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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10708 ~l
May 19, 1994
TRUTH IN SAVINGS
— Proposed Amendments to Regulation DD
— Withdrawal of Earlier Proposal
To All Depository Institutions in the Second Federal
Reserve District, and Others Concerned:
The following statem ent has been issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has issued for public comment proposed amendments to Regulation DD (Truth in Savings)
which clarify that once interest is credited to an account, it becomes part of the principal. Comment is requested by July 5.
The proposed amendments would provide new rules for institutions that offer consumers the choice of leaving interest
in the account or taking interest by check or transfer. Under the proposal, institutions must credit interest that remains
in the account and pay interest on those funds at the same frequency as interest credited by check or transfer. The proposed
revisions also have the effect of producing an annual percentage yield (APY) that reflects the time value of money.
At the same time the Board proposed these amendments to Regulation DD, it also withdrew other amendments to
the regulation that would have required an internal rate of return formula to calculate the APY. These amendments were
withdrawn based on considerations of cost and regulatory burden.
Printed below are excerpts from the Federal Register o f May 11, containing the text o f the withdrawal o f the
earlier proposal and the text o f the current proposal. Comments on the current proposal should be subm itted by
July 5, 1994, and may be sent to the Board of Governors, as specified in the notice, or to our Com pliance
Exam inations D epartm ent.
W illiam J. McDonough ,
President.
FEDERAL RESERVE SYSTEM
12 CFR Part 230
[Regulation DD; Docket No. R-0812]
Truth In Savings; Proposed Regulatory
Amendment
Board of Governors of the
Federal Reserve System.
AGENCY:
ACTION: W ithdrawal o f proposed rule.
SUMMARY: The Board is withdrawing
proposed am endm ents 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DATES: This proposed rule is withdrawn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 ,1 9 9 4 .
FOR FURTHER INFORMATION CONTACT: Jane
Ahrens, Senior Attorney, Kyung Cho, or
Kurt Schumacher, Staff Attorneys,
D ivision of Consumer and Community
Affairs, Board o f Governors of the
Federal Reserve System, at (202) 4 5 2 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 -3 5 4 4 .
SUPPLEMENTARY INFORMATION:
(1) Background
The Truth in Savings Act (12 U .S.C
4301 et seq.) requires depository
institutions to provide disclosures to
consum ers 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 im plem ented
by the Board’s Regulation DD (12 CFR
part 230), w hich becam e effective June
2 1 ,1 9 9 3 . (See final rule published on
September 2 1 ,1 9 9 2 (57 FR 43337),
correction notice published on October
5, 1992 (57 FR 46480), and a m e n d m e n ts
published on March 1 9 ,1 9 9 3 (58 FR
15077).
In its initial rulemaking, the Board
w as guided by several general
principles, such as establishing sim ple
rules that m inim ize the possibility of
errors and com pliance costs and
providing institutions w ith flexibility to
promote a variety o f product choices for
consumers. This included designing a
sim ple, easy-to-use formula for
calculating the APY. A s deposit brokers
and institutions began com plying with
the new formula, the Board was asked
by the Securities Industry Association
(SLA) and others to reconsider how the
APY is calculated. Proposed
am endm ents that w ou ld provide for an
additional APY formula were published
on December 6 ,1 9 9 3 (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
m w l
Federal Register / Vol. 59, No. 90 / Wednesday, May 11, 1994 / Proposed Rules
m a tu rity . F o r so m e a c c o u n ts, th e
fo rm u la p ro d u c e s a n A PY th a t reflec ts
th e tim e v a lu e o f in te re s t re c e iv e d .1 F o r
o th e rs th e A PY fails to re fle c t th e tim e
v a lu e o f in te re s t re c e iv e d . T h is h a p p e n s
in ca se s w h e re in s titu tio n s o ffer lo n g
te rm c e rtific a te s o f d e p o s it (CDs) th a t
a re n o n c o m p o u n d in g b u t p a y in te re st
p e rio d ic a lly . In th is ca se , th e fo rm u la
p ro d u c e s a n A PY th a t is le ss th a n th e
c o n tra c t in te re s t ra te .*2
In c o n s id e rin g w h e th e r t o p ro p o se
a m e n d m e n ts to th e A PY fo rm u la, th e
B o ard fo c u se d o n tw o issu es: a d e s ire
fo r a n A PY th a t re fle c ts th e tim e v a lu e
o f m o n e y , a n d a c o n c e rn a b o u t th e
c o m p lia n c e c o s ts a n d im p a c t o n
d e p o s ito ry in s titu tio n s if ch a n g es w e re
m a d e. T h e B o a rd p u b lis h e d a p ro p o sa l
th a t w o u ld fac to r in to th e A PY
c a lc u la tio n th e s p e c ific tim e in te rv a ls
for in te re s t p a id o n th e a c c o u n t— th a t is,
th e tim e v a lu e o f m o n e y (A p p ro a c h A).
H o w ev er, th e B o a rd a lso re q u e ste d
c o m m e n t o n a n a rro w e r a p p ro a c h th a t
w o u ld affect o n ly n o n c o m p o u n d in g
m u lti-y e a r CDs th a t p a y in te re st a t le a st
a n n u a lly . F o r th e s e a c c o u n ts, th e A PY
w o u ld n e v e r b e lo w e r th a n th e in te re st
ra te (A p p ro a c h B). T h e B o ard also
s o lic ite d c o m m e n t o n le av in g th e
re g u la tio n u n c h a n g e d (A p p ro a c h C).
