumers about their
deposit accounts, including an annual percentage yield (APY) on
interest-bearing accounts. The act is implemented by the Board's
Regulation DD (12 CFR part 230), which became effective June 21, 1993
(see 57 FR 43337 and 58 FR 15077).
Because the current formula for calculating the APY assumes that
interest remains on deposit until maturity, the resulting APY may--but
does not always--reflect the time value of money. The formula produces
an APY that is less than the contract interest rate for long-term
certificates of deposit (CDs) that are noncompounding but pay interest
periodically. On December 6, 1993, the Board published a proposal that
called for an additional APY formula that would have factored into the
APY calculation the specific time intervals for interest paid on the
account--that is, the time value of money (58 FR 64190). The proposal
was withdrawn on May 11, based on considerations of cost and regulatory
burden (59 FR 24376).
In the context of deliberations about the December 1993 proposal,
the Board considered related issues regarding depository institutions'
compounding and crediting practices. On May 11, 1994, the Board
proposed amendments to clarify the relationship between compounding and
crediting and provide an alternative basis for eliminating anomalies
produced by the current APY formula (59 FR 24378). The Board has
received requests for an extension of the proposal's comment period,
due to end on July 5, 1994; the Board is extending the comment period
to September 6, 1994.
Alternative APY Resolution
In addition to extending the comment period on the current
proposal, the Board has decided to solicit comment on an alternative
approach for APY calculations. Under this alternative, the only
institutions affected would be those offering noncompounding multi-year
CDs that pay interest at least annually. Those institutions would
disclose an APY equal to the interest rate, regardless of whether
interest payments were made annually or more frequently. The APY for
all other accounts would reflect the interest rate paid and any
compounding. Interest payments by check or transfer would not be
factored into the APY calculation.
This alternative (called Approach B in the December 1993 proposal)
was considered by the Board in its deliberations on adding a new APY
formula. The Board declined to adopt Approach B at that time, mainly
based on concerns about the limited resolution of anomalies associated
with the APY and costs associated with its implementation.
A number of factors have led the Board to reopen comments on this
alternative. The Congress chose the APY as the primary uniform
measurement for comparison shopping among deposit accounts. The Board
believes the APY formula should produce a mathematical figure that is
easily understood and readily reveals to consumers an account's
comparative value. The Board also believes that regulatory compliance
should be as simple and cost-effective as possible, and that reductions
in product variety and consumer choice due to regulatory requirements
should be minimized.
Taking all these factors into account, and recognizing that all
formulas contain assumptions that are valid in some circumstances and
not in others, the Board seeks comment on whether this limited approach
would achieve a satisfactory resolution of the competing interests for
accuracy, consumer understanding, product flexibility, and ease of
compliance.
The Board also solicits comment on whether adoption of such an
alternative would reduce the incentive for institutions to offer
compounding multi-year CDs. For example, assume two institutions offer
a two-year CD with a 6.00% interest rate; one mandates monthly interest
checks, the other offers annual compounding. Both could advertise a
6.00% APY, even though a consumer depositing $1,000 receives $120 if
interest checks are paid annually and $123.60 if money is left in the
account.
(2) Proposed Regulatory Revisions: Section-by-Section Analysis
A section-by-section description of proposed amendments follows.
Section 230.4--Account Disclosures
Paragraph (b)(6)--Features of Time Accounts
The regulation requires a disclosure for institutions offering time
accounts that compound interest and permit a consumer to withdraw
accrued interest during the account term. The disclosure states that
the APY assumes interest remains on deposit until maturity and that a
withdrawal of interest will reduce earnings. The Board request comments
on whether a similar disclosure would be helpful to consumers
purchasing noncompounding multi-year CDs that pay interest at least
annually and disclose an APY equal to the interest rate. For example,
the disclosure would alert consumers that dollar earnings will be less
than for a multi-year CD with the same maturity (and disclosing the
same APY) that compounds annually. The Board solicits suggestions for
text that would be most helpful to consumers.
Section 230.8--Advertising
Paragraph (c)(6)--Features of Time Accounts
The regulation requires institutions advertising APYs to disclose
other key features about the account. The Board solicits comment on
whether institutions advertising an APY equal to the interest rate on
noncompounding multi-year accounts that make interest payments annually
should be required also to make a disclosure like the one discussed
above. If so, the Board solicits suggestions for text that would be
helpful to consumers and take into account the constraints of
advertising media.
Appendix A to Part 230--Annual Percentage Yield Calculation
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
A. General rules. Under the alternative approach, the proposed
amendments to Appendix A only affect institutions that offer
noncompounding multi-year CDs that pay interest at least annually. A
new paragraph E is added to clarify how APYs shall be determined for
such accounts. The Board requests comment on the proposed paragraph and
accompanying example.
Appendix B--Model Clauses and Sample Forms
The Board solicits comments on model clauses or additional sample
forms that may be appropriate if the amendments are adopted.
(3) Form of Comment Letters
Comment letters should refer to Docket No. R-0836, and, when
possible, should use a standard typeface with a type size of 10 or 12
characters per inch. This will enable the Board to convert the text
into machine-readable form through electronic scanning, and will
facilitate automated retrieval of comments for review. Also, if
accompanied by an original document in paper form, comments may be
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.
(4) Regulatory Flexibility Analysis and Paperwork Reduction Act
The Board's Office of the Secretary previously prepared an economic
impact statement on the proposed alternative dealing with
noncompounding multi-year CDs that pay interest at least annually. A
copy of the analysis may be obtained from Publications Services, Board
of Governors of the Federal Reserve System, Washington, DC 20551, at
(202) 452-3245.
In accordance with section 3507 of the Paperwork Reduction Act of
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be
reviewed by the Board under the authority delegated to the Board by the
Office of Management and Budget after consideration of comments
received during the public comment period.
List of Subjects in 12 CFR Part 230
Advertising, Banks, Banking, Consumer protection, Deposit accounts,
Interest, Interest rates, Truth in savings.
Certain conventions have been used to highlight the proposed
revisions to the regulation. New language is shown inside bold-faced
arrows, while language that would be deleted is set off with bold-faced
brackets.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 230 as follows:
PART 230--TRUTH IN SAVINGS (REGULATION DD)
1. The authority citation for part 230 would continue to read as
follows:
Authority: 12 U.S.C. 4301, et seq.
2. In Part 230 Appendix A would be amended by revising the second
sentence in the introductory text to Part I and the first sentence of
paragraph A, and by adding a new paragraph E as follows:
Appendix A to Part 230--Annual Percentage Yield Calculation
* * * * *
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
* * * Special rules apply to accounts with tiered and stepped
interest rates, and to certain time accounts with a
stated maturity greater than one year.
A. General Rules
Except as provided in Part I.E. of this appendix, the
[The] annual percentage yield shall be calculated by the
formula shown below. * * *
* * * * *
E. Time accounts with a stated maturity greater than one
year that compound interest less often than annually
For time accounts with a stated maturity greater than one year
that do not compound interest on an annual or more frequent basis,
and that require (or permit) the consumer to withdraw interest at
least annually, the annual percentage yield shall be equal to the
interest rate.
Example:
(1) If an institution offers a $1,000 two-year certificate of
deposit that credits interest semi-annually solely by check or
transfer, and there is no compounding at a 6.00% interest rate, the
annual percentage yield is 6.00%.
* * * * *
Board of Governors of the Federal Reserve System, July 5, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-16641 Filed 7-8-94; 8:45 am]
BILLING CODE 6210-01-P
