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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10772 " 1 February 13, 1995 TRUTH IN SAVINGS — Revised Proposed Amendments to Regulation DD — Interim Rule on Calculating APY on Time Accounts Comments on Proposal Due March 20, 1995 To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has decided to reconsider an earlier decision to amend its Truth in Savings regulation and to seek further comment on possible changes in the formula for calculating annual percentage yields on deposit accounts. On January 4, the Board approved an amendment to its Regulation DD requiring that the annual percentage yield (APY) reflect the frequency of interest payments. Seven banking and two consumer organizations petitioned the Board to reconsider its decision and seek further comment. In view of these requests and the complexity of the issues, the Board decided unanimously to grant the petitions. Under the action taken today, the Board: — Granted the petitions for reconsideration, thus nullifying the January 4 decision requiring that the APY reflect the frequency of interest payments. Except as indicated below, this leaves the original regulation in place pending final action. — Seeks further comment on the January 4 amendment, as well as the interest rate of return formula that was previously proposed but withdrawn last year. — Adopted as an interim rule a narrowly drawn amendment to Regulation DD to permit institutions to disclose an APY equal to the contract interest rate for time accounts with maturities greater than one year that do not compound but require interest distributions at least annually. Printed on the following pages is the text of the Board’s proposal, followed by the text of the interim rule, as published in the Federal Register. The interim rule became effective on January 18. Comments on the proposed amendments should be submitted by March 20, 1995, and may be sent to the Board, as specified in the notice, or to our Compliance Examinations Department. W il l ia m J. M cD onough, President. 5142 Proposed Rules Federal R g s e eitr V o l. 6 0 , N o. 1 7 Thursday. January Comments should refer to Docket No. R-0869, and may be mailed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. Comments also may be delivered to Room B-2222 of the Eccles Building between 8:45 a.m. and 5:15 p.m. FEDERAL RESERVE SYSTEM weekdays, or to the guard station in the Eccles Building courtyard on 20th Street 12CFR Part 230 NW. (between Constitution Avenue and C Street) at any time. Comments may be [Regulation DD; Docket No. R -0869] inspected in Room MP-500 of the Martin Building between 9:00 a.m. and Truth in Savings 5:00 p.m. weekdays, except as provided AGENCY: Board of Governors of the in 12 CFR 261.8 of the Board’s rules regarding availability of information. Federal Reserve System. FOR FURTHER INFORMATION CONTACT: Jane ACTION: Proposed rule. Ahrens, Senior Attorney, Kyung ChoSUMMARY: The Board is publishing for Miller, or Obrea Otey Poindexter, Staff public comment proposed amendments Attorneys, Division of Consumer and to Regulation DD (Truth in Savings) that Community Affairs, Board of Governors would amend the current formula to of the Federal Reserve System, at (202) factor the frequency of interest 452-3667 or 452-2412; for questions payments into the calculation of the associated with the regulatory analysis, annual percentage yield (APY), along Gregory Elliehausen, Economist, Office with the interest rate paid and of the Secretary, at (202) 452-2504; for frequency of compounding. The the hearing impaired only, Dorothea proposal is intended to correct an Thompson, Telecommunications Device anomaly under the current formula, to for the Deaf, at (202) 452-3544. avoid misranking accounts that pay out SUPPLEMENTARY INFORMATION: interest (without compounding). The I. Background Board is also soliciting comment on an alternative approach that would use an The Truth in Savings Act (12 U.S.C. internal rate of return formula to 4301 et seq.) requires depository calculate the APY. The Board believes institutions to provide disclosures to an APY that reflects the timing of consumers about their deposit accounts, interest payments would enhance including an annual percentage yield comparison shopping among savings (APY) on interest-bearing accounts products, and the proposals provide two calculated under a method prescribed approaches for reaching that result. by the Board. The APY is the primary Institutions would not be required to uniform measurement for comparison change the nature of their accounts shopping among deposit accounts. The under either approach, nor would they law also contains rules about be required to compound interest at the advertising, including the advertising of same frequency as they credit interest accounts at depository institutions by check or transfer when consumers offered to consumers by deposit brokers. may receive interest payments or leave The Board’s Regulation DD (12 CFR part interest in the account. Separately 230), which was adopted in September published elsewhere in this issue of the 1992 and became effective in June 1993, Federal Register, the Board is adopting implements the ack (See 57 FR 43337, an interim rule for certain September 21,1992, and 58 FR 15077, noncompounding multi-year certificates March 19,1993.) of deposit that would permit In adopting Regulation DD, the Board institutions to disclose an APY equal to considered various approaches for the contract interest rate while the calculating the APY, reflecting several public is commenting on the proposal competing interests and concerns. The and the Board is evaluating those current APY formula is simple and easy comments. to use. It assumes that interest remains on deposit until maturity. This DATES: Comments must be received on assumption produces an APY that has or before March 20,1995. 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. ADDRESSES: 26, 1995 the effect of reflecting the time value of money in cases when interest payments are made at the same frequency as interest is compounded for funds that remain on deposit until maturity. It does not always reflect the time value of money when there are interest payments prior to maturity. II. Proposals Affecting the APY As deposit brokers began complying with the APY formula and the regulation’s advertising rules, the Securities Industry Association (S1A) asked the Board to reconsider how the APY is calculated. The SIA objected to the fact that, for multi-year certificates of deposit (CDs) that are noncompounding but pay interest at least annually, the formula produces an APY that is less than the account interest rate. Disclosure of an APY lower than the interest rate did not, according to the SIA, always allow for meaningful comparison shopping among deposit accounts. The SIA argued that the APY should at least equal the account interest rate. In December 1993, the Board published a proposal that factored into the APY calculation the specific time intervals for interest paid on the account—that is, the time value of money—and provided an additional internal rate of return formula (58 FR 64190, December 6,1993). The proposal also offered an alternative limited change in the APY disclosure for multi year noncompounding CDs; under this approach, institutions would disclose an APY equal to the account interest rate if the CDs paid interest at least annually. The proposal was withdrawn in May, based on considerations of cost and burden at that time (59 FR 24376, May 11,1994). Simultaneously with the withdrawal of the December proposal, in May 1994 the Board published a related proposal that addressed depository institutions’ compounding and crediting practices. Under the May proposal, institutions offering accounts that paid interest by check (or transfer) or by posting interest to the account would have to post interest at least as often as they pay out interest by check. That is, for accountholders leaving the interest in the account, interest would compound on at least as frequent a basis as the interest payments made to others. For example, if an institution offered a two- 5143 Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Proposed Rules Subsequently, the Board received petitions for reconsideration from both the major banking industry trade associations and consumer advocates. The trade associations and consumer groups stated several reasons in their letters asking for reconsideration and protesting the Board’s action, including that the public should have been given an opportunity to comment directly on the amendment requiring the APY to reflect the frequency of interest payments—as modified from the May proposal—before its adoption by the Board. On January 17, in order to address the concerns raised by the petitioners regarding public comment and to ensure a full airing of all aspects of proposed amendments to the APY calculation and In July, the Board extended the time definition, the Board granted the to provide comments on the proposed petitions and decided to publish for amendments. At the same time, the further public comment the proposal Board reopened comment on the limited adopted on January 4 as well as an alternative that had been published in alternative internal rate of return December 1993 and withdrawn in May formula affecting the calculation of the 1994; that alternative equates the APY APY. At the same time, the Board and the account interest rate for adopted an interim rule that would noncompounding multi-year CDs that permit institutions to equate the APY pay interest at least annually (59 FR and the contract