T h e B o a rd re c e iv e d a b o u t 500
c o m m e n ts o n its p ro p o sa l. N early 90%
o f th e c o m m e n ts w e re from fin a n c ia l
in s titu tio n s . C o n s id e rin g a ll c o m m e n ts
re c e iv e d , a p p ro x im a te ly 5% s u p p o rte d
A p p ro a c h A ; 15% s u p p o rte d A p p ro a c h
B; a n d 75% s u p p o r te d A p p ro a c h C. T h e
r e m a in d e r p re s e n te d o th e r a lte rn a tiv e s
o r e x p re sse d n o o p in io n o n th e sp e cific
a p p ro a c h e s .
(2) D isc u ssio n
A p p ro a c h A : P ro p o sa l o f an A d d itio n a l
F orm ula
B ased o n th e c o m m e n ts re c e iv e d a n d
u p o n fu rth e r a n a ly sis, th e B o ard is
w ith d ra w in g th e p ro p o s e d a m e n d m e n ts
to th e A PY fo rm u la . O v erall, th e B o ard
' 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).
b e lie v e s th a t th e p ro p o s e d fo rm u la
(A p p ro a c h A) w o u ld b e c o m p le x a n d
co stly to im p le m e n t, a n d th e co sts
w o u ld o u tw e ig h th e b e n e fits d e riv e d
from th e p ro p o s e d c h a n g e s. (See D ocket
R -0 8 3 6 e ls e w h e re in to d a y ’s F e d e ra l
R e g iste r for p ro p o s e d a m e n d m e n ts
w h ic h th e B o a rd b e lie v e s m ig h t b e tte r
c a p tu re th e in te n t o f th e a c t’s p u rp o s e s
in a le ss c o m p le x w ay .)
T h e B o ard b e lie v e s th e fo rm u la
p ro p o s e d in D e c e m b e r w o u ld c o rre c t
th e A PY a n o m a lie s p ro d u c e d b y th e
c u rre n t fo rm u la , a n d h a s c o n s id e re d th e
v ie w o f so m e c o m m e n te rs th a t th e s h o rt
te rm c o s ts o f c o rre c tin g th e fo rm u la
m ig h t b e w o rth w h ile o v e r tim e.
H o w ev er, th e B o a rd is m o re p e rs u a d e d
b y th e c o m m e n te rs— in c lu d in g b o th
c o n s u m e r g ro u p s a n d in d u s try
a s so c ia tio n s— th a t b e lie v e d th e c o s ts o f
c o m p lia n c e o u tw e ig h th e b e n e fits fro m
im p le m e n tin g th e p ro p o s e d A PY
fo rm u la. C o m m e n te rs re p o rte d th a t
s u b s ta n tia l c o s ts re c e n tly h a d b e e n
in c u rre d to im p le m e n t th e re g u la tio n ,
a n d th e y b e lie v e d th e d is tin c tio n s in th e
A PY p r o d u c e d b y th e c o m p le x fo rm u la
p ro p o s e d b y A p p ro a c h A d i d n o t
w a rra n t th e s u b s ta n tia l c o s ts o f
im p le m e n tin g c h a n g e s to th e
re g u la tio n — p e r h a p s a s m u c h a s 50% o f
th e in itia l c o s ts to im p le m e n t th e
reg u la tio n .
T h e B o a rd c o n c u rs w ith th e
c o m m e n te rs th a t v o ic e d c o n c e rn a b o u t
th e c o m p le x ity o f th e p ro p o s e d fo rm u la.
T h e se c o m m e n te rs n o te d th a t th e
fo rm u la w a s c o m p le x for b o th
c o n s u m e rs a n d in s titu tio n s . M any
c o m m e n te rs s ta te d th a t a lth o u g h a n
in te rn a l ra te o f re tu r n fo rm u la is a
s ta n d a rd m a th e m a tic a l to o l in th e
fin a n c ia l m a rk e ts, its in tro d u c tio n in
A PY c a lc u la tio n s w o u ld e lim in a te , as a
p ra c tic a l m a tte r, th e u s e o f m a n y
h a n d h e ld c a lc u la to rs for p re p a rin g
d isc lo su re s o r q u o tin g A PY s to
c o n su m e rs. C o m m e n te rs a lso n o te d d u e
to th e c o m p le x ity o f th e APY
c a lc u la tio n th e re w o u ld b e a n in c re a se d
risk o f e rro r a n d p o te n tia l c iv il lia b ility
in m a k in g th is c a lc u la tio n for a w id e
v a rie ty o f a c c o u n ts.
T h e B o ard a lso n o te s th e v ie w s of
c o m m e n te rs th a t b e lie v e d th a t in
a d o p tin g A p p ro a c h A , th e B o ard w o u ld
m e re ly b e tra d in g o n e se t o f
a s s u m p tio n s for a n o th e r se t o f
a s su m p tio n s . M a n y c o m m e n te rs
c o n c u rre d w ith th e B o a rd th a t th e
c u rre n t A PY d o e s n o t a lw a y s reflec t th e
v a lu e o f p e rio d ic in te re s t d istrib u tio n s,
for e x a m p le . B u t th e y a lso b e lie v e d th a t
th e p ro p o s e d A PY a lso w o u ld n o t b e
fa c tu a lly a c c u ra te in a ll c irc u m sta n c e s.
