[Federal Register Volume 63, Number 146 (Thursday, July 30, 1998)]
[Rules and Regulations]
[Pages 40635-40638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20268]


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FEDERAL RESERVE SYSTEM

12 CFR Part 230

[Regulation DD; Docket No. R-0869]


Truth in Savings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board has adopted a rule amending Regulation DD (Truth in 
Savings); the action makes final an interim rule adopted in January 
1995. The amendment permits institutions to disclose an annual 
percentage yield (APY) equal to the contract interest rate for time 
accounts with maturities greater than one year that do not compound but 
that require interest distributions at least annually.

EFFECTIVE DATE: August 28, 1998.

FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, or Obrea 
Otey Poindexter, Staff Attorney, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System at (202) 452-
2412 or 452-3667; for the hearing impaired only contact Diane Jenkins, 
Telecommunications Device for the Deaf at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Truth in Savings Act (TISA) was enacted in December 1991. The 
Board published a final regulation, Regulation DD, to implement the act 
on September 21, 1992 (57 FR 43337) (correction notice at 57 FR 46480, 
October 9, 1992). Compliance with the regulation became mandatory in 
June 1993. The act and regulation require depository institutions to 
disclose yields, fees, and other terms concerning deposit accounts to 
consumers at account opening. The regulation also includes rules about 
advertising of deposit accounts. Depository institutions are generally 
subject to civil liability for violations of the act and regulation. 
Credit unions are not subject to Regulation DD, but are governed by a 
substantially similar regulation issued by the National Credit Union 
Administration.

II. Proposals Regarding APY Calculation

    In 1993, deposit brokers covered by Regulation DD's advertising 
rules petitioned the Board to reconsider how the annual percentage 
yield (APY) is calculated. They expressed concern that for a 
certificate of deposit that has a maturity greater than one year and 
that does not compound interest, the APY is less than the contract 
interest rate under the formula prescribed by Regulation DD. The Board 
subsequently published several proposals addressing this matter (58 FR 
64190, December 6, 1993; 59 FR 24376, May 11, 1994; 59 FR 35271, July 
11, 1994; 60 FR 5142, January 26, 1995).
    In January 1995, to address immediately one anomaly created by the 
regulation's formula for APY calculations, the Board adopted an interim 
rule applicable to time accounts with maturities greater than one year 
that do not compound but require interest distributions at least 
annually (60 FR 5128, January 26, 1995).

III. Summary of Final Rule

    The interim rule permitted institutions to disclose an APY equal to 
the contract interest rate for noncompounding CDs with a maturity 
greater than one year if they require interest distributions at least 
annually. The Board received more than 250 comments--about 75 comments 
on the interim rule and the remainder on a proposal published 
concurrently with the interim rule that would have amended the APY 
formula. The majority of commenters supported the interim rule and 
urged the Board to make the interim rule permanent. Many commenters 
believed that the interim rule adequately addressed the concerns of 
deposit brokers and depository institutions that require interest 
distributions at least annually. Commenters noted that the interim rule 
provided a simple solution that would be understandable to consumers. 
Some banks that opposed any change to the APY calculations favored the 
interim rule among the alternatives offered.
    Based on the comments received and further analysis, the Board has 
amended Regulation DD by making the interim rule final. The final rule 
permits institutions to disclose an APY equal to the contract interest 
rate for noncompounding CDs with a maturity greater than one year if 
they require interest distributions at least annually. Institutions may 
not disclose an APY equal to the contract interest rate for 
noncompounding multi-year CDs that either prohibit withdrawal of 
interest or that permit but do not require interest distributions; for 
these time accounts, institutions will continue to use the current 
formula for APY calculations. The Board believes that this narrow rule 
provides a targeted response to questions about the APY disclosures for 
certain time accounts that otherwise would have to disclose an APY that 
is lower than the contract interest rate. The amendment retains the 
interim rule's requirement of a brief narrative disclosure about the 
effect of interest payments on the APY and earnings from the account to 
minimize any possible consumer confusion.

IV. Regulatory Revisions: Section-by-Section Analysis

Section 230.4  Account Disclosures

4(b)  Content of Account Disclosures

4(b)(6)  Features of Time Accounts

4(b)(6)(iii)  Withdrawal of Interest Prior to Maturity

    Consistent with the interim rule, paragraph 4(b)(6) adds a brief 
narrative for institutions stating an APY equal to the contract 
interest rate for noncompounding CDs that have a maturity greater than 
one year and that require interest payouts at least annually. The Board 
believes a statement alerting consumers to the fact that interest 
cannot remain in the account will assist them in comparison shopping 
between CDs with annual compounding and CDs that do not compound but 
require interest payouts during the account term. The Board believes 
the disclosure does not add an undue burden on institutions.

