Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 24, 1993 TAG: 9305250622
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
On the other hand, they may be confused by the federally mandated language of the disclosures on statements from their bank, thrift or credit union.
Helpful or perplexing, the law will have an impact on the information from financial institutions, both directly in the lobby and through advertising that solicits deposits.
Passed in 1991, the law comes into being only next month because of the tremendous expense and planning time as banks struggled to revise everything from computer programs to statement formats.
NationsBank is already in compliance because it set a corporate target date of May 15. Most other banks will come under the umbrella by June 21.
Most major Virginia banks made no changes in their actual savings products. Mostly, it is the language and statement formats that will be different.
The exception is First Virginia Bank, which dropped a variable-rate interest checking account that it marketed as its Super NOW account. The bank's standard interest checking account remains unchanged.
James Hinson, president of First Virginia Bank-Southwest, said his bank abandoned variable checking because of a problem in disclosing all of its complex terms.
First Virginia has started sending disclosure forms to depositors, Hinson said, but people don't understand the required language.
The wording mandated by the law, he said, doesn't "accomplish very much, if anything. It's confusing to customers."
But if the statements are more difficult to read, the law will make it easier to compare interest rates.
All banks, thrifts and credit unions must quote the annual percentage yield on savings in their advertising and promotions.
That's just one way of accounting yield, but at least all financial institutions will be doing it the same way and figuring the compounding. The formula for quoting interest will be standard.
Bruce Sinkule, vice president in charge of savings products for Signet Bank in Richmond, said the government's annual percentage yield is the same as the annual yield that larger banks have been advertising.
The figures are identical at Signet and major Virginia banks, Sinkule said. It is the interest earned in a year's time, which takes the frequency of compounding into the calculation.
The only problem is that depositors may not actually receive the yield that is advertised.
Mike Woodward, compliance project manager for Crestar Bank in Richmond, said annual percentage yield is based on several assumptions.
One is that the interest rate will be static in that period, which is not necessarily the case.
The other, he said, is that the same amount of money will remain on deposit in the account for a year, when most savers add and withdraw.
Still, Woodward pointed out, the information will be standardized for the customers.
The same situation is true today, however. A six-month certificate is quoted at the annual rate or annual yield when it obviously will pay only half that much in six months.
When the law goes into effect, financial institutions also must give customers 30 days' notice before changing rates and other conditions of an account.
Yet an account can carry a variable rate, Woodward said, so long as this fact is disclosed.
Banks cannot automatically roll over a maturing CD into another one. Customers must receive 20 days' notice of the maturity date.
Banks must pay interest on the full amount of money in an account. The law bans holding out a portion of the account at no interest in the same ratio as the Federal Reserve system requires banks to hold money in reserve. Most banks that had adopted that practice dropped it last year because after it was disclosed, banks found the practice a public relations disaster.
However, they still may pay only on the collected balance. Thus a bank can continue to wait for a deposited check to clear before paying interest on the amount deposited.
The law also makes illegal the method of many credit unions of paying interest on the low balance for a period, typically a quarter.
Under that system, a person might have $1,000 in savings on Oct. 1, but draw out $900 at the end of December to pay for Christmas expenses. Currently, the saver would receive interest on only $100 in the account at the end of the quarter.
Now all financial institutions must pay on the average balance during the period.
Observers believe the law may bring other changes later.
There may be more variable rate deposit accounts in the future. That's because banks may find it easier to disclose a variable rate than to issue information about a change 30 days in advance of implementing it.
Financial institutions also might ultimately reduce the number of their savings products.
All of the required verbiage in statements and forms might discourage a prior trend of joint statement summarizing all accounts at the bank.
And banks could be pushed to formalize agreements with new savings customers rather than settle for signature card contracts.
Meanwhile banks are spending a great deal of money changing their statement format and other documents. They must program their computers and retrain staff on the new regulations.
None of the regional banks have yet calculated the cost of complying with the law. But the Federal Reserve Board has estimated 2,500 state-chartered banks will devote 1.9 million staff hours to the task this year.
\ What Truth in Savings will mean to savers\
Disclosure of yields, fees and penalties on all interest accounts. The information must appear on bank statements.
Annual percentage yield will be the standard figure all banks, thrifts and credit unions must use in all types of advertising and promotion.
Customers must have 30 days' notice before a bank, thrift or credit union can change interest or other conditions on an interest account. Or, the institution may establish savings products with a variable rate.
Payment of interest must be on the entire balance of an account, not just the so-called investable amount or the lowest balance in a time period. The latter has been a common practice among credit unions.
Memo: ***CORRECTION***