F o r e x a m p le , c o m m e n te rs re m a rk e d th a t
th e p ro p o s e d A P Y w o u ld fail to reflec t
th e fact th a t in te re s t p a y m e n ts c a n n o t
24377
a lw a y s b e im m e d ia te ly re in v e s te d a t th e
sa m e ra te as th e a c c o u n t from w h ic h th e
in te re s t w a s p a id . T h e y also b e lie v e d it
w o u ld b e in a p p ro p ria te to a s su m e s u c h
a re in v e s tm e n t ra te for sm a ll m o n th ly
in te re s t c h e c k s, fo r e x a m p le , sin c e ra te s
ty p ic a lly rise b a s e d o n th e le n g th o f
m a tu rity a n d a m o u n t o f p rin c ip a l. T h ey
n o te d th a t e ld e rly c o n s u m e rs w h o h o ld
m u lti-y e a r CD s a n d w h o re ly o n
p e rio d ic in te re s t p a y m e n ts for liv in g
e x p e n se s w o u ld b e p a rtic u la rly affected
b y th e a s s u m p tio n .
C o m m e n te rs n o te d th a t re tu rn s o n
d e p o s it a c c o u n ts tra d itio n a lly h a v e b e e n
b a s e d o n th e ra te o f in te re s t p a id a n d
a n y c o m p o u n d in g fre q u e n c y . H ig h er
y ie ld s h is to ric a lly h a v e b e e n e q u a te d
w ith h ig h e r d o lla r in te re s t p a y m e n ts—
n o t m o re fre q u e n t in te re s t p a y m e n ts—
a n d c o m m e n te rs b e lie v e d th a t
c o n s u m e rs e x p e c t a n A PY to reflect
th o s e fac to rs. M a n y c o m m e n te rs
b e lie v e d th a t th e u n d e rly in g p re m ise o f
A p p ro a c h A — th e tim e v a lu e o f
m o n e y — is in a p p ro p r ia te for d e p o s it
a c c o u n t d is c lo s u re s . M a n y b e lie v e d a n
a s s u m p tio n b a s e d o n p o te n tia l e a rn in g s
o u ts id e th e a c c o u n t re la tio n s h ip w as
m is le a d in g for th e A PY c a lc u la tio n .
T h e y b e lie v e d th e p u rp o s e s o f T ru th in
S av in g s a re n o t b e s t se rv e d b y a n A PY
d is c lo s u re b a s e d o n th e tim in g o f
in te re s t p a y m e n ts th a t is h ig h e r for
c o n s u m e rs w h o re c e iv e le ss in te re st
o v erall.
D u e to c o n c e rn s a b o u t c o sts a n d
q u e s tio n s a b o u t th e b e n e fits p ro v id e d ,
th e B o a rd b e lie v e s th is a p p ro a c h W ould
n o t b e th e b e s t so lu tio n .
A p p ro a c h B: N o n c o m p o u n d in g M ultiY ear CDs
T h e B o a rd a lso is n o t a d o p tin g
A p p ro a c h B, b a s e d o n th e c o m b in a tio n
o f th e lim ite d sc o p e o f th e p ro b lem
A p p ro a c h B se e k s to a d d re ss, th e
c re a tio n o f n e w a n o m a lie s, a n d th e co st
to th e in d u s try o f re v ie w in g a n d
im p le m e n tin g n e w c a lc u la tio n a n d
d is c lo s u re re q u ire m e n ts.
O n th e o n e h a n d , th e B o ard b e lie v e s
A p p ro a c h B is a sim p le , d ire c t a p p ro a c h
to c o rre c t o n e a n o m a ly p r o d u c e d b y th e
c u rre n t A P Y fo rm u la . T h e B o ard also
re c o g n iz e s th a t th e d is c lo s u re o f a n A PY
th a t is lo w e r th a n th e in te re s t ra te o n a
n o n c o m p o u n d in g m u lti-y e a r CD th a t
p a y s in te re s t a t le a s t a n n u a lly m a y b e
c o n fu sin g to so m e c o n s u m e rs.3
O v e ra ll, h o w e v e r, th e B o ard is m o re
p e rs u a d e d b y c o m m e n te rs th a t v o ic e d
c o n c e rn a b o u t th e a c c u ra c y o f th e A PY
d is c lo s e d u n d e r A p p ro a c h B. F or
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.
JofoZ
24378
Federal Register / VoL 59, No. 90 / W ednesday, May 11, 1994 / Proposed Rules
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 notea 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, this 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
DATES: Comments must be received on
or before July S, 1994.
ADDRESSES; Comments should refer to
Docket No. R-0836, and may be mailed
to William W. W iles, Secretary, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue NW.f Washington, DC 20551.
Comments also may be delivered to
room B-2222 of the Ecdes Building
between 8:45 a.m. and 5:15 pun.
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
Board o f Governors of the Federal Reserve
Ahrens, Senior Attorney, Kyung Cho, or
System, May 4,1994.
Kurt Schumacher, Staff Attorneys,
William W. Wiles,
Division of Consumer and Community
Secretary of the Board.
Affairs, Board of Governors of the
(FR Doc. 94-11153 Filed 5-10-94; 8:45 am i
Federal Reserve System, at (202) 452—
BILLING CODE 8210- 01-P
3667 or 452-2412; for questions
associated with the regulatory flexibility
analysis, Gregory Elliehausen,
12 CFR Part 230
Economist, Office of the Secretary, at
(202) 452-2504; for the hearing
[Regulation DD; Docket No. R-0836)
impaired only, Dorothea Thompson,
Truth in Savings; Proposed Regulatory Telecommunications Device for the
Deaf, at (202) 452-3544.
Amendment
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 1900
(44 U.&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 20651, at (202)
452-3245.
