Board of Governors of the Federal Reserve System.

Statement submitted by the Board of Governors of the Federal Reserve System to the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 30, 1991.

Thank you for the opportunity to offer the comments of the Board of Governors of the Federal Reserve System on H.R.6 and H.R.447 dealing with Truth in Savings.

Both bills would require that depository institutions disclose rate and cost information in advertisements for their consumer deposit accounts, provide detailed rate and fee information in account schedules, and inform account holders when terms are changed. The Board (or the Federal Depository Institutions Regulatory Agency as specified in H.R.6) would be required to write rules to implement these requirements.

The Board believes that account holders should have adequate information on which to make informed savings decisions and supports disclosure of important account features. In fact, the Board's Regulation Q has for many years required disclosure of account terms in advertisements, and institutions covered by the regulation have been encouraged to make schedules of their fees available to account holders.

While the goal of the legislation is consistent with the Board's objectives, the implementation of this legislation will require a set of complex rules, increasing the already heavy regulatory burden placed on depository institutions. The cumulative effect of individual rules, each well intentioned in its purpose to address a specific concern, can be overwhelming--particularly for small institutions. Because of our experience with numerous consumer statutes for which we have rulewriting authority (for example, the Truth in Lending Act), we know firsthand that simple concepts such as "truth in savings" invariably result in complicated regulations. To encompass the diversity of industry practices and products, implementing rules are often intricate and voluminous. Moreover, we have learned that rules that are not intended to affect the variety of products offered nonetheless may have the practical effect of standardizing products and reducing the options that are available to consumers.

Consequently, if the Congress decides to go forward with legislation, the Board believes that the law should be carefully tailored to ensure that compliance costs are minimized and that regulatory burdens do not lead institutions to discontinue products or decide not to develop new products. In addition, the Board believes that there are a few disclosure requirements in the bills that may confuse consumers shopping for deposit accounts. Thus, the Board encourages the Congress to consider the following changes to the bills.

Disclosures to Existing Account Holders

H.R.447 requires that depository institutions send, within ninety days after the Board adopts final regulations, a schedule of terms and conditions to all existing account holders. Mandating such a mailing to holders of the approximately 250 million consumer accounts (including certificates of deposit, savings, negotiable order of withdrawal [NOW], checking, and other accounts) would impose significant printing and mailing costs.

Mailing disclosures to existing customers does not promote the bill's purpose to provide disclosures when consumers are shopping for an account. Moreover, many depository institutions already provide account agreements or written disclosures to their customers when an account is opened. Mailing information to existing customers would provide information to consumers after they have made their choice of savings products and would frequently duplicate information that account holders are likely to have already received.

The bills already require that disclosures be made available to any person upon request. This requirement guarantees that existing account holders who want information will receive it, without mandating that institutions distribute schedules to all account holders. In addition, both bills would require that all account holders be provided with a description of any adverse changes to the terms of the account. This procedure ensures that existing account holders are alerted to any disadvantageous changes.

Thus, we believe that requiring all existing account holders to be provided with account information, as H.R.447 does, is of questionable value. In our view, H.R.6 takes a better approach. That bill simply requires that institutions include a notice on the periodic statement sent to existing account holders notifying them of the right to receive an account schedule.

Both bills require that the disclosures (or notice) be provided to existing account holders within three months after the regulation is issued in final form. There is no obvious reason for requiring that disclosures be given to existing account holders within three months of enactment of the bill, rather than the six-month time established for new customers under H.R.6. (We would also note that, other than for existing customers, H.R.447 does not specify when institutions would have to comply with the law.) Three months is too short a time for institutions to review the new regulation, reexamine their entire deposit product line, and prepare, print, and disseminate schedules to existing customers. If the Congress believes that a notice to existing account holders is desirable--as provided in H.R.6--we believe the compliance time should be extended from three to six months.

Effective Percentage Yield Disclosure

A second concern of the Board deals with rate information required to be disclosed to consumers. H.R.447 requires a disclosure of the "effective percentage yield" for accounts with maturities of less than one year, besides the annual percentage yield (APY) that must be disclosed for all accounts. Current credit and deposit account regulations calculate rates based on an assumed year regardless of the maturity of the transaction. Adding another rate like an "effective percentage yield" would be confusing to customers who are accustomed to the concept of an annual yield and would be contrary to the purpose of the law--to provide clear disclosures to consumers. We strongly encourage the Congress to delete this requirement from H.R.447. If the Congress is concerned that consumers may be confused by use of an annual rate figure for an account that matures in less than a year, an advertisement might include a statement that the annual percentage yield is based on the current rate and assumes that the rate does not change at renewal and that all funds remain on deposit for a full year.

Civil Liability

A third concern deals with the civil liability provision in H.R.447. The provision is quite sweeping and provides that any person may bring an action against an institution for failing to comply with any requirements of the act or the implementing regulation. The Congress has expressed great concerns about overly broad civil liability rules; one of the issues that prompted revision to the Truth in Lending Act in 1980, for example, was the tremendous litigation over "technical" violations of the act. And we know from experience that the threat of litigation contributes greatly to the complexity of the implementing regulations. Frequently, regulatory amendments are adopted to address compliance issues that arise because of ambiguity in the statute or variations in products.

By contrast with H.R.447, H.R.6 provides that an account holder may bring an action against an institution for failing to comply with the act or the implementing regulation. Permitting any person to bring an action, including actions for violations of the advertising requirements, could encourage litigation by nonaccount holders. We encourage the Congress to adopt the approach taken by H.R.6, which provides a remedy to those individuals who have an account relationship with the institution and who might be harmed by an incorrect disclosure.

Required Balance Computation Method

Finally, we question the approach taken in H.R.6 to mandate the methods that institutions may use to calculate the balance on which interest is figured. Mandating the balance computation method exceeds the scope of the stated purpose of the legislation--providing uniform disclosures for comparison by consumers. The Board believes that the approach taken in H.R.447--requiring disclosure of the balance computation method--is more consistent with the stated purpose of the legislation.

Besides these issues, we have attached a document setting forth several technical concerns about the bill that we urge the Congress to address.(1) We appreciate the opportunity to offer our views on the proposed legislation and hope that they will be helpful to you.

(1)The attachments to this statement are available on request from Publications Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.