interest rate for 35271, July 11,1994). noncompounding multi-year accounts The Board received about 550 that mandate interest payouts at least comments on the proposal (including annually. (See Docket R-0836 elsewhere comments on the alternative approach in today’s Federal Register.) year CD, and would permit consumers to receive accrued interest in monthly interest checks or to permit interest to remain in the account, the institution would have to credit and compound interest at least monthly. The May proposal also would treat the distribution of interest from the account as the equivalent of compounding. For example, if an institution sent consumers the interest payments (and did not permit consumers to leave interest in the account), the institution would treat the interest payment frequency as compounding in the APY calculation. Thus, for a two-year CD that requires consumers to receive an annual interest payment, the APY would reflect annual compounding. not compound. Institution B. however would disclose a 6.00% APY if interest left in the account compounds annually even though payments are made on the same basis as Institution A. The Board is also soliciting comment on an alternative approach to factor the time value of money into the APY. It would require an additional formula to calculate the APY—the internal rate of return formula proposed in December 1993. Both proposals would reflect the time value of money, and, as the table below illustrates, the APY would reflect this value. The example illustrates the effect of receiving interest payments during the term for a noncompounding 2-year CD at a 6% interest rate. Frequency of interest pay outs APY under current rule (percent) APY under proposed rules (percent) A n n u a l............... .......... S em i-annual............... Quarterly ..................... Monthly ....................... 5.83 5.83 5.83 5.83 6.00 6.09 6.14 6.17 Under this proposal, the amendments to Regulation DD adopted in the interim rule would be replaced, if the final rule adopts either of the proposed amendments using the current APY formula or the alternative APY involving noncompounding multi-year III. Factoring the Time Value of Interest calculation method using an interna) CDs). About 95% of the comments were rate of return formula. Payments Into the APY from financial institutions. The May 1994 Proposal Affecting remaining 5% were from trade Based on the comments received and Compounding and Crediting associations, data processors, and upon further analysis, the Board is Frequencies others. Approximately 450 comments proposing to reflect the frequency of addressed the proposed amendments interest payments in the calculation of One part of the May 1994 proposal affecting the APY formula; about 2% the APY, along with the interest rate would have required institutions to were in favor of the proposal, 98% were paid and frequency of compounding. match crediting and compounding This proposed amendment would factor policies for accounts where consumers opposed, most of them because of the proposed matching of compounding and the time value of interest payments into may receive interest payments or leave the APY calculation using the current crediting frequencies. About 100 interest in the account. It also would formula. It is a modified version of the commenters addressed the alternative have clarified when interest becomes May 1994 proposal. The proposal would principal and defined "crediting” and that would equate the APY to the interest rate; nearly 60% supported this apply to all account types. "compounding.” The Board recognizes This approach could be more helpful approach. that the commenters raised valid On January 4,1995, the Board to consumers who comparison shop concerns about this approach, and adopted one part of the May 1994 among deposit accounts and other because of these concerns the Board is proposal. The Board voted to amend the investment products. For example, it not considering those aspects of the May definition of the APY to reflect the could allow consumers more easily to proposal in this proposed rule. Neither frequency of interest payments; it compare accounts that require the of the proposals under consideration declined to adopt another portion of the distribution of interest payments with would require institutions to compound May proposal that would have affected those that permit consumers to receive interest at the same frequency as the institutions’ crediting and compounding payments, such as when two institution credits interest by check or policies. The Board also declined to institutions offer a two-year CD w a rith transfer for accounts where consumers adopt the alternative proposal published 6.00% interest rate and semi-annual may receive interest payments or leave in July 1994 that equated the APY and payouts (mandatory with Institution A interest in the account. the interest rate for multi-year, and optional by Institution B). If the IV. Proposed Regulatory Revisions: noncompounding certificates of deposit APY reflected the timing of interest Section-by-Section Analysis that make interest payments at least payments, both institutions would annually. The effective date for the disclose a 6.09% APY to a consumer Section 230.2—Definitions Board’s APY rule adopted on January 4 who receives payouts. Currently, the 2(c) Annual Percentage Yield would permit institutions to comply APYs disclosed may differ. Both immediately; compliance became institutions would disclose a 5.83% The act and regulation define the APY mandatory in September 1995. APY if interest left in the account does as the total amount of interest that 5144 Federal Register / Vol. 60. No. 17 / Thursday. January 26. 1995 / Proposed Rules would be received based on the interest rate and the frequency of compounding for a 365-day year. The proposed amendment would broaden the definition to treat the distribution of interest from the account (through interest checks or transfer) as the equivalent of compounding. For instance, if an institution pays a 6.00% interest rate on an account, the same APY of 6.17% would result whether an institution compounds monthly or sends out monthly interest payments. The Board is concerned that the current formula misranks certain alternatives, and is seeking comment about whether the proposed changes would better accomplish the Congressional purpose. addition to compounding. The disclosure requirement would apply to all account types (jnoney market deposit accounts as well as CDs, for example). If the annual percentage yield is based (in whole or in part) on interest distributions, institutions would be required to disclose the interest distribution frequency and include a statement that the annual percentage yield assumes interest payments are immediately reinvested at the account’s interest rate. If an institution offers a two-year CD with a 6.00% interest rate and compounds interest semi-annually but permits monthly interest checks, for example, consumers choosing to receive interest by check each month would The Board solicits comment on receive a disclosure such as "You will whether an exception should be made to earn a 6.17% APY, based on monthly the definition of APY to factor in the checks. The annual percentage yield timing of interest distributions, and whether the purpose of the regulation— assumes you immediately reinvest your interest payment at the account interest enabling consumers to make informed rate.” (Consumers choosing semi-annual decisions about deposit accounts—is compounding would receive disclosures better met if the APY captures the time value of interest received as an interest about the compounding frequency payment during the term of the account, under § 230.4(b)(2).) The new disclosure as well as by compounding. would also apply to accounts where interest compounds prior to the Section 230.3—General Disclosure distribution of interest. For example, if Requirements an institution offers an account with a 3(e) Oral Response to Inquiries 6.00% interest rate, monthly The regulation requires institutions to compounding, and quarterly interest state the annual percentage yield in an checks, the APY would be 6.17%, based oral response to a consumer’s inquiry on the assumption that the quarterly about interest rates payable on its checks (which reflect monthly accounts. The proposal would add a compounding) are reinvested at the brief disclosure about the APY, to assist account interest rate and compounding consumers in understanding the frequency. Consumers would receive a earnings and APY for the account. disclosure such as "You will earn a When responding orally to a consumer’s 6.17% APY, based on monthly inquiry about interest rates, institutions compounding. The annual percentage would be required to state the APY and yield assumes you immediately reinvest the corresponding frequency of your interest payment at the account compounding or interest distribution. interest rate.” For example, if an institution offers a two-year CD with a 6.00% interest rate 4(b)(6) Features of Time Accounts and compounds interest semi-annually but permits monthly interest checks, the 4(b)(6)(iii) Withdrawal of Interest Prior to Maturity oral response to a consumer who inquires about interest rates for a twoThe regulation currently requires a year CD could be “6.17%, based on disclosure for institutions offering time monthly checks” (or “6.09%, based on accounts that compound interest and semi-annual compounding,” or both). Section 230.4—Account Disclosures 4(b) Content of Account Disclosures 4(b)(1) Rate Information 4(b)(1)(iii) Effect of Interest Payments The