Board of Governors of the
Federal Reserve System.
ACTION: Proposed rule.
AGENCY:
SUPPLEMENTARY INFORMATION:
(1) Background
The Truth in Savings Act (12 U.S.C.
4301 e t s e q .) requires depository
SUMMARY: The Board is publishing for
institutions to provide disclosures to
comment proposed amendments to
consumers about their deposit accounts,
Regulation DD (Truth in Savings) which including an annual percentage yield
clarify that once interest is credited to
(APY) on interest-bearing accounts. The
an account, it becomes part of the
act is implemented by the Board’s
principal. By defining terms such as
Regulation DD (12 CFR part 230), which
“ c re d itin g ,” and “compounding,” the
became effective June 21,1993 (See 57
amendments w ill provide certainty to
FR 43337 and 58 FR 15077).
institutions, better fulfill the purposes of
Because the current formula for
the act, and eliminate anomalies that
calculating the APY assumes that
currently occur in the APY calculation.
interest remains on deposit until
The amendments provide that for
maturity, the resulting APY may—but
institutions that pay interest (that is,
does not always—reflect the time value
credit interest) to the consumer by
of money. On December 8,1993, the
check or transfer or permit interest to
Board published a proposal that would
remain in the account, an institution
have factored into die APY calculation
must pay interest on funds that remain
the specific time intervals for interest
in the account at the same frequency as
paid on the account—that is, the time
the institution credits interest by check
value of money (58 FR 64190). It called
or transfer. Accounts that credit interest for adding an additional APY formula.
solely by posting to the account would
Based on the comments received and
not be required to send out interest
upon further analysis, the Board has
checks or to transfer the interest to other withdrawn toe proposed amendments.
accounts. Similarly, institutions offering (See Docket R-0812 elsewhere in
accounts that ’.‘credit” interest solely by today’s Federal Register.) Compounding
paying it out to the consumer by check
and crediting issues.
In the context of deliberations about
or transfer would not be required to
permit credited interest to remain in the the APY proposal, the Board has
account for compounding.
considered two related Issues regarding
Federal Register / Vol. 59, No. 90 / Wednesday, May 11, 1994 / Proposed Rules
d e p o s ito ry in s titu tio n s ’ c o m p o u n d in g
a n d c re d itin g p rac tic e s. T h is
r e la tio n s h ip b e tw e e n c re d itin g a n d
c o m p o u n d in g h a s n o t p re v io u s ly b e e n
a d d re s s e d in th e re g u la tio n o r in
s u p p le m e n ta ry in fo rm a tio n . (T h e
re s o lu tio n o f th e se issu e s, as d is c u s s e d
b e lo w , c o u ld p ro v id e a n a lte rn a tiv e
b a s is for e lim in a tin g th e a n o m a ly
p r o d u c e d b y th e c u rre n t fo rm u la w h ile
re q u irin g few ch a n g es to th e c u rre n t
A PY fo rm u la .) '
T h e ac t re q u ire s in s titu tio n s to p a y
in te re s t o n th e fu ll a m o u n t o f th e
p r in c ip a l in th e a c c o u n t e a c h d ay , a n d
p ro v id e s th a t th is re q u ire m e n t s h a ll n o t
b e c o n s tru e d as p ro h ib itin g o r re q u irin g
th e u s e o f an y p a rtic u la r m e th o d of
c o m p o u n d in g o r c re d itin g in te re st.
R e g u la tio n DD sta te s th a t th e
re q u ire m e n t to p a y in te re s t o n th e fu ll
a m o u n t o f p rin c ip a l d o e s n o t re q u ire
in s titu tio n s to c o m p o u n d o r c re d it
in te re s t at an y p a rtic u la r fre q u e n c y .
N e ith e r th e ac t n o r th e re g u la tio n
d e fin e s “ c o m p o u n d in g ,” “ c re d itin g ,” o r
“ p r in c ip a l.”
O n e iss u e th a t h a s a rise n is w h e th e r
in te re s t c a n b e p o ste d to a c o n s u m e r ’s
a c c o u n t a n d n o t b e tre a te d as p a rt o f th e
p rin c ip a l. A n o th e r is w h e th e r
in s titu tio n s th a t offer to c re d it in te re s t
to th e c o n s u m e r b y c h e c k o r tra n s fe r
a n d p e rm it in te re st to re m a in in th e
a c c o u n t m u s t c re d it a n d c o m p o u n d
in te re s t o n th e sa m e o r a m o re fre q u e n t
b a s is fo r th o se c o n s u m e rs th a t le a v e
in te re s t in th e acc o u n t. F o r e x a m p le , if
a n in s titu tio n offers a tw o -y e a r
ce rtific a te o f d e p o s it (CD) a n d p e rm its
c o n s u m e rs to rec eiv e a c c ru e d in te re s t in
m o n th ly in te re st ch e ck s, d o e s th e
in s titu tio n th a t also p e rm its in te re s t to
re m a in in th e a c c o u n t h a v e to c re d it a n d
c o m p o u n d in te re st in th e a c c o u n t o n th e
sa m e o r m o re fre q u e n t b a s is (m o n th ly or
m o re often).
T h e B o ard rec o g n iz e s th a t in s titu tio n s
m a y h a v e re a d th e ac t a n d re g u la tio n as
p e rm ittin g p ra c tic e s w h ic h c o m p o u n d
a n d c re d it a t d iffe re n t in te rv a ls. T h e
B o ard is p ro p o sin g to a m e n d th e
re g u la tio n to clarify th a t in te re s t c a n n o t
b e c re d ite d to a c o n s u m e r’s a c c o u n t
w ith o u t b ec o m in g p a rt o f th e p rin c ip a l.
