[Federal Register Volume 63, Number 146 (Thursday, July 30, 1998)]
[Rules and Regulations]
[Pages 40635-40638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20268]
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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: Final rule.
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SUMMARY: The Board has adopted a rule amending Regulation DD (Truth in
Savings); the action makes final an interim rule adopted in January
1995. The amendment permits 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
that require interest distributions at least annually.
EFFECTIVE DATE: August 28, 1998.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, or Obrea
Otey Poindexter, Staff Attorney, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System at (202) 452-
2412 or 452-3667; for the hearing impaired only contact Diane Jenkins,
Telecommunications Device for the Deaf at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The Truth in Savings Act (TISA) was enacted in December 1991. The
Board published a final regulation, Regulation DD, to implement the act
on September 21, 1992 (57 FR 43337) (correction notice at 57 FR 46480,
October 9, 1992). Compliance with the regulation became mandatory in
June 1993. The act and regulation require depository institutions to
disclose yields, fees, and other terms concerning deposit accounts to
consumers at account opening. The regulation also includes rules about
advertising of deposit accounts. Depository institutions are generally
subject to civil liability for violations of the act and regulation.
Credit unions are not subject to Regulation DD, but are governed by a
substantially similar regulation issued by the National Credit Union
Administration.
II. Proposals Regarding APY Calculation
In 1993, deposit brokers covered by Regulation DD's advertising
rules petitioned the Board to reconsider how the annual percentage
yield (APY) is calculated. They expressed concern that for a
certificate of deposit that has a maturity greater than one year and
that does not compound interest, the APY is less than the contract
interest rate under the formula prescribed by Regulation DD. The Board
subsequently published several proposals addressing this matter (58 FR
64190, December 6, 1993; 59 FR 24376, May 11, 1994; 59 FR 35271, July
11, 1994; 60 FR 5142, January 26, 1995).
In January 1995, to address immediately one anomaly created by the
regulation's formula for APY calculations, the Board adopted an interim
rule applicable to time accounts with maturities greater than one year
that do not compound but require interest distributions at least
annually (60 FR 5128, January 26, 1995).
III. Summary of Final Rule
The interim rule permitted institutions to disclose an APY equal to
the contract interest rate for noncompounding CDs with a maturity
greater than one year if they require interest distributions at least
annually. The Board received more than 250 comments--about 75 comments
on the interim rule and the remainder on a proposal published
concurrently with the interim rule that would have amended the APY
formula. The majority of commenters supported the interim rule and
urged the Board to make the interim rule permanent. Many commenters
believed that the interim rule adequately addressed the concerns of
deposit brokers and depository institutions that require interest
distributions at least annually. Commenters noted that the interim rule
provided a simple solution that would be understandable to consumers.
Some banks that opposed any change to the APY calculations favored the
interim rule among the alternatives offered.
Based on the comments received and further analysis, the Board has
amended Regulation DD by making the interim rule final. The final rule
permits institutions to disclose an APY equal to the contract interest
rate for noncompounding CDs with a maturity greater than one year if
they require interest distributions at least annually. Institutions may
not disclose an APY equal to the contract interest rate for
noncompounding multi-year CDs that either prohibit withdrawal of
interest or that permit but do not require interest distributions; for
these time accounts, institutions will continue to use the current
formula for APY calculations. The Board believes that this narrow rule
provides a targeted response to questions about the APY disclosures for
certain time accounts that otherwise would have to disclose an APY that
is lower than the contract interest rate. The amendment retains the
interim rule's requirement of a brief narrative disclosure about the
effect of interest payments on the APY and earnings from the account to
minimize any possible consumer confusion.
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
Consistent with the interim rule, paragraph 4(b)(6) adds a brief
narrative for institutions stating an APY equal to the contract
interest rate for noncompounding CDs that have a maturity greater than
one year and that require interest payouts at least annually. The Board
believes a statement alerting consumers to the fact that interest
cannot remain in the account will assist them in comparison shopping
between CDs with annual compounding and CDs that do not compound but
require interest payouts during the account term. The Board believes
the disclosure does not add an undue burden on institutions.
Section 230.8 Advertising
8(c) When Additional Disclosures are Required
8(c)(6) Features of Time Accounts
Consistent with the interim rule, paragraph 8(c)(6) adds a brief
disclosure for any advertisement that states an APY equal to the
contract interest rate for a noncompounding multi-year CD that requires
the automatic payment of interest at least annually. To assist
[[Page 40636]]
consumers in comparison shopping, institutions must state that interest
payouts are mandatory and that interest cannot remain in the account,
parallel to the disclosure required by Sec. 230.4(b)(6)(iii).
