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Consumer News
The Bank Customer’s Publication

Volume I No. 9

EDITOR: Josie Downey

January 1982

Truth In Lending Act Protects Against
Deceptive Advertising
A main purpose of the Truth in Lend- ing
Act (TILA) is to ensure complete
disclosure of consumer credit terms so
customers can determine the true cost of
credit and make informed choices among
competing lenders.
Prior to the enactment of TILA, some
advertisers disclosed only the most
attractive credit terms and omitted other
important conditions. For example, an
advertisement that reads, “1978 Chrysler,
no money down, $50 per month,” may or
may not be a bargain, depending on such
missing information as the total price and
the
number
of
payments.
The
advertisement also fails to disclose an
annual percentage rate or even whether
the transaction is a credit sale or a lease.
TILA requires that such information be
disclosed.
Any creditor, lessor, association,
manufacturer or even any government
agency (such as the Federal Housing
Administration) that advertises “open end
credit” must comply with TILA.
Open end credit permits the customer to
make purchases or obtain loans on a
continuing basis. The customer has the
privilege of paying the balance in full or in
installments, and a finance charge is
imposed periodically on the outstanding
unpaid balance. Credit cards are an
example of open end credit. If an
advertisement promoting open end credit
contains any of the following terms, it must
include certain disclosures:
(1) TILA requires an explanation of
any “free ride” period, such as in:
“Up to 30 days of free credit if you
pay in full each month.” The free
ride period is the time within
which any credit extended may be
paid in full without incurring a
finance charge.

(2) “A small monthly service charge
on the remaining balance each
month.” TILA requires that the
creditor dis- close the method of
determining the balance on which
a finance charge may be imposed.
(3) Terms such as minimum finance
charge, periodic rate and billing
costs must be explained. Creditors
must disclose the method used to
determine the amount of the finance charge, including any minimum charge, fixed charge, check
service charge, transaction charge,
activity charge or similar charge
which is imposed.
(4) The annual percentage rate (APR)
must be stated clearly. Where one
or more periodic rates are used

compute the finance charge. each
corresponding APR must be disclosed, as well as the range of balances to which each rate applies.
When applying for open end credit,
consumers should be aware that all disclosures must be specific. Consumers
should make sure they understand all
credit terms and should ask for explanations of any they don't understand. For
more information about the law's provisions, contact the nearest FDIC Re- gional
Office.
Congress has passed a new TILA, which
will become effective on October 1, 1982.
The new statute contains precise language
clarifying what types of creditors must
make
disclosures.
Josie Downey

ASCs Offer Tax-Free Interest
Last October, investors were given a
unique opportunity to earn up to $1,000
tax-free interest ($2,000 for returns filed
jointly) by purchasing a new time de- posit
known as an All Savers Certificate (ASC).
Depository institutions began offering
the new time deposit on October 1, 1981
and will continue until December 31, 1982.
This certificate has a maturity of exactly
one year and pays an annual yield equal to
70 percent of the rate determined at the
most recent auction of 52-week U.S.
Treasury bills (T-bills). T- bills are
auctioned every fourth Thurs- day and the
results of the auction are announced by the
Treasury Department late that day. The
average investment

yield determined by the auction applies to
all ASCs issued beginning the follow- ing
week, usually on Monday, and con- tinues
to apply for the next four weeks.
When an individual buys an ASC, the
rate remains constant for the duration of
the certificate; it does not fluctuate with
the monthly auction rates on the T-bills. If
a consumer withdraws funds from an ASC
account before the certifi- cate matures, a
penalty equal to three months interest at
the same interest rate being paid on the
ASC is applied to the amount withdrawn.
Also, a depositor who withdraws funds
prior to the certif- icate's maturity forfeits
the tax-free bene- fit and may not exclude
any interest

PREPARED BY THE DIVISION OF BANK SUPERVISION
Federal Deposit Insurance Corporation
Washington, D.C. 20429

(Continued on page 2.)