Section 230.8  Advertising

8(c)  When Additional Disclosures are Required

8(c)(6)  Features of Time Accounts

    Consistent with the interim rule, paragraph 8(c)(6) adds a brief 
disclosure for any advertisement that states an APY equal to the 
contract interest rate for a noncompounding multi-year CD that requires 
the automatic payment of interest at least annually. To assist

[[Page 40636]]

consumers in comparison shopping, institutions must state that interest 
payouts are mandatory and that interest cannot remain in the account, 
parallel to the disclosure required by Sec. 230.4(b)(6)(iii).
Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
Purposes

E. Time Accounts With a Stated Maturity Greater Than One Year That Pay 
Interest at Least Annually
    The final rule adds paragraph E to Appendix A to clarify how APYs 
may be determined for noncompounding time accounts that have a maturity 
greater than one year and that pay interest at least annually. Two 
examples are added, including an example calculating the APY for a 
stepped-rate account covered by the amendments.
    The statute provides that the APY shall be calculated under a 
method prescribed by the Board in regulations. It authorizes the Board 
to provide for adjustments and exceptions for any class of accounts 
that, in the Board's judgment, are necessary or proper to carry out the 
purposes of the act, prevent circumvention of the act's requirements, 
or facilitate compliance. Based on the comments received and further 
analysis, the Board finds that a final rule permitting institutions to 
disclose an APY equal to the contract interest rate, for noncompounding 
CDs with a maturity greater than one year that require interest 
distributions at least annually, is necessary to carry out the purposes 
of the act--enabling consumers to make informed decisions about deposit 
accounts. The exception is narrowly drawn, and reflects the value of 
receiving payments at least annually on accounts that do not permit 
account holders to keep interest on deposit until maturity.
Appendix B to Part 230--Model Clauses and Sample Forms
B-1  Model Clauses for Account Disclosures

(h) Disclosures Relating to Time Accounts

(h)(v) Required Interest Distribution

    Under the final rule, the Board has included a model clause to 
describe the effect of interest payments on earnings.

V. Regulatory Flexibility Analysis

Final Rule on Annual Percentage Yields for Certain Time Accounts

    Need and objectives of the rule. The annual percentage yield in 
Regulation DD is an effective rate of interest, which shows the effect 
of compounding on the rate of return. Annual percentage yields greater 
than the rate of simple interest reflect the additional earnings 
resulting from the conversion of interest to principal during a year.
    When interest is not compounded and the term to maturity is greater 
than a year, the annual percentage yield in the original Regulation DD 
is less than the rate of simple interest. This result reflects an 
assumption that interest accumulates idly in the account rather than 
generating additional returns. Following implementation of the 
regulation, a national trade association representing deposit brokers 
questioned the appropriateness of this calculation for multiple-year 
time deposits that distribute the interest--such as brokered deposits. 
The association argued that because the distributed interest is 
available to reinvest, the annual percentage yield understated the 
potential return on such time deposits. The Truth in Savings 
requirement that advertisements for brokered deposits contain annual 
percentage yields made it difficult for the association's members to 
market brokered deposits, which distribute interest.
    In response to a petition of the trade association, Board staff and 
the Board explored alternatives to the annual percentage yield formula 
specified in the original regulation in four requests for public 
comment (December 1993, May 1994, July 1994, and January 1995). The 
most recent request for public comment included an interim rule 
permitting institutions to disclose an annual percentage yield equal to 
the rate of simple interest for multiple-year time accounts that 
require distributions of interest at least annually. The interim rule 
is a limited exception to the general formula for the annual percentage 
yield. It eliminated the marketing problem of members of the 
petitioning association without fundamentally changing the original 
regulation. The final rule adopts this interim rule.
    Issues raised by public comment to proposed rule. Board staff and 
the Board considered several alternative approaches to resolve the 
issue raised by the trade association. These alternative approaches 
included (1) proposals to change the assumptions underlying the 
calculation of the annual percentage yield, (2) proposals to change 
industry practices regarding the compounding and distribution of 
interest, and (3) proposals to create exceptions from the general rule. 
Commenters suggested that proposals following the first two approaches 
would be especially costly to implement and may not improve some 
consumers' ability to make choices among investment alternatives. They 
suggested that proposals following the second approach also had the 
potential to impose opportunity costs by reducing consumer choices. 
Some commenters questioned the need to make any changes in the original 
rule, noting that an institution could avoid the problem by simply 
offering to compound interest at least annually. Many public comments 
supported retaining the original rule or, if necessary, creating a 
limited exception.
    Number of small entities to which the rule will apply. There were 
6,334 small commercial banks at the end of September 1996, where small 
is defined as having assets of less than $100 million.<SUP>1</SUP> 
Almost all small banks offered time deposits with terms to maturity 
greater than a year, and 15% of small banks did not compound interest 
on time deposits with terms to maturity greater than a 
year.<SUP>2</SUP> In contrast, only about 10% percent of medium-sized 
and large banks did not compound interest on time deposits with terms 
to maturity greater than a year.
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    \1\ Federal Deposit Insurance Corporation [Online], Statistics 
on Banking, All FDIC-Insured Depository Institutions, Number of 
Institutions by Asset Size, (September 30, 1996), Available through: 
http://www.fdic.gov/databank/ [April 29, 1996].
    \2\ Monthly Survey of Selected Deposits (FR2042), September 
1994. More recent data on compounding practices for time deposits by 
term to maturity are not available.
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    Thrift institutions (savings banks, savings and loan associations, 
and credit unions) also offer time deposits, and securities brokers 
offer brokered deposits. Many of these institutions are small, but data 
on the terms to maturity on their offerings of time deposits or 
brokered deposits are not available.
    Description of projected compliance requirements. Since the interim 
rule is already effective, the start-up costs of the final rule are 
probably negligible. Most institutions that require at least annual 
withdrawal of interest paid on multiple-year time deposits probably 
have already implemented the interim rule because the annual percentage 
yield for such time deposits is higher under the interim rule than 
under the original Regulation DD. If any institutions waited because of 
uncertainty about whether the interim rule would be adopted as a final 
rule and now choose to implement the rule,