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
The final rule adds paragraph E to Appendix A to clarify how APYs
may be determined for noncompounding time accounts that have a maturity
greater than one year and that pay interest at least annually. 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. It 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 a final rule permitting institutions to
disclose an APY equal to the contract interest rate, for noncompounding
CDs with a maturity greater than one year 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
account holders 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 final rule, the Board has included a model clause to
describe the effect of interest payments on earnings.
V. Regulatory Flexibility Analysis
Final Rule on Annual Percentage Yields for Certain Time Accounts
Need and objectives of the rule. The annual percentage yield in
Regulation DD is an effective rate of interest, which shows the effect
of compounding on the rate of return. Annual percentage yields greater
than the rate of simple interest reflect the additional earnings
resulting from the conversion of interest to principal during a year.
When interest is not compounded and the term to maturity is greater
than a year, the annual percentage yield in the original Regulation DD
is less than the rate of simple interest. This result reflects an
assumption that interest accumulates idly in the account rather than
generating additional returns. Following implementation of the
regulation, a national trade association representing deposit brokers
questioned the appropriateness of this calculation for multiple-year
time deposits that distribute the interest--such as brokered deposits.
The association argued that because the distributed interest is
available to reinvest, the annual percentage yield understated the
potential return on such time deposits. The Truth in Savings
requirement that advertisements for brokered deposits contain annual
percentage yields made it difficult for the association's members to
market brokered deposits, which distribute interest.
In response to a petition of the trade association, Board staff and
the Board explored alternatives to the annual percentage yield formula
specified in the original regulation in four requests for public
comment (December 1993, May 1994, July 1994, and January 1995). The
most recent request for public comment included an interim rule
permitting institutions to disclose an annual percentage yield equal to
the rate of simple interest for multiple-year time accounts that
require distributions of interest at least annually. The interim rule
is a limited exception to the general formula for the annual percentage
yield. It eliminated the marketing problem of members of the
petitioning association without fundamentally changing the original
regulation. The final rule adopts this interim rule.
Issues raised by public comment to proposed rule. Board staff and
the Board considered several alternative approaches to resolve the
issue raised by the trade association. These alternative approaches
included (1) proposals to change the assumptions underlying the
calculation of the annual percentage yield, (2) proposals to change
industry practices regarding the compounding and distribution of
interest, and (3) proposals to create exceptions from the general rule.
Commenters suggested that proposals following the first two approaches
would be especially costly to implement and may not improve some
consumers' ability to make choices among investment alternatives. They
suggested that proposals following the second approach also had the
potential to impose opportunity costs by reducing consumer choices.
Some commenters questioned the need to make any changes in the original
rule, noting that an institution could avoid the problem by simply
offering to compound interest at least annually. Many public comments
supported retaining the original rule or, if necessary, creating a
limited exception.
Number of small entities to which the rule will apply. There were
6,334 small commercial banks at the end of September 1996, where small
is defined as having assets of less than $100 million.1
Almost all small banks offered time deposits with terms to maturity
greater than a year, and 15% of small banks did not compound interest
on time deposits with terms to maturity greater than a
year.2 In contrast, only about 10% percent of medium-sized
and large banks did not compound interest on time deposits with terms
to maturity greater than a year.
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\1\ Federal Deposit Insurance Corporation [Online], Statistics
on Banking, All FDIC-Insured Depository Institutions, Number of
Institutions by Asset Size, (September 30, 1996), Available through:
http://www.fdic.gov/databank/ [April 29, 1996].
\2\ Monthly Survey of Selected Deposits (FR2042), September
1994. More recent data on compounding practices for time deposits by
term to maturity are not available.
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Thrift institutions (savings banks, savings and loan associations,
and credit unions) also offer time deposits, and securities brokers
offer brokered deposits. Many of these institutions are small, but data
on the terms to maturity on their offerings of time deposits or
brokered deposits are not available.
Description of projected compliance requirements. Since the interim
rule is already effective, the start-up costs of the final rule are
probably negligible. Most institutions that require at least annual
withdrawal of interest paid on multiple-year time deposits probably
have already implemented the interim rule because the annual percentage
yield for such time deposits is higher under the interim rule than
under the original Regulation DD. If any institutions waited because of
uncertainty about whether the interim rule would be adopted as a final
rule and now choose to implement the rule,
[[Page 40637]]
they would need new disclosures for affected accounts. Software
modifications and some employee training would be required to produce
the new disclosures.