act and regulation require institutions to disclose the APY and interest rate before an account is opened or upon request. A brief disclosure for APYs is proposed, to assist consumer understanding of an APY based on the frequency of interest payments in permit a consumer to withdraw accrued interest during the account term. The disclosure states that the APY assumes interest remains on deposit until maturity and that a withdrawal will reduce earnings. The proposal would eliminate the disclosure, since the APY would no longer reflect the assumption that interest remains on deposit until maturity. Further, under the proposal, consumers would receive transactionspecific disclosures reflecting their interest payment choice. Section 230.5—Subsequent Disclosures 5(a) Change in Terms 5(a)(2) No Notice Required 5[a)(2)(iv) Changes to the F r e q u e n c y o f Interest Payments Initiated bv the Consumer The act and regulation require institutions to give 30-days’ advance notice of any change in the account disclosures if the change might reduce the APY or adversely affect the consumer. The proposal would create an exception for changes to the interestpayment intervals that are initiated by the consumer. For example, if a consumer receives monthly interest payments on an account and prior to maturity requests the institution to start making payments semi-annually, no advance notice would be required. However, if an institution that permits interest payments monthly eliminates that payment option during the term of an account, advance notice of the change would be required for consumers who are receiving monthly payments. Section 269 of the act authorizes the Board to make adjustments and exceptions that are necessary or proper to carry out the purposes of the act. The Board solicits comment on whether the proposed exception to the change-in terms notice requirements should be made. Section 230.8—Advertising 8(c) When Additional Disclosures Are Required 8(c)(7) Effect of Compounding or Interest Distributions The act and regulation provide that when an APY is stated in an advertisement, additional disclosures are required. For the same reasons as discussed for account disclosures requirements, institutions that advertise an APY would be required to indicate whether the APY is based on the frequency of interest checks or compounding. The Board believes it is important that consumers who use advertisements to comparison-shop are alerted to this assumption, to avoid potential confusion or misunderstanding. Similarly, if an APY is based in whole or in part on interest distributions, the advertisement would have to alert consumers that the APY assumes that interest received is reinvested at the account interest rate. For example, if an institution advertises a two-year CD with a 6.00% interest rate, monthly compounding, and quarterly interest checks, the institution must include in the advertisement a Federal Register / Vol. 60, No. 17 / Thursday. January 26, 1995 / Proposed Rules disclosure such as “You will earn a 6.17% APY, based on monthly compounding and quarterly checks. The annual percentage yield assumes you immediately reinvest your interest payment at the account interest rate.” The Board also proposes to amend paragraph (e) of this section, which exempts certain types of advertisements from some disclosure requirements. Appendix A to Part 230—Annual Percentage Yield Calculation The proposed amendment that would factor the time value of interest payments into the APY calculation using the current formula (the modified version of the May 1994 proposal) is discussed below as "Alternative 1.” The alternative approach that would use an internal rate of return formula to calculate the APY (proposed in December 1993) is discussed as “Alternative 2.” Both approaches would incorporate two assumptions to provide greater flexibility and to ease compliance. First, institutions could calculate the APY by assuming an initial deposit amount of $1,000. Or, institutions could factor in the actual dollar amount of a deposit, although the Board notes that the effects of rounding interest paid on a very small deposit amount such as $25 can produce a skewed APY. Second, if interest is paid out monthly, quarterly, or semi-annually, institutions could base the number of days either on the actual number of days for those intervals or on an assumed number of days (30 days for monthly distributions, 91 days for quarterly distributions, and 182 days for semiannual distributions). Appendix A permits institutions to use a similar assumption for determining the number of days in the term of a “three-month” or “six-month” time account, for example. (Of course, if the institution chooses to use 91 days as the number of days for each quarter, it must also use 91 days to compute interest for those quarters. And see § 230.7, which requires institutions to pay interest on the full principal balance in the account each day.) To illustrate, assume the institution sends interest payments at the end of each calendar month to consumers with six-month CDs. If the institution bases its APY calculation on an assumed term of 183 days, the institution could calculate the effect of monthly interest payments by using the actual days in each calendar month or assuming five 30-day intervals and one 33-day interval. Also, footnote 3 would be deleted as unnecessary, since both alternatives specifically factor in when interest payments are made on an account. The following illustrates the differences in the two calculation methods under Alternative 1 and Alternative 2. If an institution offers a noncompounding two-year stepped-rate CD that pays a 5.00% interest rate in the first year and a 10.00% interest rate the second year and sends annual interest checks of $50 and $100 on a $1,000 deposit, the APY would be 7.47% under Alternative 1 (the proposed amendment using the current formula), and 7.41% using the internal rate of return formula (Alternative 2). If a noncompounding two-year stepped-rate CD paid a 10.00% interest rate in the first year and a 5.00% interest rate the second year and the institution sends annual interest checks of $100 and $50 on a $1,000 deposit, the APY would be 7.47% under Alternative 1 and 7.59% under Alternative 2. Alternative 1: Modifying the Current APY Formula Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes A. General Rules Under Alternative 1, the Board would amend the definition of “interest” in the APY formula to provide that institutions must factor in the timing of interest payments, if interest payments occur more frequently than any compounding. In effect, the interest payment would be treated as if the interest were compounded. For example, if an institution offers a two-year CD with a 6.00% interest rate and annual 5145 account and for those who receive monthly interest checks. In this case (when interest compounds more frequently than interest is distributed), the APY would be based on the compounding frequency. On the other hand, if the institution offers daily compounding to those consumers who leave interest in the account and does not compound interest if consumers choose to receive monthly interest checks, the APY would be 6.17% for the “monthly check” account. In another example, if an institution compounds monthly but offers consumers the option of receiving interest checks quarterly or semi-annually, the APY would be based on monthly compounding. The APY would be 6.17%. Two examples would be added to illustrate the new rule. Alternative 2: Adding an Internal Rate of Return Formula Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes A. General Rules 2. Formula for all Accounts Under Alternative 2, the Board would add a standard internal rate of return formula which produces an APY that reflects the timing of interest payments. The new formula could be used for all accounts. It would have to be used for accounts that pay interest prior to the maturity of the account. For example, institutions would use the formula to calculate the APY for a one-year time compounding and offers interest account that compounds semi-annually payments semi-annually to the consumer by check or transfer to another account, the "Interest” figure used in the APY formula would be $125.51 on a $1,000 deposit for the consumer who chooses semi-annual interest payments. This is the dollar amount of interest earned for a two-year CD with a 6.00% interest rate that compounds semi-annually. The APY for the account with semi-annual interest payments would be 6.09%. For the consumer who leaves interest in the account for annual compounding, the “interest” figure would be $123.60 and the APY 6.00%. On the other hand, if the same CD offered daily compounding and monthly interest checks (with daily compounding), the imputed interest figure would be $127.49, which reflects daily compounding and the assumption that the monthly interest checks are reinvested at the daily compounding rate. The APY would be 6.18% for consumers who leave interest in the and for which the consumer receives interest payments during the year. The APY is determined directly from the proposed formula. For an internal rate of return program that is standard for most calculators and software, calculations would consider the amount and days at which payments are made in relation to the amount and day of the deposit. Using standard programs, the calculation will result in a daily yield, which is annualized to produce the APY.' 3. Formula for Certain Accounts Institutions could continue to use the APY formulas currently in Appendix A for accounts with a single interest payment made at maturity (whether or not compounding occurs prior to maturity).