[[Page 40637]]

they would need new disclosures for affected accounts. Software 
modifications and some employee training would be required to produce 
the new disclosures.
    The ongoing costs of the disclosures under the new rule are likely 
to be similar to those under the original Regulation DD. Thus, adopting 
the interim rule as a final rule would not significantly change ongoing 
compliance costs.
    Description of the steps taken to minimize the impact on small 
entities. No special steps were taken to minimize the impact of the 
rule on small entities. The cost of implementing a change in the method 
of calculating annual percentage yields was a major consideration 
leading to the choice of the interim rule over the other alternative 
rules, however. During its deliberations, the Board was aware of 
evidence of the existence of scale economies in start-up compliance 
costs, which implies that per-unit compliance costs would be higher at 
small institutions than at large institutions.<SUP>3</SUP> Although the 
start-up costs of the interim rule are probably subject to scale 
economies, the interim rule may have a less disparate effect on small 
institutions than the other alternatives because it has a relatively 
small effect on institutions' operations.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board, by the Office of Management and 
Budget, after consideration of comments received during the public 
comment period. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0271.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR 230 and in Appendices A and B. This information is 
mandatory (12 U.S.C. 4308) to evidence compliance with the requirements 
of the Truth in Savings Act and the Board's Regulation DD. This 
information is used to assist consumers in comparing deposit accounts 
offered by depository institutions, principally through the disclosure 
of fees, APY, interest rate, and other account terms whenever a 
consumer requests the information and before an account is opened. The 
regulation also requires that fees and other information be provided on 
any periodic statement the institution sends to the consumer. The 
recordkeepers are for-profit financial institutions, including small 
businesses. Records must be retained for twenty-four months.
    No comments specifically addressing the burden estimate were 
received.
    The current estimated total annual burden for this information 
collection is 1,478,395 hours, as shown in the table below. These 
amounts reflect the burden estimate of the Federal Reserve System for 
the 996 state member banks under its supervision. This regulation 
applies to all types of depository institutions (except credit unions), 
not just to state member banks. Other agencies account for the 
paperwork burden for the institutions they supervise.
    The final rule revises the APY that may be disclosed for 
noncompounding CDs with maturities greater than one year that require 
interest payouts at least annually. It also adds a brief narrative for 
account disclosures and advertisements for accounts that disclose the 
contract interest rate as the APY. The Board believes that there is no 
net change in the Board's current estimate of paperwork burden 
associated with Regulation DD. There is estimated to be no associated 
capital or start up cost and no annual cost burden over the annual hour 
burden.