The ongoing costs of the disclosures under the new rule are likely
to be similar to those under the original Regulation DD. Thus, adopting
the interim rule as a final rule would not significantly change ongoing
compliance costs.
Description of the steps taken to minimize the impact on small
entities. No special steps were taken to minimize the impact of the
rule on small entities. The cost of implementing a change in the method
of calculating annual percentage yields was a major consideration
leading to the choice of the interim rule over the other alternative
rules, however. During its deliberations, the Board was aware of
evidence of the existence of scale economies in start-up compliance
costs, which implies that per-unit compliance costs would be higher at
small institutions than at large institutions.3 Although the
start-up costs of the interim rule are probably subject to scale
economies, the interim rule may have a less disparate effect on small
institutions than the other alternatives because it has a relatively
small effect on institutions' operations.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule 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 Federal Reserve may not conduct or sponsor, and an
organization is not required to respond to, this information collection
unless it displays a currently valid OMB control number. The OMB
control number is 7100-0271.
The collection of information that is revised by this rulemaking is
found in 12 CFR 230 and in Appendices A and B. This information is
mandatory (12 U.S.C. 4308) to evidence compliance with the requirements
of the Truth in Savings Act and the Board's Regulation DD. This
information is used to assist consumers in comparing deposit accounts
offered by depository institutions, principally through the disclosure
of fees, APY, interest rate, and other account terms whenever a
consumer requests the information and before an account is opened. The
regulation also requires that fees and other information be provided on
any periodic statement the institution sends to the consumer. The
recordkeepers are for-profit financial institutions, including small
businesses. Records must be retained for twenty-four months.
No comments specifically addressing the burden estimate were
received.
The current estimated total annual burden for this information
collection is 1,478,395 hours, as shown in the table below. These
amounts reflect the burden estimate of the Federal Reserve System for
the 996 state member banks under its supervision. This regulation
applies to all types of depository institutions (except credit unions),
not just to state member banks. Other agencies account for the
paperwork burden for the institutions they supervise.
The final rule revises the APY that may be disclosed for
noncompounding CDs with maturities 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 that there is no
net change in the Board's current estimate of paperwork burden
associated with Regulation DD. There is estimated to be no associated
capital or start up cost and no annual cost burden over the annual hour
burden.
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Estimated
Number of Estimated annual
respondents annual Estimated response time burden
frequency hours
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Complete account disclosures (Upon 996 300 5 minutes......................... 24,900
request and new accounts).
Subsequent notices:
Change in terms.................. 996 1,130 1 minute.......................... 18,757
Prematurity notices.............. 996 1,095 1 minute.......................... 18,177
Periodic statements.................. 996 84,615 1 minute.......................... 1,404,609
Advertising.......................... 996 12 1 hour............................ 11,952
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Total............................ ........... ........... .................................. 1,478,395
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Because the records would be maintained at state member banks and
the notices are not provided to the Federal Reserve, no issue of
confidentiality under the Freedom of Information Act arises.
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\3\ For a summary of the evidence, see Gregory Elliehausen, The
Cost of Bank Regulation, Staff Studies (Board of Governors of the
Federal Reserve System, forthcoming).
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The Federal Reserve has a continuing interest in the public's
opinions of our collections of information. At any time, comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden, may be
sent to: Secretary, Board of Governors of the Federal Reserve System,
20th and C Streets, N.W., Washington, DC 20551; and to the Office of
Management and Budget, Paperwork Reduction Project (7100-0271),
Washington, DC 20503.
List of Subjects in 12 CFR Part 230
Advertising, Banks, Banking, Consumer protection, Federal Reserve
System, Reporting and recordkeeping requirements, Truth in savings.
Accordingly, the interim rule amending 12 CFR part 230 which was
published at 60 FR 5128 on January 26, 1995, is adopted as a final rule
with the following changes:
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 revising the sentence at the end of
paragraph (b)(6)(iii) to read as follows:
Sec. 230.4 Account disclosures.
* * * * *
(b) * * *
(6) * * *
(iii) * * * For 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
[[Page 40638]]
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 revising 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 by revising section E of Part
I to read as follows:
Appendix A To Part 230--Annual Percentage Yield Calculation
* * * * *
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 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
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, respectively.
The sum of these products, 6570, is divided by 1095, the total
number of days in the term. The composite interest rate and APY are
both 6.00%.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, July 24, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-20268 Filed 7-29-98; 8:45 am]
BILLING CODE 6210-01-P