* 1 1Annual percentage yield = ((daily yield 100 ♦ 1)V - 1)xl00. W 5146 Federal Register / Vol. 60. No. 17 / Thursday, January 26, 1995 / Proposed Rules institutions must disclose any rate stated as the APY (see 12 CFR 230.8(b)) An additional example is proposed to and may also state the interest rate. Also, the regulation requires institutions illustrate the use of the new formula. to provide disclosures, including the C. V ariable-R ate A c co u n ts APY, prior to maturity of automatically The proposal modifies the example in renewing time accounts. (12 CFR this paragraph to illustrate the use of the 230.5(b)) The Board solicits comment on how institutions offering accounts with proposed new formula. multiple payment and compounding Appendix B to Part 230—Model Clauses options may comply with the and Sample Forms regulation’s requirements under § 230.4(a) (requests for account The proposed amendments to model disclosures), § 230.3(e) (oral inquiries), clauses and sample forms would § 230.8(b) (advertisements), and address disclosure issues raised by factoring the timing of interest payments § 230.5(b) (disclosures for maturing rollover CDs) in a manner that best into the APY, under the proposed serves consumers who are comparison amendments using the current APY shopping. For example, comment is formula or an internal rate of return requested on whether an institution formula. could state, along with any B - l M o d el C lau ses f o r A c c o u n t compounding and crediting frequency: D isclosu res (1) any currently available APY, such as, “An annual percentage yield of 6.17% An additional model clause (a)(v) is assumes you receive monthly interest proposed to describe the effect of payments,” (2) the lowest and highest interest payments on the APY. Clause (b)(i) provides model language APYs for a given maturity, or (3) all APYs for the account. that may be used to disclose the frequency of an institution’s VI. Form of Comment Letters compounding and crediting practices. Comment letters should refer to The proposal adds a new sentence Docket No. R-0869, and, when possible, providing model language to use when should use a standard courier typeface interest is credited by check payments with a type size of 10 or 12 characters or transfer to another account. per inch. This will enable the Board to In accord with the proposed removal convert the text in machine-readable of paragraph 4(b)(6)(iii), the Board also form through electronic scanning, and proposes to remove clause (h)(iii), and will facilitate automated retrieval of to redesignate clause (h)(iv) as (h)(iii). comments for review. Also, if B -7 S a m p le Form accompanied by an original document in paper form, comments may be Given the proposed removal of submitted on 3V2 inch or 51 inch /* paragraph 4(b)(6)(iii) and model clause computer diskettes in any IBMB-l(h)(iii), the proposal would remove compatible DOS-based format. the last two sentences in the first paragraph of the sample form. VII. Regulatory Flexibility Analysis and Paperwork Reduction Act B -1 0 S a m p le Form The Board’s Office of the Secretary The proposed new sample form has previously prepared regulatory illustrates a disclosure for a CD that analyses on proposals to factor the offers consumers the options to compound interest or to receive interest timing of interest payments into the APY. Copies may be obtained from on a more frequent basis. The form Publication Services, Board of discloses which interest payment option Governors of the Federal Reserve was chosen, and an APY reflecting that System, Washington, D.C. 20551, at choice. (202) 452-3245. The proposed amendments would V. Interpretive Guidance require institutions to disclose an APY A P Y D isclosu res fo r A c co u n ts Offering that reflects the timing of interest M u ltip le P a ym e n t a n d C o m p o u n d in g payments as well as compounding. O p tio n s Either alternative would likely require In addition to disclosing the APY one-time software modifications and before an account is opened, institutions changes to account disclosures and must state an APY when responding to advertisements. The Board solicits consumers’ requests for written comments on the likely costs for information about an account or to an complying with the proposed oral inquiry about rates. (See 12 CFR amendments, and whether the costs to 230.4(a) and 12 CFR 230.3(e).) In a implement Alternative 1 (modifying the consumer account advertisement, current formula) would differ B. S tep p e d -R a te A c co u n ts (D ifferent R ates A p p ly in S u cceed in g P erio d s) significantly from those required to implement Alternative 2 (adding an internal rate of return formula). In accordance with Section 3507 of the Paperwork Reduction Act of 1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be reviewed by the Board under the authority delegated to the Board by the Office of Management and Budget after considering comments received during the public comment period. List of Subjects in 12 CFR Part 230 Advertising, Banks, banking, Consumer protection, Federal Reserve System. Reporting and recordkeeping requirements, Truth in savings. For the reasons set forth in the preamble, the Board proposes to amend 12 CFR part 230 as set forth below: PART 230—TRUTH IN SAVINGS (REGULATION DO) 1. The authority citation for part 230 would continue to read as follows: Authority: 12 U S C 4301, e t seq. ... 2. Section 230.2 would be amended by revising paragraph (c) to read as follows: §230.2 Definitions. * * * * * (c) A n n u a l p e rc e n ta g e y ie ld means a percentage rate reflecting the total amount of interest earned or imputed on an account, based on the interest rate and the frequency of compounding, or interest distributions from the account, for a 365-day period and calculated according to the provisions in Appendix A of this part. * * * * * 3. Section 230.3 would be amended by revising the first sentence of paragraph (e) to read as follows: § 230.3 General disclosure requirements. * * * * * (e) O ral re sp o n se to in quiries. In an oral response to a consumer’s inquiry about interest rates payable on its accounts, the depository institution shall state the annual percentage yield, accompanied by the corresponding frequency of compounding or interest distribution.* * * * * * * * 4. Section 230.4 would be amended as follows: a. A new paragraph (b)(l)(iii) would be added, b. Paragraph (b)(6)(iii) would be removed, and c. Paragraph (b)(6)(iv) would be redesignated as paragraph (b)(6)(iii). The addition would read as follows: Federal Register / Vol. 60, No. 17 / Thursday. January 26, 1995 / Proposed Rules § 230.4 Account disclosures. * * * * * (b) * * * Cl) * * * (iii) Effect of interest payments. If the annual percentage yield is based in whole or in part on interest distributions: (A) The interest distribution frequency. (B) A statement that the annual percentage yield assumes the consumer immediately reinvests interest payments at the account’s interest rate. * * * * * 5. Section 230.5 would be amended by adding a new paragraph (a)(2)(iv) to read as follows: § 230.5 Subsequent disclosures. (a)* * * ( 2) * * * (iv) Changes to the frequency of interest payments initiated by the consumer. Changes initiated by the consumer to the frequency of interest payments. * * * * * ii. The introductory text to Part I would be revised; iii. In Part I, A. General Rules the text preceding Examples would be revised; iv. In Part I, A. General Rules, under Examples, new paragraphs (3) and (4) would be added; and v. In Part I, A. section E would be removed. b. Under the second alternative, Appendix A would be amended as follows: i. The introductory text to Appendix A would be revised; ii. The introductory text to Part I would be removed; iii. In Part I, A. General Rules would be revised; iv. In Part I, B. Stepped Rate Accounts (Different Rates Apply in Succeeding Periods), the Examples would be revised; v. In Part I, C. Variable-Rate Accounts would be revised; and vi. In Part I, section E would be removed. The revisions and additions under the first alternative would read as follows: 6. Section 230.8 would be amended as follows: a. Paragraph (c)(6)(iii) would be removed; b. A new paragraph (c)(7) would be added;and c. Paragraph (e)(1) introductory text would be revised. The addition and revision would read as follows: Appendix A to Part 230—Annual Percentage Yield Calculation The annual percentage yield measures the total amount of interest earned or imputed on an account based on the interest rate and the frequency of compounding or interest distributions.1 The annual percentage yield is expressed as an annualized rate, based on a 365-day year.2 Part I of this appendix discusses the annual § 230.8 Advertising. * * * * * percentage yield calculations for account disclosures and advertisements, (c) * * * (7) Effect of compounding or interest while Part II discusses annual percentage yield earned calculations for distributions. The frequency of periodic statements. compounding or interest distributions. If the annual percentage yield is based (in whole or in part) on interest distributions, a statement that the annual percentage yield assumes the consumer immediately reinvests interest payments at the account’s interest rate. * * * * * (e) Exemption for certain advertisements—(1) Certain media. If an advertisement is made through one of the following media, it need not contain the information in paragraphs (c)(1), (c) (2), (c)(4), (c)(5), (c)(6)(ii), (c)(7), (d) (4), and (d)(5) of this section: * * * * * 7. In Part 230, Appendix A would be amended under one of the two following alternatives: a. Under the first alternative, Appendix A would be amended to read as follows: i. The introductory text would be revised; Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes In general, the annual percentage yield for account disclosures under §§ 230.4 and 230.5 and for advertising under § 230.8 is an annualized rate that reflects the relationship between the amount of interest that would be earned by the consumer for the term of the account (taking into account the frequency of interest distributions or 1The annual percentage yield reflects only interest and does not include the value of any bonus (or other consideration worth $10 or 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 circumstances that may or may not occur in the future. 