2

Small Investors Can Participate
In Some Repurchase Agreements
Financial institutions have found a way
to attract new money and offer consumers
market rates of interest on relatively small
amounts of money. To compete with
money market funds, some banks and
savings and loan associations are selling
repurchase agreements or “repos.”
Not long ago, repos were primarily sold
to large institutions for $100,000 or more.
However, banks and federal savings and
loans are now issuing retail repos to the
banking public for less than $100,000.
A repo is a financial agreement between a financial institution and a conSumer. The bank sells to the customer,
and at the same time agrees to repur-

chase within 89 days, an interest in a U.S.
Government or government agency
security. In return, the customer is paid a
market rate of interest by the bank for use
of the money. For example, the All Money
Bank sells Mr. Smith an interest in a
bank-owned U.S. Treasury bill for $5,000
plus interest at 10 percent for the 89 days
the bank has use of Mr. Smith's money.
At the end of 89 days, Mr. Smith receives
$5,000 plus the interest which has accrued
for 89 days.
Retail repos must have a maturity of less
than 90 days and may not be automatically renewed or extended. There
may be, but need not be, a fee or penalty
for the early redemption of the repo. A fee
and/or penalty may be imposed at

the discretion of the bank. Since retail
repos are not deposits, interest rate ceilings do not apply and the yields have
generally been higher than those permitted on passbook accounts or certificates of
deposit of similar amount or maturity.
Consumers should be aware that repos
are not deposits and therefore not insured
by the FDIC or the FSLIC. Repos are not
guaranteed by the U.S. Government or any
of
its
agencies.
FDIC recommends that consumers read
all financial agreements carefully before
signing them.
Louise N. Kotoshirodo
Consumer Affairs Specialist

ASCs Offer Tax-Free Interest
(Continued from page 1.)

earned from gross income for tax purposes.
If a depositor withdraws interest periodically from an ASC, a specific interest
formula must be used by the issuer to
ensure that the interest payments do not
exceed the permissible limit. An annual
yield greater than that permitted would
disqualify the ASC from tax-exempt
status. Also, while other time deposits may
be used as collateral for a loan, the use of
an ASC as collateral would result in loss of
its tax-exempt status.
In sum, the tax-free benefit is dependent on three conditions:
(1) the certificate must be issued only
from October 1, 1981 through December 31, 1982:
(2) the certificate must have a matur- ity
of exactly one year; and (3) the
deposit must have an annual
investment yield equal to 70 percent of the applicable average an-

nual investment yield on 52-week
Treasury bills.
Conversions of existing certificates to
ASCs are permitted with the consent of the
issuing institution. Two conditions must be
met: the remaining time of the existing
certificate of deposit must be one year or
less and the interest rate on the ASC must
be equal to or lower than that on the
present certificate of deposit. Partial
conversions of existing time deposits are
also permitted. For example, if a depositor
owns a $20,000 six-month Money Market
Certificate (MMC) and desires to convert,
without penalty, $15,000 of that amount
into an ASC, he or she may do so providing
the interest rate on the ASC is no higher
than the rate payable on the existing
MMC. The one-year maturity on the ASC
will al- ways be longer than the remaining
maturity on the MMC. Interest on the
remaining $5,000 could not be paid at the
MMC rate, however, because that

amount is lower than the $10,000 minimum required for MMCs.
The rate payable on the remaining $5,000
would be the maximum rate allowed on
deposits with maturities of 90 days or more
but less than one year, even if fewer than
90 days remain to maturity on the MMC.
This rate would be paid from the time of
conversion and is 5.75 percent and 6
percent at commer- cial banks and mutual
savings banks, respectively. In the
alternative, the de- positor could transfer
the $5,000 into a time deposit of a longer
maturity than that remaining on the MMC
(for exam- ple, a 2%-year Small Savers
Certificate). lf the depositor chooses to
withdraw the remaining $5,000 from the
bank, the depositor would be penalized
three months' interest based on that
amount at the original MMC rate.
Elaine S. Pool
Consumer Affairs Assistant

3

Los Inversionistas Pequeños Pueden
Participar En Algunos Acuerdos De Recompra
Las instituciones financieras han
descubierto una manera de atraer fondos
nuevos y al mismo tiempo ofrecer a los
consumidores tasas de interés del mercado
por cantidades de dinero relativamente
pequeñas. Algunos bancos y asociaciones
de ahorros y préstamos están vendiendo
acuerdos de recompra (conocidos en inglés
como “repurchase agreements" o “repos")
para competir con los fondos del mercado
monetario.
En el pasado, los acuerdos de recom- pra
se vendían primordialmente a instituciones
grandes por la cantidad mínima de S
100,000 o cantidad may- or. Sin embargo,
en la actualidad los bancos y las
instituciones fede- rales de ahorros y
préstamos están ofreciendo al público
bancario acuer- dos de recompra al detalle
por menos de S 100,000.
Un acuerdo de recompra es un Convenio
financiero entre la institu- ción financiera
y el consumidor. El banco le vende al
cliente y al mismo tiempo consiente en
recomprar parti- cipación de valores del
Gobierno de los Estados Unidos o agencia
guber- namental, dentro de un margen de
89 días.

