Statements to Congress - policy statements by members of the Federal Reserve System

Federal Reserve Bulletin, July, 1989 by Martha R. Seger, H. Robert Heller, Glenn E. Loney

Statements to Congress Thank you for the opportunity to offer the comments of the Board of Governors on H.R. 736, the "Truth in Savings Act." H.R. 736 would require that certain information be provided to existing or potential deposit account holders regarding the terms of a deposit account. Depository institutions would have to disclose rate and cost information in advertisements, to provide more detailed rate and cost information in a schedule, and to inform account holders when terms are changed. The Board would be required to write rules to implement these requirements.

The Board is mindful of the interest in ensuring that account holders have adequate information on which to base their saving decisions, and fully supports that concept. In fact, the Board's Regulation Q has, for many years, required disclosure of account terms in advertisements, and institutions have been encouraged to make schedules of their fees available to their account holders.

It appears that the industry recognizes the value of full disclosure as well. Our experience in examining state member banks tells us that the majority of our institutions already provide comprehensive written disclosures outlining their fees and the terms of their accounts. Further, consumer surveys conducted by the Board reflect that most depositors believe that they are receiving adequate information.

With this as background, the Board is ambivalent about H.R. 736. On the one hand, the goal of the legislation is consistent with the Board's objectives and with general banking practice. On the other hand, any set of complex rules of the type that will be required by this legislation will increase an already heavy regulatory burden. Particularly for small institutions, the cumulative effect of individual regulations, each well intended in its purpose to address a specific problem, can be overwhelming. For example, just since the beginning of last year, extensive new requirements have been mandated relating to funds availability, adjustable-rate mortgages, credit and charge card solicitations, and home equity lines. Each of these new regulations has required institutions to revise or create printed forms, adopt conforming policies and procedures, provide training for personnel, and, particularly in the case of funds availability, make extensive data processing system changes. And, of course, these additional requirements are over and above the ongoing regulatory burdens financial institutions bear.

Because of our experience with these recent laws--as well as with numerous other consumer statutes for which we have rule-writing authority--we know firsthand that simple concepts invariably result in complex regulations. For example, the concepts of improved funds availability and uniform consumer credit disclosures appeared to be simple and straightforward. Yet, as history has shown, to encompass the diversity of business practices and products among financial institutions, the implementing regulations of necessity are intricate and voluminous. Moreover, we have learned that even rules that are not designed to affect the number or diversity of products--such as simple disclosure requirements--may have the practical effect of standardizing products. If fewer options are available, consumers may be deprived of the benefits of variety. Consequently, we believe that a compelling need should be demonstrated before new legal requirements are added to the array of existing rules.

In the case of account disclosures, our best information suggests that, by and large, institutions are providing the information that depositors say they need, either voluntarily or as a result of existing account advertising regulations such as Regulation Q. We would, therefore, question the need for H.R. 736 at this time, particularly because of the additional regulatory burden it would impose on depository institutions.

If the Congress nevertheless decides to go forward with legislation, H.R. 736 should be carefully tailored to avoid unnecessary complications and burdens. In particular, we recommend the following actions.

H.R. 736 would require the disclosure of an "effective percentage yield" on accounts with maturities of less than one year besides the annual percentage yield" (APY) that must be disclosed for all accounts. Requiring a yield relating to a portion of a year would directly conflict with the notion of APY, and would tend to confuse the consumer about the return on the account. Consumers have become accustomed to the concept of annual percentage figures through the "annual percentage rate" disclosed in consumer credit transactions pursuant to the Truth in Lending Act. The Board recommends that disclosures in advertisements and account schedules for a rate other than an APY on accounts with maturities of less than one year be deleted from H.R. 736; alternatively, a statement could be appended to the APY that discloses that the "yield assumes that the funds are on deposit for a full year."