2Institutions may calculate the annual percentage yield based on a 365-day or a 366-day year in a leap year. 5147 compounding) and the amount of principal used to calculate that interest. Special rules apply to accounts with tiered and stepped interest rates. A. General Rules 1. The annual percentage yield shall be calculated by the formula shown in paragraph 2 of Part I. A. of this appendix. Institutions shall calculate the annual percentage yield based on the actual number of days in the term of the account. For accounts without a stated maturity date (such as a typical savings or transaction account), the calculation shall be based on an assumed term of 365 days. In determining the total interest figure to be used in the formula, institutions shall assume that no withdrawals or deposits of principal occur during the term. For time accounts that are offered in multiples of months, institutions may base file number of days on either the actual number of days during the applicable period, or the number of days that would occur for any actual sequence of that many calendar months. If institutions choose to use the latter rule, they must use the same number of days to calculate the dollar amount of interest earned on the account that is used in the annual percentage yield formula (where “Interest” is divided by “Principal”). 2. The annual percentage yield is calculated by use of the following general formula (“APY” is used for convenience in the formulas): APY+100((l+(Interest/principal))(365/D s a> in term) _ -j J a. “Principal” is the amount of funds assumed to have been deposited at the beginning of the account. b. “Interest” is the total dollar amount of interest earned on the Principal for the term of the account in which interest remains in the account. If interest is distributed by check or transfer at the same frequency or more frequently than interest is compounded, “Interest” is imputed to be the amount that would result if it were compounded at the same frequency interest is distributed. If interest is distributed by check or transfer and that interest is based in part on compounding, “Interest” is imputed to be the amount that would result if the distributed interest based on that compounding frequency had remained in the account. c. “Days in term” is the actual number of days in the term of the account. When the “days in term” is 365 (that is, when the stated maturity is 365 days or when the account does not have a stated maturity), the annual percentage yield can be calculated by use of the following simple formula: Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Proposed Rules 5148 APY=100 (Interest/Principal) Examples * * * * * (3) If an institution offers a $1,000 two-year certificate of deposit that distributes interest semi-annually by check or transfer, and there is annual compounding at a 6.00% interest rate, using the general formula above, the annual percentage yield is 6.09% for an account with semi-annual checks, and 6.00% for an account where interest is left in the account for compounding. APY=100[(l+(125.51/l,000))(365/730)— ll APY=6.09% APY=100[(1+(123.60/1,000)) (365/730) _ ! ] APY=6.00% (4) If an institution offers a $1,000 two-year certificate of deposit that compounds daily and distributes monthly interest checks at a 6.00% interest rate, using the general formula above, the annual percentage yield is 6.18%, for consumers who leave interest in the account and for those who receive monthly checks: APY=100[(1+(127.49/1,000)) (365/730) _ U APY=6.18% * * * * * The revisions and additions under the first alternative would read as follows: Appendix A to Part 230—Annual Percentage Yield Calculation The annual percentage yield measures the total amount of interest earned or imputed on an account based on the interest rate and the frequency of compounding or interest distributions.1 The annual percentage yield is expressed as an annualized rate, based on a 365-day year.2 Part I of this appendix discusses the annual percentage yield calculations for account disclosures and advertisements, while Part II discusses annual percentage yield earned calculations for periodic statements. Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes A. General Rules 1. General. In general, the annual percentage yield for account disclosures under §§ 230.4 and 230.5 and for 1The annual percentage yield reflects only interest and does not include the value of any bonus (or other consideration worth S10 or 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 circumstances that may or may not occur in the future. 2Institutions may calculate the annual percentage yield based on a 365-day or a 366-day year in a leap year. advertising under § 230.8 is an annualized rate that reflects the relationship between the amount of interest that would be earned by the consumer for the term of the account (taking into account the frequency of interest distributions or compounding) and the amount of principal used to calculate that interest. Special rules apply to accounts with tiered and stepped interest rates. The annual percentage yield shall be calculated by the formula shown in paragraph 2. of Part I.A. of this appendix. Institutions shall calculate the annual percentage yield based on the actual number of days in the term of the account. For accounts without a stated maturity date (such as a typical savings or transaction account), the calculation shall be based on an assumed term of 365 days. In determining the total interest figure to be used in the formula, institutions shall assume that no withdrawals or deposits of principal occur during the term. For time accounts that are offered in multiples of months, institutions may base the number of days on either the actual number of days during the applicable period, or the number of days that would occur for any actual sequence of that many calendar months. If institutions choose to use the latter rule, they must use the same number of days to calculate the dollar amount of interest earned on the account that is used in the annual percentage yield formulas. If interest is paid to the account or to the consumer from the account by check or transfer monthly, quarterly or semi-annually, institutions may base the number of days on either the actual number of days for those intervals, or the following assumed intervals: monthly, 30 days; quarterly, 91 days; and semi-annually, 182 days. If institutions choose to use the latter rule, they must use the same number of days to calculate the dollar amount of interest earned on the account that is used to determine when interest was paid to the account or to the consumer from the account. Institutions may base the dollar amount of a deposit on either the actual amount of the deposit or an assumed deposit of $1,000. 2. Formula for all accounts. The following formula may be used for all accounts. It shall be used for all accounts where interest is paid prior to the maturity of the account. This formula reflects the specific frequency of interest payments to the consumer. Deposit=First payment/fl+APY/lOO)0** of deposit to day of first paymcnt/365 -(-Succeeding payment/(l+APY/100)D ay of deposit to succeeding paymcnt/365 + ... +Final Payment/(l+APY/100)D of a> to day of final paymcnt/365 a. “APY” is the annual percentage yield paid on the deposit. b. “Deposit” is the initial deposit. c. “First payment” is the amount of the first interest payment made during the term of the account. d. “Succeeding payment” is the amount of each succeeding interest payment, excluding the first and final payments, made during the term of the account. e. “Final payment” is the amount of the final payment including principal made at the end of the account. f. “Day of deposit to day of first payment” is the number of days between the day of the initial deposit and the first payment. g. “Day of deposit to succeeding payment” is the number of days between the day of the initial deposit and each succeeding payment. h. “Day of deposit to day of final payment” is the actual number of days in the term of the account. Examples (1) For a $1,000 two-year CD (with a 6.00% interest rate and a .01644% daily periodic rate, and no compounding but semi-annual interest payments), an institution makes two midyear interest payments of $29.92 on day 182 of each year (days 182 and 547) and two interest payments of $30.08 at each year’s end (days 365 and 730). Using the formula in paragraph 2. of Part I.A. of this appendix, the annual percentage yield is 6.09%: 1,000=29.92/(1+APY/100)I82'3«+N 30.08/ (l+APY/100)36S/365+29.92/(l+APY/ 100)547/365+1030.08/(l+APY/ 100)73a,36S Daily yield=-01619% APY=6.09% (2) For a $1,000 one-year CD (with a 6.00% interest rate and a .01644% daily periodic rate, compounded semi annually), an institution which allows the consumer to elect quarterly interest payments assumes three