El banco le paga al consumidor la tasa de
interés del mercado a cambio de utilizar
su dinero. Por ejemplo, el Banco X le
vende al Sr. López participación en un
Bono del Tesoro de los Estados Unidos,
pagaré o títulos, por la cantidad de $5,000
más interés al 10 por ciento por los 89 días
que el banco ha utilizado el dinero del Sr.
López. Al cabo de los 89 días, el Sr. López
recibe $5,000 más el interés devengado
por el período de 89 días.
Los acuerdos de recompra tienen un
vencimiento de un plazo menor de 90 días
y no pueden ser renovados o extendidos
automáticamente. Un cargo o multa
puede resultar a causa de una
amortización prematura del acuer- do de
recompra. El cargo y/o la multa pueden
ser impuestos a la discreción del banco.
Puesto que los acuerdos de recompra no
son depósitos, no están sujetos a los límites
máximos de las tasas de interés, y los
rendi- mientos usualmente son mayores
que aquellos permitidos en los ahorros
bancarios o los certificados de de- pósitos
por una cantidad o venci- miento similar.

Los consumidores deben tener pre- sente
que los acuerdos de recompra no son
depósitos y por lo tanto no están asegurados
por el FDIC o el FSLIC. Estos convenios no
están garantizados por el Gobierno de los
Estados
Unidos
o
sus
agencias.
El FDIC recomienda que los consumidores lean antes de firmar todos los
acuerdos financieros cuidadosamente. Si
desea información adicional acerca de los
acuerdos de recompra, llame a la Oficina
Regional del FDIC más carcana.

FDIC CONSUMER NEWS

Si usted desea recibir este noticiero
favor de enviar su nombre y dirección
postal a la siguiente dirección:
Josie Downey, Editor
FDC Consumer News
55O 17th Street, N.W.
Washington, D.C. 20429

IF YOU WISH TO BE PLACED ON THE FDIC CONSUMER NEWSLETTER MAILINGLIST, PLEASE FILL OUT THE
FORM BELOW AND MAIL TO: Josie Downey, Editor, Federal Deposit Insurance Corporation, 550 17th St., N.W.,
Washington, D.C. 20429
2. LISTCODE
LINE 1
(NAME)

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The next issue of the FDIC Consumer Newsletter will be in April 1982.

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4

Questions From Bank Customers

FDIC CONSUMER HOTLINE
– 800-424–5488–

Q.

Q. Are Individual Retirement Accounts (IRAs) and Keogh
Accounts insured by the FDIC?

A.

Such accounts in FDIC-insured banks are insured up to
$100,000, separately from a depositor's other accounts.

Q.

Can a bank legally stop payment on a cashier's check?

A.

A bank can stop payment on a check drawn on itself, but
does so only in unusual cases. For example, if a customer
loses the check, the bank may stop payment on it.

Q.

Can a bank use citizenship as a reason for denying credit?

A.

Yes. Some banks deny credit to non-U.S. citizens because
of their transient status.

Q.

Can a bank refuse to cash a social security or other type of
check if the payee does not have an account with the
bank?

A.

Yes. Some banks refuse to cash checks unless the payee
has an account with them.

Q.

Can a bank hold a disability or retirement check to cover
overdrafts when the check is automatically deposited to an
account?

A.

Depending on State law, deposits made to an account
which is overdrawn may be used to offset the overdraft.
Can a customer substitute a certificate of deposit for other
collateral without being charged a higher interest rate on
a loan?

Q.

Many institutions are offering interest on checking, the socalled NOW accounts. What is the highest rate of interest a
bank can pay on a NOW account?

Q.

A.

Under the rules of the Depository Institutions Deregulation
Committee, the maximum is 5% percent.

A.

A bank cannot secure a loan with a certificate of deposit it
has issued unless the interest rate charged on the loan is
one percent higher than the interest rate on the certificate
of deposit. However, a bank can accept as security a
certificate of deposit drawn on a different bank without
charging a higher interest rate.
GPO 800-527