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

The bill would require depository institutions to send "in a regular mailing" schedules of terms and conditions to existing account holders no later than 90 days after the effective date of regulations implementing the act. The Board believes that 90 days is too brief a period for depository institutions to review the new regulation, effectively reexamine their entire deposit product line, and prepare, print, and mail account schedules to existing customers. In our view, an appropriate minimum time period for mandating compliance is 180 days after the effective date of the regulation. Also, depository institutions should be given flexibility to decide in what manner to mail the required schedule to their existing customers. For example, if a depository institution wished to send its schedule in a special mailing, it should be permitted to do so. Language requiring the schedule to be included in a "regularly scheduled" mailing should be deleted.

We note that the civil liability provisions of this bill are quite sweeping, and, in covering advertising, are broader than those in other consumer disclosure laws such as the Truth in Lending Act. A violation of the advertising provision of H.R. 736 would be subject to statutory penalties that would allow an individual to recover a minimum of $100 and allow class actions with the potential for recoveries far out of proportion to any actual harm. Further, suits could be brought by individuals who have no relationship with the financial institution or its consumer deposit products other than having viewed a newspaper advertisement. Particularly since financial institutions will be examined for compliance by federal regulatory agencies, the Board believes that the Congress can achieve the purposes of the legislation without subjecting institutions to costly litigation by the public at large.

To clarify coverage, H.R. 736 should expressly provide in its definition of "account" that the act applies only to consumer deposit accounts, and not to business purpose accounts. This provision would reduce the compliance burden somewhat and would focus the disclosures on the class of depositors who might most need them. In addition, H.R. 736 should make clear that the requirement to notify account holders of a change in a term that "may reduce the yield" is not intended to govern a decrease in yield in accordance with a variable-rate term previously disclosed. This will avoid institutions having to mail a "change in term" notice when yields vary as a result of routine rate adjustments.

H.R. 736 would preempt state laws relating to the disclosure of deposit account information to the extent the state law is inconsistent with the new federal law. H.R. 736 does not, however, provide a mechanism for determining if a given state law is preempted. Similarly, the bill would allow depository institutions to rely on rules issued by the Board, but does not provide a means for interpretation of formal Board actions. To ease compliance burdens by alleviating uncertainty, and to promote greater uniformity of enforcement of H.R. 736, the Board recommends that it be given the express authority both to determine if state laws are preempted under the act and to authorize an official to issue interpretations of the regulation. This follows the approach taken in other consumer financial services legislation such as the Truth in Lending Act and the Electronic Fund Transfer Act. We have found that such provisions allow us to provide greater certainty about disclosure requirements in an efficient and flexible manner.