quarterly interest payments of $14.96 at 91-day intervals (days 91,182 and 273), and a final payment of $1015.12 on day 365. Using the formula in paragraph 2. of Part I.A. of this appendix, the annual percentage yield for the quarterly payment option is 6.14%: 1.000=14.96/(l+APY/100)9,/365+14.96/ (l+APY/100)l82/365+14.96/(l+APY/ 100)273/365+1015.12/(l+APY/ 100)365/565 Daily yield=.01632% APY=6.14% 3. Formula for certain accounts. The formula under this paragraph may be Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Proposed Rules paragraph 3. of Part I.A. of this used for accounts that make a single appendix, the annual percentage yield is interest payment at maturity. When 5.39%: using the formula, institutions shall determine the total interest figure to be APY=100 ((l+(26.68/l,000))(365/l83) — lj used in the formula by assuming that all APY=5.39% principal and interest remain on deposit (2) If an institution offers a $1,000 for the entire term and that no other two-year certificate of deposit on which transactions (deposits or withdrawals) it pays a 6.00% interest rate, occur during the term. The annual compounded daily, for the first year, percentage yield is calculated by use of and a 6.50% interest rate, compounded the following formula (“APY” is used daily, for the next year, the total interest for convenience in the formulas): paid in a single payment at maturity is APY=100 [(l+(Interest/ $133.13 and, using the formula in Principal))*365'0**5in — i] paragraph 3. of Part I.A. of this a. “Principal” is the amount of funds appendix, the annual percentage yield is 6.45%: assumed to have been deposited at the beginning of the account. APY=100 [(1+133.13/1,000)<3 s5 3 > U < /7 O — d. “Interest” is the total dollar amountAPY=6.45% of interest earned on the Principal for (3) For a $1,000 two-year certificate of the term of the account. deposit (with an interest rate of 6.00% c. “Days in term” is the actual number a daily periodic rate of .01644% the and of days in the term of the account. When first year, and an interest rate of 6.50% the "days in term” is 365 (that is, where and a daily periodic rate of .01781% the the stated maturity is 365 days or where second year, no compounding but semi the account does not have a stated annual interest payments), an maturity), the annual percentage yield institution makes two payments during may be calculated by use of the the first year, a midyear interest following simple formula: payment of $29.92 on day 182 and a APY=100 (Interest/Principal) year-end interest payment of $30.08 on day 365, and two payments during the Examples second year, a midyear interest payment (1) If an institution pays $61.83 in of $32.41 on day 547 and a final interest in a single payment at maturity payment of $1032.59 on day 730. Using for a 365-day year on $1,000 deposited the formula in paragraph 3. of Part I.A. into a one-year CD (with a 6.00% of this appendix, the annual percentage interest rate and daily compounding), yield is 6.34%: using the formula shown in paragraph 3. of Part I.A. of this appendix, the annual 1,000=29.92/(l+APY/100),82/365+30.08/ (l+APY/100)365'365 percentage yield is 6.18%: +32.41/(l+APY/100)547/365+1032.59/ a p y = ioo [(l+ tei.ss/i.o o o ))* 365'365) - 1 ] (l+APY/100)730/365 APY=6.18%. Daily yield=.01684% (2) If an institution offers a $1,000 six- APY=6.34% month certificate of deposit (where the six-month period used by the institution C. Variable-Rate Accounts 1. For variable-rate accounts without contains 182 days, interest is paid at an introductory premium or discounted maturity, and there is daily rate, an institution must base the compounding at a 6.00% interest rate), using the formula shown in paragraph 3. calculation only on the initial interest of Part I.A. of this appendix, the annual rate in effect when the account is opened (or advertised), and assume that percentage yield is 6.18%: this rate will not change during the year. APY=100 [(l+ (30.37/l,000))(365/l*2>—1] 2. Variable-rate accounts with an APY=6.18% introductory premium (or discount) rate B. Stepped-Rate Accounts (Different must be calculated like a stepped-rate Rates Apply in Succeeding Periods) account. Thus, an institution shall * * * * * assume that: (i) The introductory interest rate is in effect for the length of Examples time provided for in the deposit (1) If andnstitution offers a $1,000 6contract: and (ii) the variable interest month certificate of deposit on which it rate that would have been in effect pays a 5.00% interest rate, compounded when the account is opened or daily, for the first three months (which advertised (but forthe introductory rate) contain 91 days), and a 5.50% interest is in effect for the remainder of the year. rate, compounded daily, for the next If the variable rate is tied to an index, three months (which contain 92 days), the index-based rate in effect at the time the total interest paid in a single of disclosure must be used for the payment at maturity for six months is remainder of the year. If the rate is not $26.68, and using the formula in tied to an index, the rate in effect for 5149 existing consumers holding the same account (who are not receiving the introductory interest rate) must be used for the remainder of the year. 3. For example, assume an institution offers an account on which it pays quarterly interest payments at an introductory 7.00% interest rate and a .01934% daily periodic rate, compounded daily, for the first three months (which, for example, contain 91 days), while the variable interest rate that would have been in effect when the account was opened was 5.00% with a daily periodic rate of .01378%. For a 365-day year on a $1,000 deposit an institution would make one quarterly interest payment on day 91 of $17.60 (based on 91 days at 7.00%), followed by two interest payments of $12.54 on days 182 and 273, and a final payment of $1012.68 on day 365 (based on 274 days at 5.00%). Using the formula in paragraph 2. of Part I. A. of this appendix, the annual percentage yield is 5.66%: 1,000=17.60/(1+APY/100)*,l/365+l 2.54/ (l+APY/100)1 '365 *2 +12.54/(l+APY/100)273/365+1012.68/ (l+APY/100)365'365 Daily yield=.01508% APY=5.66% * * * * * 8. In Part 230, Appendix B would be amended as follows: a. Under B— 1—Model Clauses For Account Disclosures: i. A new paragraph (a)(v) would be added following the text under Tiering Method B; ii. Paragraph (b)(i) would be revised: iii. Paragraphs (h)(iii) and (h)(v) would be removed: and iv. Paragraph (h)(iv) would be redesignated as paragraph (h)(iii), b. The last two sentences in the first paragraph of B-7—Sample Form would be removed: and c. A new B-10—Sample Form would be added. The additions and revisions would read as follows: Appendix B to Part 230—Model Clauses and Sample Forms * * * * * B-l—Model Clauses For Account Disclosures (a) * * * (v) Effect of interest payments Your annual percentage yield is based o n ________ (time period) payments/ checks, and assumes you immediately reinvest interest payments at the account interest rate. * * * * * (b) Compounding and crediting 5150 Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Proposed Rules (i) Frequency Interest will be compounded [on a ________ basis/every_______ _(time period}]. Interest will be credited to your account [on a ________ basis/every ________ (time period)]. Interest for your account will be paid [by check/to another account] [(time period)]. * * it i t BILLING CODE 6210-01-P * Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Proposed Rules B-10 - SAMPLE FORM (CERTIFICATE OF DEPOSIT) x y z s a v in g s b a n k 1 YEAR CERTIFICATE OF DEPOSIT Rate information The interest rate for your account is 5.00 % with an annual percentage yield of 5.12 %. You will be paid this rate until the maturity date of the certificate. Your certificate will mature on m September 30. 1994 . Interest for your account will be: Compounded and credited to your account___ two times a year. ___ four times a year. Paid monthly __ four times a year to you by check __ to another account. Interest begins to accrue on the business day you deposit any noncash item (for example, checks). Minimum balance requirements You must deposit $1,000 to open this account. You must maintain a minimum balance of $1,000 in your account every day to obtain the annual percentage yield listed above. Balance computation method We use the daily balance method to calculate the interest on your account. This method applies a daily periodic rate to the principal in the account each day. Transaction limitations After the account is opened, you may not make deposits into or withdrawals from the account until the maturity date. Early withdrawal penalty If you withdraw any principal before the maturity date, a penalty equal to three months’ interest will be charged to your account. Renewal policy This account will be automatically renewed at maturity You have a grace period of ten (10) calendar days after the maturity date to withdraw the funds without being charged a penalty. BILLING CODE 8210-01-C 5151 5128 Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Rules and Regulations consumers about their deposit accounts, including an annual percentage yield (APY) on interest-bearing accounts calculated under a method prescribed by the Board. The APY is the primary uniform measurement for comparison shopping among deposit accounts. The law also contains rules about advertising, including the advertising of accounts at depository institutions offered to consumers by deposit brokers. The Board’s Regulation DD (12 CFR part 230), which was adopted in September 1992 and became effective in June 1993, implements