F o r e x a m p le , a ssu m e a c o n s u m e r e a rn s
$5 in in te re s t o n a $ 1 ,0 0 0 b a la n c e for th e
m o n th o f Jan u ary . If a n in s titu tio n
c h o o s e s to c re d it in te re s t to th e a c c o u n t
m o n th ly , th e n th e in s titu tio n m u s t
a c c ru e in te re st o n th a t su m . F o r
e x a m p le , i f $5 is c re d ite d in Ja n u a ry to
a n a c c o u n t w ith a b a la n c e o f $ 1 ,0 0 0 , th e
in s titu tio n m u s t a c c ru e in te re s t o n
»If an institution offers a multi-year
noncompounding CD, the APY produced by the
current formula is less than the interest rate, even
if the institution pays out interest annually or more
often.
$1,005 for th e m o n th o f F eb ru ary .
S im p ly p u t, if c o n s u m e rs are g iv e n
ac ce ss to e a rn e d in te re s t in a n a c c o u n t,
th e B o ard b e lie v e s th e ac t re q u ire s th a t
c o n s u m e rs ea rn in te re st o n th o se fu n d s
at th a t tim e.
T h e B o ard also p ro p o se s a n
a m e n d m e n t clarify in g th a t a lth o u g h
in s titu tio n s m a y ch o o se an y
c o m p o u n d in g o r c re d itin g fre q u e n c y for
a n a c c o u n t, in s titu tio n s th a t p ro v id e for
c re d itin g in te re st e ith e r b y c h e c k (or
tra n sfe r o f a c c ru e d in te re s t to a n o th e r
a c c o u n t) o r by p o stin g in te re s t to th e
a c c o u n t m u s t d o so o n th e sa m e
p e rio d ic b asis. T h a t is, if in te re s t c a n b e
“ c r e d ite d ” b y c h e c k o r tra n sfe r, an
in s titu tio n m u s t c re d it in te re s t to all
s u c h a c c o u n ts at le a st as o ften a
fre q u e n c y . F or e x a m p le , a n in s titu tio n
o fferin g a o n e-y e ar CD w ith th e o p tio n
to re c e iv e m o n th ly or q u a rte rly in te re s t
c h e c k s w o u ld h a v e to c re d it in te re s t to
th e a c c o u n t for c o m p o u n d in g o n a t le a st
a m o n th ly fre q u en c y .
O f co u rse , a n in s titu tio n n e e d n o t
p e rm it c o n s u m e rs to re c e iv e in te re s t
p a y m e n ts b y c h e c k or tran sfe r.
S im ila rly , th e B o ard b e lie v e s th a t if an
in s titu tio n re q u ire s c o n s u m e rs to
re c e iv e in te re s t so le ly b y c h e c k (or
tra n sfe r to a n o th e r a c c o u n t), th e
in s titu tio n n e e d n o t also p e rm it
c o n s u m e rs to leav e in te re s t in th e
a c c o u n t for c o m p o u n d in g .
T h e B o ard n o te s th a t th is p ro p o s e d
in te rp re ta tio n c o u ld re q u ire a c h a n g e in
th e c o m p o u n d in g a n d c re d itin g
p ra c tic e s o f so m e d e p o s ito ry
in s titu tio n s , sin c e in s titu tio n s th a t do
n o t c u rre n tly c o m p o u n d o n th e sam e
b a s is as th e y offer in te re st p a y m e n ts
w o u ld h a v e to ch a n g e c o m p o u n d in g
fre q u e n c ie s o r re d u c e p a y m e n t o p tio n s.
T h e im p a c t o f th e p ro p o s e d
a m e n d m e n ts m a y b e g rea ter for th o se
in s titu tio n s offering c o n s u m e rs m a n y
o p tio n s in c re d itin g fre q u e n c ie s. F o r
e x a m p le , a n in s titu tio n p e rm ittin g
q u a rte rly in te re st p a y m e n ts m u s t also
c re d it a n d c o m p o u n d at le a st q u a rte rly
fo r th o se c o n s u m e rs w h o c h o o se to
le a v e in te re s t in th e a c c o u n t. If an
in s titu tio n allo w s c o n s u m e rs to rec eiv e
m o n th ly in te re s t ch e c k s (a n d c a n leav e
in te re s t in th e ac c o u n t), th e in s titu tio n
c o u ld n o t offer th is o p tio n w ith o u t
o fferin g m o n th ly c re d itin g a n d
c o m p o u n d in g to o th e r h o ld e rs o f th e
sa m e a c c o u n t as w ell. T h e B o ard
re q u e sts c o m m e n t o n th e s e m a tte rs.
T h e B o ard also so lic its c o m m e n ts on
w h e th e r c o n s u m e rs w h o u se A PY s to
c o m p a riso n sh o p m a y b e c o n fu se d b y an
A PY th a t reflec ts m o n th ly c o m p o u n d in g
b u t p a y s le ss in te re s t th a n if in te re s t h a d
c o m p o u n d e d in th e a c c o u n t. F o r
e x a m p le , a s su m e tw o in s titu tio n s offer a
o n e -y e a r CD w ith a 6 .0 0 % in te re s t rate.
