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FEDERAL RESERVE BANK OF NEW YORK C ircu la r N o. 10722 ~| [ July 1 9 , 1 9 9 4 TRUTH IN SAVINGS — Extension of Comment Period on Proposal to Amend Regulation DD — Additional Proposal Regarding APY Calculations Comments Requested by September 6 To A l l D e p o s i t o r y I n s t i t u t i o n s in th e S e c o n d F e d e r a l R e s e rv e D is tr ic t, a n d O th e r s C o n c e rn e d : The following statement has been issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has extended the comment period on its proposal to amend Regulation DD (Truth in Savings) dealing with crediting and compounding practices that would produce an annual percentage yield (APY) reflecting the time value of money. At the same time, the Board is publishing an alternative approach 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. Comments for both the proposal and the alternative approach are requested by September 6. Printed on the following pages is the text of the Board’s official notice in this matter, which was published in the Federal Register of July 11. The proposal for which the Board has extended the comment period was sent to you on May 19, 1994 (Cir. No. 10708). In addition, the Board is also requesting comment on an alternative approach for APY calculations. Comments on either of the proposals should be submitted by September 6, and may be sent to the Board of Governors, as specified in the notice, or to our Compliance Examinations Department. W il l ia m J. M c D o n o u g h , President. J07M 35271 Proposed Rules Federal Register Vol. 59, No. 131 Monday, July 11, 1994 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12CFR Part 230 [Regulation OD; Docket No. R -0836] Truth In Savings AGENCY: Board of Governors of the Federal Reserve System. Proposed rule and extension of comment period. ACTION: 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. A D D R E SSE S: 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 5:1,5 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 M P-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) 4523667 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 o n ly, 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 Boarc* 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. A lte r n a tiv e A P Y R e so lu tio n 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 »lso 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 /o 7s & 35272 Federal Register / Vol. 59, No. %31 / Monday, July 11, 1994 / Proposed Rules institutions offer a two-year CD w ith 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. S ection 230.4— A c c o u n t D isc lo su re s 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 tenn. The disclosure states that the APY assumes interest remains on deposit until maturity and that a withdrawal of interest w ill 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 w ill 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. S ectio n 2 3 0 .8 —A d v e rtisin g 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. A p p e n d ix A to P art 2 3 0 — A n n u a l P ercen tage Y ie ld C a lcu la tio n Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes A. G en eral ru les. 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 PART 230—TRUTH IN SAVINGS to clarify how APYs shall be determined (REGULATION DD) for such accounts. The Board requests 1. The authority citation for part 230 comment on the proposed paragraph would continue to read as follows: and accompanying example. A p p e n d ix B— M o d e l C la u ses a n d S a m p le F orm s 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 w ill 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 3V2 inch or 5V4 inch computer diskettes in any IBMcompatible 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 1328.13), the proposed revisions w ill 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 o f 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: 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 fTheJ annual percentage yield shall be calculated by the formula shown below. * * * * * * * * ►E. Time accounts with a stated m aturity greater than one year that com pound 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 o f the Board. [FR Doc. 94-16641 Filed 7-8-94; 8:45 am] BILUNG CODE 62KW H-P
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