Retail bankers have to confront a robust stock market, aggressive deposit acquisition strategies from growing firms, and maybe more than three Fed rate increases coming in 2018. Increasingly more creative methods are being used to attract deposit dollars. One such method is offering higher introductory rate products to catch attention while still holding down the overall cost of funds.
The Truth in Savings Act anticipated various products that considered rate swings. An introductory rate promotion is one product suited for this deposit acquisition environment.
But from a compliance perspective, a high‐teaser introductory rate product can be tricky. That’s why your compliance officer needs to be involved from the outset. Otherwise, a “wrong turn” could cause consumer harm risks.
Regulation DD goes into detail on how to calculate the Annual Percentage Yield (APY) for ads and disclosures. Appendix A to Regulation DD, Truth in Savings, specifies the way in which an introductory APY is calculated. The APY must be a blend between the interest rate for the introductory period and the interest rate that would normally be paid on the account outside of the introductory rate.
Appendix A further clarifies that for accounts without a stated maturity date, the interest calculation should be based on an assumed 365‐day term. The blended rate calculation for a variable‐rate account should assume that the variable rate in effect at the time of disclosure will remain in effect through the term, which could mean the APY required in the advertisement will differ from the actual APY the consumer will earn on the account in the event of a rate change.
So, what does that mean?
Well, let’s look at an example. Suppose we had a $1,000 certificate of deposit account with a one‐year term, quarterly compounding and an introductory rate of 4% for the first three months, and then 2% for the rest of the term. The bank should disclose the rate applying the 4% to the first three months and using the 2% rate that was in effect at the time the account was opened and disclosed for the remaining nine months. Both rates must be disclosed.
The general formula for calculating the APY is found in Appendix A of Regulation DD. A good way to know that you are on the right track to calculating the introductory rate is to check that the blended rate is less than the initial rate, but more than the rate going into effect after the teaser rate kicks in.
The Regulation DD formula for calculating the blended rate includes the “Days in term.” This timeline is the actual number of days in the term of the account; however, when there is no stated maturity, the calculation should be figured on a 365day calculation.
For the certificate in our example above, the APY for this account would be 2.52%.
Introductory rates can attract funds for the bank without having too much of a negative impact on rate sensitivity. But the fine print in an advertisement and disclosure must be easily understood by the consumer.
TCA can help! Call 800‐934‐REGS or e‐mail [email protected] to learn about having a TCA consultant assist with the review of your introductory rate disclosures.