24379
O n e m a n d a te s m o n th ly in te re s t ch e ck s,
th e o th e r p e rm its m o n th ly in te re s t
c h e c k s o r m o n th ly c o m p o u n d in g . B oth
c o u ld a d v e rtise a 6 .17% A PY , e v e n
th o u g h a c o n s u m e r d e p o s itin g $1,000
re c e iv e s $60 if in te re s t c h e c k s are p a id
a n d $ 6 1 .7 0 if m o n e y is left in th e
a c c o u n t.
(2) Proposed Regulatory Revisions:
Section-by-Section Analysis
A se c tio n -b y -se c tio n d e s c rip tio n o f
p ro p o s e d a m e n d m e n ts fo llo w s.
§230.2
Definitions.
P aragraph (c)—A n n u a l P ercen tage
Y ie ld
T h e a c t a n d re g u la tio n d e fin e th e A PY
as th e to ta l a m o u n t o f in te re s t th a t
w o u ld b e re c e iv e d b a s e d o n th e in te re s t
ra te a n d th e fre q u e n c y o f c o m p o u n d in g
for a 3 6 5 -d ay y ear. T h e p ro p o s e d
a m e n d m e n t b ro a d e n s th e d e fin itio n to
tre a t c re d itin g to th e c o n s u m e r’s
a c c o u n t— w h ic h in c lu d e s th e
d is trib u tio n o f in te re s t th ro u g h in te re s t
c h e c k s o r tra n sfe r— as th e e q u iv a le n t o f
c o m p o u n d in g . F o r ex a m p le , if a n
in s titu tio n p a y s a 6 .00% in te re s t ra te on
a n a c c o u n t, th e sa m e A PY w o u ld re s u lt
w h e th e r a n in s titu tio n c o m p o u n d s
m o n th ly or so le ly s e n d s o u t m o n th ly
in te re s t p a y m e n ts a n d d o e s n o t p e rm it
in te re s t to re m a in in th e a c co u n t.
T h e B o ard so lic its c o m m e n ts o n
w h e th e r a n e x c e p tio n s h o u ld b e m a d e to
th e d e fin itio n o f APY, a n d w h e th e r th e
p u rp o s e o f th e re g u la tio n — e n a b lin g
c o n s u m e rs to m ak e in fo rm e d d e c isio n s
a b o u t d e p o s it a c c o u n ts— is b e tte r m e t if
th e A PY c a p tu re s th e tim e v a lu e of
in te re s t re c e iv e d as a n in te re s t p a y m e n t
d u rin g th e te rm o f th e a c c o u n t, as w e ll
as b y c o m p o u n d in g .
P aragraph (h)— C o m p o u n din g
T h e ac t a n d re g u la tio n re q u ire
in s titu tio n s to d isc lo se c o m p o u n d in g
p o lic ie s for in te re st-b e a rin g a c c o u n ts.
T h e B o ard p ro p o se s to d e fin e th e te rm
“ c o m p o u n d in g ” as th e fre q u en c y th a t
e a rn e d in te re st is a d d e d to th e p r in c ip a l
in th e c o n s u m e r’s a c c o u n t, o n w h ic h
in te re s t th e n ac cru es. T o illu s tra te , a CD
o fferin g m o n th ly c o m p o u n d in g a d d s
in te re s t to p rin c ip a l e a c h m o n th , a n d
in te re s t th e n a c c ru e s o n th e n e w
m o n th ’s p rin c ip a l— in c lu d in g th e p rio r
m o n th ’s a c c ru e d in te re st.
P aragraph (j)— C rediting
T h e a c t a n d re g u la tio n also re q u ire
in s titu tio n s to d isc lo se c re d itin g
p o lic ie s for in te re st-b e a rin g a c c o u n ts.
T h e B o ard p ro p o se s to d e fin e th e te rm
“ c r e d itin g ” to in c lu d e th e fre q u e n c y
th a t e a rn e d in te re st is p a id to th e
a c c o u n t, o r p ro v id e d to th e c o n s u m e r by
/ O
24380
W
Federal Register / VoL 59, No. 90 / Wednesday, May 11, 1994 / Proposed Rules
check or transfer to another account.
Thus, for example, an institution that
sends a consumer a m onthly check o f
accrued interest w ould be crediting
interest monthly, even if interest were
not permitted to remain in the account
to earn additional interest.
§230.4 Account Disclosures.
Paragraph (
)
—Wi t hdrawal o f
Interest Prior to M aturity
The regulation requires a disclosure
for institutions offering tim e accounts
that com pound interest and permit a
consumer to withdraw accrued interest
during the account term. The disclosure
states that the APY assum es interest
remains on deposit until maturity and
that a withdrawal w ill reduce earnings.
The Board requests com m ent on
w hether the disclosure w ould continue
to b e helpful to consum ers in the
current form if the proposed
amendm ents are adopted.
§ 230.7 Payment ot Interest
Paragraph (b)■—Com pounding a n d
Crediting Policies
The act requires institutions to pay
interest on the full amount o f the
principal in the account each day, and
provides that this requirement shall not
be construed as prohibiting or requiring
the use of any particular m ethod of
com pounding or crediting interest.
Regulation DD states that the
requirement to pay interest on the full
amount of principal does not require
institutions to com pound or credit
interest at any particular frequency.
A s discussed above, the Board
believes institutions m ay choose any
com pounding or crediting frequency.
However, once interest is credited to an
account it becom es part of the principal,
and if interest remains in the account,
interest must be paid on those funds.