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                                                                                                      Estimated 
                                        Number of    Estimated                                          annual  
                                       respondents     annual          Estimated response time          burden  
                                                     frequency                                          hours   
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Complete account disclosures (Upon             996          300  5 minutes.........................       24,900
 request and new accounts).                                                                                     
Subsequent notices:                                                                                             
    Change in terms..................          996        1,130  1 minute..........................       18,757
    Prematurity notices..............          996        1,095  1 minute..........................       18,177
Periodic statements..................          996       84,615  1 minute..........................    1,404,609
Advertising..........................          996           12  1 hour............................       11,952
                                      --------------------------                                    ------------
    Total............................  ...........  ...........  ..................................    1,478,395
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    Because the records would be maintained at state member banks and 
the notices are not provided to the Federal Reserve, no issue of 
confidentiality under the Freedom of Information Act arises.
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    \3\ For a summary of the evidence, see Gregory Elliehausen, The 
Cost of Bank Regulation, Staff Studies (Board of Governors of the 
Federal Reserve System, forthcoming).
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    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, N.W., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0271), 
Washington, DC 20503.

List of Subjects in 12 CFR Part 230

    Advertising, Banks, Banking, Consumer protection, Federal Reserve 
System, Reporting and recordkeeping requirements, Truth in savings.

    Accordingly, the interim rule amending 12 CFR part 230 which was 
published at 60 FR 5128 on January 26, 1995, is adopted as a final rule 
with the following changes:

PART 230--TRUTH IN SAVINGS (REGULATION DD)

    1. The authority citation for part 230 continues to read as 
follows:

    Authority: 12 U.S.C. 4301, et seq.

    2. Section 230.4 is amended by revising the sentence at the end of 
paragraph (b)(6)(iii) to read as follows:


Sec. 230.4  Account disclosures.

* * * * *
    (b) * * *
    (6) * * *
    (iii) * * * For accounts with a stated maturity greater than one 
year that do not compound interest on an annual or more frequent basis, 
that require interest payouts at least annually, and that disclose an 
APY determined in

[[Page 40638]]

accordance with section E of Appendix A of this part, a statement that 
interest cannot remain on deposit and that payout of interest is 
mandatory.
* * * * *
    3. Section 230.8 is amended by revising paragraph (c)(6)(iii) to 
read as follows:


Sec. 230.8  Advertising.

* * * * *
    (c) * * *
    (6) * * *
    (iii) Required interest payouts. For noncompounding time accounts 
with a stated maturity greater than one year that do not compound 
interest on an annual or more frequent basis, that require interest 
payouts at least annually, and that disclose an APY determined in 
accordance with section E of Appendix A of this part, a statement that 
interest cannot remain on deposit and that payout of interest is 
mandatory.
* * * * *
    4. In Part 230, Appendix A is amended by revising section E of Part 
I to read as follows:

Appendix A To Part 230--Annual Percentage Yield Calculation

* * * * *
    E. Time Accounts with a Stated Maturity Greater than One Year 
that Pay Interest At Least Annually
    1. For time accounts with a stated maturity greater than one 
year that do not compound interest on an annual or more frequent 
basis, and that require the consumer to withdraw interest at least 
annually, the annual percentage yield may be disclosed as equal to 
the interest rate.

Example

    (1) If an institution offers a $1,000 two-year certificate of 
deposit that does not compound and that pays out interest semi-
annually by check or transfer at a 6.00% interest rate, the annual 
percentage yield may be disclosed as 6.00%.
    (2) For time accounts covered by this paragraph that are also 
stepped-rate accounts, the annual percentage yield may be disclosed 
as equal to the composite interest rate.

Example

    (1) If an institution offers a $1,000 three-year certificate of 
deposit that does not compound and that pays out interest annually 
by check or transfer at a 5.00% interest rate for the first year, 
6.00% interest rate for the second year, and 7.00% interest rate for 
the third year, the institution may compute the composite interest 
rate and APY as follows:
    (a) Multiply each interest rate by the number of days it will be 
in effect;
    (b) Add these figures together; and
    (c) Divide by the total number of days in the term.
    (2) Applied to the example, the products of the interest rates 
and days the rates are in effect are (5.00% x 365 days) 1825, 
(6.00% x 365 days) 2190, and (7.00% x 365 days) 2555, respectively. 
The sum of these products, 6570, is divided by 1095, the total 
number of days in the term. The composite interest rate and APY are 
both 6.00%.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, July 24, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-20268 Filed 7-29-98; 8:45 am]
BILLING CODE 6210-01-P