the act. (See 57 FR 43337, September 21,1992, and 58 FR 15077, March 19,1993.) In adopting Regulation DD, the Board considered various approaches for FEDERAL RESERVE SYSTEM calculating the APY, reflecting several competing interests and concerns. The 12 CFR Part 230 current APY formula is simple and easy [Regulation DD; Docket No. R-0836] to use. It assumes that interest remains on deposit until maturity. This Truth in Savings assumption produces an APY that has AGENCY: Board of Governors of the the effect of reflecting the time value of Federal Reserve System. money for accounts that remain on ACTION: In te rim ru le . deposit until maturity. It does not always reflect the time value of money SUMMARY: The Board has adopted an when there are interest payments prior interim rule amending Regulation DD to maturity. (Truth in Savings) to permit institutions II. Proposals Affecting the APY to disclose an annual percentage yield (APY) equal to the contract interest rate As deposit brokers began complying for time accounts-with maturities greater with the APY formula and Regulation than one year that do not compound but DD’s advertising rules, the Securities require interest distributions at least Industry Association (SLA) asked the annually. This interim rule does not Board to reconsider how the APY is apply to or affect institutions that calculated. The SIA objected to the fact permit but do not require (or that bar) that, for multi-year certificates of interest distributions before maturity. deposit (CDs) that are noncompounding This amendment resolves questions but pay interest at least annually, the about the APY disclosure for these formula produces an APY that is less accounts during consideration of public than the contract interest rate. comments on a related proposal Disclosure of an APY lower than the published elsewhere in today’s Federal interest rate did not, according to the Register. SIA, always allow for meaningful EFFECTIVE DATE: January 18, 1995. comparison shopping among deposit FOR FURTHER INFORMATION CONTACT: Jane accounts. The SIA believed that the Ahrens, Senior Attorney, Kyung ChoAPY should at least equal the contract Miller, or Obrea Otey Poindexter, Staff interest rate. Attorneys, Division of Consumer and In December 1993, the Board Community Affairs, Board of Governors published a proposal that would have of the Federal Reserve System, at (202) factored into the APY calculation the 452-3667 or 452-2412; for questions specific time intervals for interest paid associated with the regulatory flexibility on the account—that is, the time value analysis, Gregory Elliehausen, of money (58 FR 64190, December 6, Economist, Office of the Secretary, at 1993); an additional internal rate of (202) 452-2504; for the hearing return formula would have been added impaired only, Dorothea Thompson, to the regulation. The proposal also Telecommunications Device for the offered an alternative limited change in Deaf, at (202) 452-3544. the APY disclosure for multi-year noncompounding CDs; under this SUPPLEMENTARY INFORMATION: approach, institutions would disclose I. Background an APY equal to the contract interest The Truth in Savings Act (12 U.S.C. rate if the CDs paid interest af least 4301 et seq.) requires depository annually. The proposal was withdrawn in May 1994, based on considerations of institutions to provide disclosures to Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Rules and Regulations cost and burden at that time (59 FR 24376, May 11,1994). Simultaneously with the withdrawal of the December 1993 proposal, in May 1994 the Board published a related proposal that addressed depository institutions’ compounding and crediting practices. Under the May proposal, institutions offering accounts that pay interest by check (or transfer) or by posting interest to the account would have to post interest at least as often as they pay out interest by check. That is, for accountholders leaving the interest in the account, interest would compound on at least as frequent a basis as the interest payments made to others. For example, if an institution offers a two-year CD, permits consumers to receive accrued interest in monthly interest checks, and also permits interest to remain in the account, the institution would have to credit and compound interest at least monthly. If an institution sends consumers the interest payments (and does not permit consumers to leave interest in the account), the institution would treat the interest payment frequency as compounding in the APY calculation. For example, for a two-year CD that requires consumers to receive an annual interest payment, the APY would reflect annual compounding. In July, the Board extended the time to provide comments on the proposed amendments. At the same time, the Board reopened comment on a limited alternative that had been published in December 1993 and withdrawn in May 1994; that alternative equates the APY and the contract interest rate for noncompounding multi-year CDs that pay interest at least annually. (59 FR 35271. July 11,1994) The Board received about 550 comments on the proposal (including comments on the alternative approach involving noncompounding multi-year CDs). About 95% of the comments were from financial institutions. The remaining 5% were from trade associations, data processors and others. Approximately 450 comments addressed the proposed amendments affecting the APY formula; about 2% were in favor of the proposal, 98% were opposed, most of them because of the proposed matching of compounding and crediting frequencies. About 100 commenters addressed the alternative that would equate the APY to the interest rate; nearly 60% supported this approach. On January 4,1995, the Board adopted one part of the May 1994 proposal. The Board voted to amend the definition of the APY to reflect the frequency of interest payments; it declined to adopt another portion of the May proposal that would have affected institutions’ crediting and compounding policies. The Board also declined to adopt the alternative proposal published in July 1994 that equated the APY and the interest rate for multi-year, noncompounding certificates of deposit that make interest payments at least annually. Subsequently, the Board received petitions for reconsideration from both the major banking industry trade associations and consumer advocates. On January 17, the Board granted the petitions and decided to publish for public comment a modified version of the May 1994 proposal, which would factor the time value of interest payments into the APY calculation using the current formula, but would not require institutions to match crediting and compounding policies for accounts where consumers may receive interest payments or leave interest in the account. The Board is also soliciting comment on a second approach that would factor the time value of interest payments into the APY calculation using an additional internal rate of return formula. (See Docket R-0869 elsewhere in today’s Federal Register.) In order to address immediately one anomaly created by the current rule, the Board is adopting as an interim rule an APY disclosure for noncompounding multi-year CDs. 5129 disclosed for compounding and noncompounding CDs (such as a noncompounding two-year CD with annual interest checks and a two-year CD that also offers annual interest checks or annual compounding) and this might discourage compounding. The Board believes the interim rule responds to these concerns. The interim rule does not apply to a multi-year CD that provides optional periodic withdrawals of interest. That account must compound at least annually to quote an APY equal to the contract interest rate. Under the existing rules, for example, if a consumer invests $1,000 in a two-year CD and Institution A offers a noncompounding two-year CD at a 6% interest rate and permits interest withdrawals or requires interest payouts only at maturity, the APY is 5.83%. Under the interim rule, if Institution B offers a noncompounding two-year CD at the same interest rate and requires annual interest checks, the APY is 6.00%. In addition to narrowing the scope of the amendment, the Board is requiring a brief narrative for account disclosures and advertisements if institutions choose to comply with the interim rule and state an APY equal to the contract interest rate. The Board believes this narrative will further minimize possible consumer confusion about the effect of interest payments on the APY and earnings from the account. The interim rule being adopted by the III. Equating the APY and Interest Rate Board will permit new APY disclosures for Multi-Year Noncompounding CDs to be made in certain circumstances The interim rule represents a pending final resolution of this matter. modified version of the July proposal: Institutions may disclose an APY equal As the Board moves toward a permanent resolution of this issue, it will consider to the contract interest rate for commenters’ views on retaining the noncompounding multi-year CDs that interim rule. require interest distributions at least annually. Institutions that prohibit IV. Regulatory Revisions: Section-bywithdrawal of interest or that permit Section Analysis (but do not require) interest distributions are not affected. The Board Section 230.4—Account Disclosures 4(b) Content of account disclosures believes that this narrow rule provides 4(b)(6) Features of time accounts a targeted response to questions about 4(b)(6)(iii) Withdrawal of interest prior the APY disclosure for the class of to maturity accounts that currently must disclose an The regulation requires a disclosure APY that