The Board believes institutions may
ch oose to offer accounts that credit
interest solely by posting interest to the
account, or by sending interest checks
or transferring the interest to another
account. But the Board also believes
institutions offering accounts that
rovide consumers w ith the option to
ave interest credited by check (or
transfer to another account) or by
posting interest to the account provide
at least as frequent a crediting frequency
to all holders of the same account. That
is, institutions must com pound interest
on funds remaining in the account at a
frequency no less often than interest is
offered to be credited—hy check or
transfer—to other consumers holding
such accounts. For exam ple, institutions
may offer a one-year CD: w ith m onthly
com pounding and the option to receive
monthly or quarterly interest checks,
but they may not combine quarterly
compounding with the option to receive
monthly interest checks. The Board
requests comment on the proposal.
Appendix A to Part 230—Annual
Percentage Yield Calculation
Part I. A nnual Percentage Y ield fo r
A ccou n t Disclosures a n d A dvertising
Purposes
A. General Rules
The proposed am endm ents to
A ppendix A only affect institutions that
credit interest solely by check or
transfer to another account (and that do
not permit the consumer to leave
interest in the account). The Board
proposes two am endm ents to A ppendix
A to address the calculation of the APY
for these accounts. First, the Board
proposes to d elete footnote 3 as
unnecessary. Second, the definition of
“Interest’' in the APY formula w ould be
am ended to provide that for such
accounts, institutions w ould factor in
the timing o f interest payments as i f
interest were being com pounded. For
exam ple, if an institution offers a twoyear CD w ith a 6.00% interest rate and
credits interest semi-annually to the
consumer by check or transfer to
another account, the “Interest” figure
used in the APY formula w ould be
$125.51 on a $1,000 deposit. This w ould
be the dollar amount of interest earned
for a two-year CD w ith a 6.00% interest
rate that com pounds semi-annually. The
APY w ould be 6.09%.
Finally, the Board also provides
guidance on tw o assum ptions for
calculating the APY that provide greater
flexibility and ease com pliance w ith the
APY formula. First, institutions could
calculate the APY by assum ing an initial
deposit amount of $1,000. Second, if
interest is paid out m onthly, quarterly,
or semi-annually, institutions could
base the number of days either on the
actual number of days fen those
intervals or on an assumed number of
days (30 days for m onthly distributions,
91 days for quarterly distributions, and
182 days for semiannual distributions).
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.
(4) Proposed Additional Guidance
The proposed regulatory amendments
associated with a new APY formula
raise other interpretive issues. The
Board solicits comments on the issues
addressed below:
1. Comparing accounts that disclose
the sam e A P Y but earn different dollar
am ounts o f interest. Under the proposal,
consum ers may receive the same APY
disclosure but different dollar Amounts
of interest.3 The Board solicits comment
on whether consum ers w ho are
comparison shopping w ould be better
served if the specific manner in w hich
interest is credited (such as, “A n annual
percentage yield o f 6.17% w ith monthly
interest checks”) should be stated along
w ith the APY. (See §§ 230.3(e), 4(a)(ii),
4(b)(l)(i), 5(b), 8(b).)
2. Com pounding a n d crediting
frequencies. The regulation requires
institutions to d isclose the frequency
w ith w hich interest is com pounded and
credited. This standard w ould require
institutions also to specify the crediting
frequency for interest payments sent
directly to the consum er or to another
account, whether by check or other
m eans, as w ell as w h en interest is
credited to the account. H id Board
solicits com m ent on the proposed
disclosure and on whether stating the
frequency of crediting by interest
payments or transfers to other accounts
is likely to help consum ers compare and
understand differences in account
terms. (See § 230.4(b)(2).)
(5) Form of Comment Letters
Comment letters should refer to
Docket No. R -0836, and, w hen possible,
should use a standard typeface w ith a
type size of 10 or 12 characters per inch.
This w ill enable the Board to convert
the text into machine-readable form
through electronic scanning, and w ill
facilitate automated retrieval of
com m ents for review. A lso, if
accom panied by an original document
in paper form, com m ents may be
submitted on 3 1/2 inch or 5 1/4 inch
computer diskettes in any IBMcom patible DOS-based format
(6) Regulatory Flexibility Analysis and
Paperwork Reduction Act
The Board’s Office of the Secretary
has prepared an econom ic impact
statement on the proposed revisions to
Regulation DD. The analysis expresses
concern about the desirability of
2 For example, assume a one-year CD that pays an
interest rate of 6.00%. Consumers would receive an
APY of 6.17% if the Institution requires monthly
interest payments. Or, if the institution permits
interest to be withdrawn monthly instead, the
proposed amendments would also require
institutions to permit interest to remain in the
account for monthly compounding. Consumers
holding this account would also receive an APY of
6.17% whether the consumer chooses to take
monthly interest checks or to have Interest remain
in the account However, based on a $1,000 deposit
consumers who receive interest checks will earn
$60.00", while those who compound interest wilt
earn $61.70.
Federal Register / Vol. 59, No. 90 / Wednesday, May 11, 1994 / Proposed Rules
am ending the regulation regarding the
linkage of com pounding and crediting
frequencies at this time. 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.
The Board solicits information
regarding the likely costs for com plying
w ith the proposed changes to the
regulation. In particular, the Board
solicits com m ents on the following:
• What proportion of existing
accounts w ould be affected by the
proposed new rule requiring institutions
to offer com pounding on the sam e
frequency as they permit interest
payouts?
• What changes w ould institutions
have to make to im plem ent the
proposed new com pounding and
crediting rule, and what w ould it cost
institutions to make these changes?
