New Rules to Help Bank Patrons Compare Rates

Don’t look now, but your bank is about to revise its advertising and disclosure practices. And some of these changes could be significant.

The Federal Reserve just put the finishing touches on new regulations spurred by the Truth in Savings Act, passed by Congress last November.

Designed to eliminate deceptive advertising, the act is expected to help consumers shop for deposit rates and terms. Although banks don’t have to comply with the new rules until March, some say they will implement many of the provisions sooner.

What will change under Truth in Savings?

First and foremost, every bank and savings and loan in the country will compute and advertise deposit rates in the same way. Starting March 21, they will all disclose the annual percentage yield, or APY, on all deposit accounts.

The annual percentage yield is calculated by compounding the stated rate of interest on the whole balance every day.

Many banks calculate yields this way now. But some do not.

Indeed, consumer activists complain that a handful of banks mislead savers by compounding interest in a way that gives consumers a lower return than advertised. The rationale behind this deceptive compounding method is complex, but the result is not. The advertised rate may say 5%, for example, but the bank only pays that rate on part of the deposit. In the end, the real yield is significantly lower. The new law will end that practice.

“The standardization of these numbers is wonderful,” said Charles Cohn, vice president at Bank of America in San Francisco. “Consumers will know that when they see the APY, they are comparing apples to apples.”

Banks will also have to disclose whether rates on various standard accounts can vary based on the size of your deposit. In many cases, for example, banks will pay 2% if your balance is $500, but they’ll give you 2.25% if the balance is over $2,000.

Disclosure of all interest rate “tiers” is required on passbook savings, interest checking and money market accounts, among others. But banks do not have to disclose the varying rates they pay on certificates of deposit. Why? CDs are considered individual contracts between bank and depositor--not standard products.

While that means that your banker may fail to tell you that you could get a significantly better CD rate if you merely deposited a few dollars more or agreed to keep the deposit in the bank for a few extra days, it also means that savvy consumers can continue to bargain with their bankers for better terms.

If you have a large deposit, many banks will give you a boosted interest rate if you think to ask. If the bank is advertising 5% on three-year CDs, you might be able to get 5.25% if your deposit is over $50,000, for example. But banks only bargain if they really want your business. If a bank isn’t all that anxious to lure deposits, it may not go along.

Truth in Savings also requires banks to give depositors at least 30 days’ notice when they’re planning to change interest rates on accounts, which should give consumers time to shop around for more favorable terms when interest rates have been pared.

The new law also prohibits banks from saying that a checking account is “free” when in fact there are strings attached, such as minimum balance requirements.

Finally, the law requires prominent disclosure of fees and other account terms in new-account literature and monthly statements.

Some examples of what might be disclosed under the new rules: When does interest begin to accrue on deposits--the day they are deposited or the day they “clear,” that is, when the funds are actually available to the bank?

How often can interest rates change on variable-rate accounts? Will you be charged additional fees if you write more than a set number of checks or visit a branch more than a set number of times?

In a few areas, Truth in Savings may actually hurt consumers. The more detailed disclosure requirements, for example, may cause some banks to reduce the number of products they offer. They may also cut down on rate advertisements or reduce the number of interest rate tiers, Cohn said.

“In general, I think this is positive for both banks and consumers,” Cohn said.

“But there is a cost to implementing it. From the consumer’s standpoint, that may mean slightly less product choice.”