is lower than the stated interest rate. The Board believes for institutions offering time accounts adopting the interim rule is necessary to that compound interest and permit a consumer to withdraw accrued interest limit any consumer confusion and to allow more effective comparison during the account term. The disclosure shopping by consumers. states that the APY assumes interest Tne interim rule is based on concerns remains on deposit until maturity and expressed by commenters in the earlier that a withdrawal of interest will reduce rulemakings and upon further analysis earnings. Under the interim rule, the by the Board. For example, commenters Board is adding a brief narrative for voiced concern that under the July 1994 institutions that state an APY equal to proposal, which covered the contract interest rate for noncomprounding multi-year CDs that noncompounding multi-year CDs that paid—or offered to pay—interest at least require interest payouts at least annually, the same APY could be annually. The Board believes a 5130 Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Rules and Regulations statement alerting customers to the fact that interest cannot remain in the account will assist consumers in comparison shopping between multi year CDs with annual compounding and multi-year CDs that do not compound but require interest payouts during the account term, without adding an undue burden on institutions. Section 230.8—Advertising 8(c) When additional disclosures are required 8(c)(6) Features of time accounts The regulation requires institutions advertising APYs to disclose other key features about the account. Under the interim rule, the Board is adding a brief narrative that parallels the disclosure required by § 230.4(b)(6)(iii). If an institution states an APY equal to the contract interest rate in advertising a noncompounding multi-year CD that requires interest payments, the fact that interest payouts are mandatory and that interest cannot remain in the account must be stated. The Board believes that the disclosure will assist consumers in comparison shopping between multi year CDs that compound annually and multi-year CDs that do not compound but require interest payouts at least annually, without adding undue burden on institutions. 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 Under the interim rule, the amendments to Appendix A affect institutions offering noncompounding multi-year CDs that require interest payouts at least annually. A new paragraph E is added to clarify how APYs may be determined for such accounts. 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, and authorizes the Board to provide for adjustments and exceptions foT 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 an interim rule permitting institutions to disclosure an APY equal to the contract interest rate for noncompounding multi year CDs 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 accountholders to keep interest on deposit until maturity. System, Reporting and recordkeeping requirements, Truth in savings. For the reasons set forth in the preamble, the Board amends 12 CFR part 230 as set forth below: 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, e t . seq. 2. Section 230.4 ft amended by Appendix B to Part 230—Model Clauses adding a new sentence at the end of and Sample Forms paragraph (b)(6)(iii) to read as follows: B-l Model Clauses for Account § 230.4 Account disclosures. Disclosures * * * * * (h) Disclosures relating to time accounts (b) * * * (h)(v) Required interest distribution * * * Under the interim rule, the Board is (iii) * * * For accounts that do not adding a model clause to describe the compound interest on an annual or effect of interest payments on earnings. more frequent basis, with a stated V. Regulatory Flexibility Analysis and maturity greater than one year that require interest payouts at least Paperwork Reduction Act annually and that disclose an APY The Board’s Office of the Secretary determined in accordance with section has prepared a regulatory analysis on E of Appendix A of this part, a the interim rule. A copy of the analysis statement that interest cannot remain on may be obtained from Publications deposit and that payout of interest is Services, Board of Governors of the mandatory. Federal Reserve System, Washington, * * * * * D.C. 20551, at (202) 452-3245. 3. Section 230.8 is amended by In accordance with section 3507 of adding a new paragraph (c)(6)(iii) to the Paperwork Reduction Act of 1980 read as follows: (44 U.S.C. 35; 5 CFR 1320.13), the revisions were reviewed by the Board § 230.8 Advertising. under the authority delegated to the * * * * * Board by the Office of Management and (c) * * * Budget after consideration of comments ( 6) * * * received during the public comment (iii) Required interest payouts. For period. The interim rule revises the APY that noncompounding time accounts with a stated maturity greater than one year may be disclosed for noncompounding that do not compound interest on an CDs greater than one year that require interest payouts at least annually. It also annual or more frequent basis, that require interest payouts at least adds a brief narrative for account annually, and that disclose an APY disclosures and advertisements for determined in accordance with section accounts that disclose the contract E of Appendix A of this part, a interest rate as the APY. The Board believes the burden associated with the statement that interest cannot remain on deposit and that payout of interest is amendment affects a narrow class of mandatory. accounts and is likely to be minimal. * * * * * New calculations are permissive, and the Board believes only a small number 4. In Part 230, Appendix A is of institutions will be affected. Based on amended as follows: its analysis of the impact of the a. The second sentence in the amended regulation, the Board believes introductory text to Part I is revised; that there is no net change in the b. The first sentence of the Board’s current estimate of paperwork introductory text to Part I, A. General burden associated with Regulation DD. Rules is revised; and The annual information disclosure c. A new section E is added to Part I. burden for state member banks is The revisions and addition read as estimated to be 1.7 million hours. follows: List of Subjects in 12 CFR Part 230 Appendix A t Part 230— Annual Percentage o Yield Calculation Advertising, Banks, banking, * * * * * Consumer protection, Federal Reserve Federal Register / Vol. 60, No. 17 / Thursday, January 26, 1995 / Rules and Regulations P a rt I. A n n u a l P e rc e n ta g e Y ie ld f o r A c c o u n t D isc lo su re s a n d A d v e rtis in g P u rp o ses * * * Special r l s apply t accounts with ue o t e e and stepped i t r s r t s and t ird n e e t ae, o c r a n time accounts with a s a e maturity eti ttd g e t rthan one y a . rae er A. General Rules Except a provided i P r IE oft i s n a t .. h s appendix, the annual percentage y e d s a l i l hl be calculate by the formula shown d below.* * * * * * * * E Time Accounts with a Stated Maturity . Greater than One Year t a Pay I t r s At ht neet L a t Annually es 1 For time accounts with a s a e maturity . ttd g e t rthan one year t a do not compound rae ht i t r s on an annual or more frequent b s s neet ai, and t a req h t uire the consumer t withdraw o i t r s a l a tannually, the annual neet t es percentage y e d may be disclosed a equal il s t the i t r s r t . o n e e t ae E x a m p le ( )I an i s i u i n o f r a S , 1 f n t t t o f e s I 000 two-year c r i i a eofdeposit t a does not compound etfct ht and t a pays out i t r s semi-annually ht neet s l l by check or t a s e ,a a 6.00% oey rnfr t i t r s r t the annual percentage y e d may neet ae il be disclosed a 6.00%. s 2 For time accounts covered by t i . hs paragraph t a a e a s stepped-rate accounts, ht r lo the annual percentage y e d may be disclosed il asequal tothecomposite i t r s r t . n e e t ae E x a m p le .( )I an i s i u i n o f r a SI,000 t r e 1 f nttto fes heyearc r i i a eofdeposit t a does not etfct ht compound and t a pays out i t r s ht neet annually s l l by check or t a s e , a a oey rnfr t 5.00% i t r s r t f rthe frty a , 6.00% neet ae o is e r i t r s r t f rthe second y a , and 7.00% neet ae o er i t r s r t f rthe t i d y a , the i s i u i n neet ae o hr er nttto may compute the composite i t r s r t and neet ae APY as f l o s olw: ()Multiply each i t r s r t by the a neet ae number ofdays i w l be i e f c ; t il n fet ( )Add these f g r s t g t e ;and b iue oehr ()Divide by the t t lnumber ofdays i c oa n t et r . h em ( )Applied t the example, the products o 2 o f t e i t r s r t sand days the r t s a e i h neet ae ae r n e f c a e (5.00%x365 d ys) 1825. fet r a (6.00%x365 days) 2190. and (7.00%x36fr days) 2555 d ys, r s e t v l . The sum of a epciey th s products, 6570 d ys, i divided by ee a s 1095, the t t l number ofdays i the t r . oa n em The composite i t r s r t and APY are both neet ae 6 . 00 % . * * * * * 5. In Part 230, Appendix B, under B1 Model Clauses For Account Disclosures, a new paragraph (h)(v) is added to read as follows: Appendix B to Part 230—Model Clauses and Sample Forms * * * * * B-l— Model Clauses f rAccount Disclosures o * * . * * * ( I i) * * * ( )Required i t r s d s r b t o . v neet itiuin This account requires the distribution of interest and does not allow interest to remain in the account. * * * * * By order of the Board of Governors of the Federal Reserve System, January 18.1995. William W. Wiles. Secretary of the Board. |FR Doc 95-1785 Filed 1-25-95: 8:45amJ BILLING OOOE 6210-01-P 5131
@FedFRASER