Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 21, 1993 TAG: 9306240484
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Long
Under the Truth in Savings Act, taking effect today, banks and savings institutions must offer clear, complete and uniform disclosures of the terms of their deposit accounts - both checking and savings.
Advertising must not be misleading or incomplete. For instance, checking advertised as free can carry no hidden charges or conditions.
"Any account advertised as free after June 21 cannot be what I call a `free, asterisk' account," said Ed Mierzwinski, a lobbyist for the U.S. Public Interest Research Group, which pushed for the law.
"It cannot charge regular maintenance or per-check fees or require balance minimums to avoid fees," he said. However, banks and S&Ls still can charge free-checking customers for a box of checks and for automated-teller transactions.
The act also bans the "investable balance" method to pay interest. Under the method - most prevalent in Virginia, Maryland, Georgia, North Carolina and Florida, according to Mierzwinski - a bank might advertise a 3 percent rate on savings accounts but pay it on only 90 percent of the balance, effectively reducing the rate to 2.7 percent.
Low-balance methods of calculating interest no longer will be permitted. Under one such system, customers earn interest only on their lowest daily balance for the month, instead of the average daily balance. Or, under another, an account dipping below the minimum balance for a single day would lose interest for the entire month.
"Truth in Savings will require banks to pay interest on a consumer's full balance, each day," Mierzwinski said.
Another important change, according to consumer advocates, is the inauguration of annual percentage yield, a standardized method of expressing interest, taking into account the rate and compounding.
"Consumers will be able to compare apples to apples. Right now, they're comparing apples to oranges but they don't know it," said attorney Michelle Meier of Consumers' Union.
Customers no longer will have to try to figure out if 2 percent compounded daily is better than 2.2 percent without compounding. One hundred dollars deposited in an account, paying an annual percentage yield of 2.24 percent, will earn $2.24 in one year. A higher APY always means more interest.
"This puts consumers in a much more equal bargaining position. It gives them the resources they need to make prudent decisions in the marketplace," said Kent Brunette, a banking expert with the American Association of Retired Persons.
In addition to providing clear and uniform disclosures of fees, interest rates and conditions before an account is opened, banks will be required to notify customers by mail before certificates of deposit roll over to a new rate.
Bankers fought the new regulations, not because they oppose disclosure, but because of the heavy cost of regulating disclosure so precisely, said lobbyist Edward Yingling of the American Bankers Association.
"A number of community bankers have talked about the incredible cost of buying the software to start up. . . . And they're very concerned that it's so complicated that it will be very difficult not to make mistakes and it may actually confuse customers more than it helps them," he said.
Institutions that violate the rules would be subject to lawsuits from individual customers and from groups of customers bringing class-action suits.
Yingling said bankers are angry that one of their primary competitors, mutual funds offered by securities firms, will not be required to make similar disclosures.
"This could have the perverse tendency to push money out of the banking system into products that have the weakest disclosure," he said.
Diane Casey, executive director of Independent Bankers Association of America, said some banks may pass the cost of complying with the rules on to customers in the form of higher fees. And disclosure requirements may encourage other banks to cut back on the account choices they offer, she said.
Consumer advocates conceded that banks face added costs during the transition to the new laws, but said their ongoing costs of compliance should be little different from the cost of administering deposit accounts now.
Credit union regulators are writing their own rules, based on those applying to banks and S&Ls. They will take effect in June 1994.
\ TRUTH IN SAVINGS ACT\ Key provisions of regulations taking effect today at banks and savings institutions:\ \ FULL DISCLOSURE: Banks and S&Ls must fully and clearly disclose the fees and terms of their deposit accounts - both checking and savings. Advertising must not be misleading or incomplete. For instance, checking accounts advertised as free really must be free, with no balance requirements or per-check or monthly fees.\ \ ANNUAL PERCENTAGE YIELD: Interest paid on deposit accounts must be expressed as an annual percentage yield, or APY, which takes compounding into account.\ \ INTEREST PAYMENT: Deposit customers must receive interest on their full balance every day. The practice of paying interest on only part of an account, 90 percent for instance, is banned. Also forbidden is paying interest only on the lowest daily balance during a month and forcing the forfeit of an entire month's interest if an account drops below the minimum balance for even a single day during the month.\ \ CERTIFICATES OF DEPOSIT: Customers holding certificates of deposit must be notified by mail before the certificates roll over to a new interest rate.\ \ PENALTIES: Financial institutions violating the rules will be subject to fines and could be sued by their customers, either individually or in class-action groups.\ \ EXCEPTIONS: The rules don't apply to mutual funds. Similar regulations applying to credit unions don't take effect until June 1994.
by CNB