• What changes in the num ber o f
different account terms and types o f
accounts offered w ould result i f the
proposal w ere adopted? For exam ple,
w ould institutions reduce the number of
products offered? What effect w ould the
amendments have on “private banking”
relationships? W ould institutions
change from com pounding to
distributing the interest paid on
accounts without com pounding?
In accordance w ith section 3507 of
the Paperwork Reduction A ct o f 1980
(44 U.S.C. 35; 5 CFR 1320.13), the
proposed revisions w ill be reviewed by
the Board under the authority delegated
to the Board by the Office o f
Management and Budget after
consideration of com m ents received
during the p ublic com m ent period.
List o f Subjects in 12 CFR Part 230
Advertising, Banks, Banking,
Consumer protection, D eposit accounts,
Interest, Interest rates, Truth in savings.
Certain conventions have been used
to highlight the proposed revisions to
the regulation. N ew language is shown
inside bold-faced arrows, w hile
language that w ould be deleted is set off
w ith 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 DO)
1. The authority citation for part 230
w ould continue to read as follows:
Authority: 12 U.S.C. 4301 e ts e q .
2. Part 230.2 w ould be am ended by
revising paragraph (c), by redesignating
paragraph (h) and paragraphs (i) through
(v) as paragraph (i) and paragraphs (k)
through (w), respectively, and by adding
new paragraphs (h) and (j) to read as
follows:
24381
P arti. Annual Percentage Yield for
Account Disclosures and Advertising
Purposes
In general, the annual percentage
yield for account disclosures under
§§ 230.4 and 230.5 o f this part and for
(c)
Annua] percentage yield means a advertising under § 230.8 of this part is
an annualized rate that reflects the
percentage rate reflecting the total
relationship between the amount o f
amount of interest paid on an account,
interest that w ould be earned by the
based on the interest rate and the
consumer
for the term o f the account
frequency o f ^crediting or#
#(and taking into account the frequency
com pounding, for a 365-day period and
o f crediting)# and the amount of
calculated according to the rules in
principal used to calculate that interest.
A ppendix A o f this part.
Special rules apply to accounts w ith
*
*
*
*
*
tiered and stepped interest rates.
♦(h) Compounding m eans the
A. General Rules
frequency that earned interest is added
to the principal in the account on w hich
* * * In determining the total interest
interest then accrues.#
figure to be used in the formula,
*
*
*
*
*
institutions shall assum e that all
#{j) Crediting m eans the frequency
principal and interest remain on deposit
that earned interest is paid to the
for the entire term and that no other
account, or provided to the consum er by transactions (deposits or withdrawals)
check or transfer to another account. A
occur during the term.I3*] * * *
*
*
*
*
*
The annual percentage y ield is
3. Section 230.7 w ould be amended
calculated by u se of the follow ing
by redesignating paragraph (b) as
general formula ("APY” is u sed far
convenience in the formulas):
paragraph (b)(1) and by adding a new
paragraph (b)(2) to read as follow s:
A P Y = 1 0 0 [(l+ (In te re s t/
§ 230.2
*
*
Definitions.
*
*
*
§ 230.7 Payment of interest
* * * * *
(b) 1 * * *
#(2) Equivalent compounding and
crediting frequencies. Institutions
offering accounts that permit consumers
to receive interest by check or transfer
to another account and that permit
consumers to leave interest in the
account, must com pound interest on
funds left in the account at a frequency
no less often than interest is offered to
be credited to any consum er holding
such an account.#
*
*
*
*
*
4. Appendix A of part 230 w ould be
am ended by revising the first sentence
in the introductory paragraph, the
introductory text to Part I, and
amending paragraph A, and by
removing footnote 3 in Part I o f
A ppendix A to read as follows:
Appendix A to Part 230—Annual
Percentage Yield Calculation
The annual percentage yield measures
the total amount o f interest [paid}
team ed # on an account based on the
interest rate, and the frequency of
coin pounding},) #or crediting#.* * * *
• The annual percentage yield reflects only
interest and does not include the value of any
bonus (or other consideration worth $ldor 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
Principal))*3*5'0*******<om) —1)
“Principal” is the amount o f funds
assumed to have been deposited at the
beginning of the account.
“Interest” is the total dollar amount of
interest earned on the Principal for the
term of the account #in w hich credited
interest remains in the account. If
interest is required to be credited solely
by check or transfer, the total dollar
amount o f interest earned on the
Principal for the term of the account is
the amount of interest that w ould result
if it were com pounded at the same
frequency interest is credited.#
“Days in term” is the actual number
of days in the term o f the account.
*
*
*
*
*
Examples:
*
*
*
*
*
# (3 ) If an institution offers a $1,000
two-year certificate of deposit that
credits interest sem i-annually solely by
check or transfer, and there is no
com pounding at a 6.00% interest rate,
using the general formula above, the
annual percentage yield is 6.09%:
APY=100 [(l+(125.51/l,000))<365'730)—l j
APY=6.09%#
*
*
*
*
*
circumstances that may or may not occur in the
future.
3[This assumption shall not be used if an
Institution requires, as a condition of the account,
that consumers withdraw interest during the term.
In such a case, the interest (and annuel percentage
yield calculation) shall reflect that requirement.)
W oZ
24382
F ederal R egister / Vol. 59, No. 90 / W ednesday, May 11, 1994 / Proposed Rules
Board of Governors of the Federal Reserve
System, May 4,1994.
W illiam W. Wiles,
Secretary of the Board.
(FR Doc. 94-11154 Filed 5-10-94; 8:45 am)
BILLING CODE 6210-01-P
@FedFRASER