Q&A; : Why Banking Ads Are Telling Nothing but the Truth These Days

If you’re noticing fewer advertisements for bank deposits, it’s no accident. Not only are deposit rates so low that heavy advertising seems futile, but bankers are grappling with a new regulation that has forced many to drastically revamp the way they pitch to customers.

The federal Truth in Savings Act, which went into effect Monday, bans banks from using deceptive practices that allowed them to advertise one rate but pay another.

Here are some answers to questions about how Truth in Savings affects you:

Q. What is Truth in Savings?

A. It is a law that was passed by Congress in 1991 but is just now being implemented. The law is complex, but its goal is ultimately simple: to get banks to report fees and interest rates uniformly so that consumers can compare one account to another with ease.

Q. Why was the law needed?

A. Largely to curb three practices that allowed banks to advertise higher rates than they were actually paying. The three practices:

* Interest timing. The bank advertised a specific interest rate but failed to mention that if you didn’t have your deposit in by a certain date--say the 10th of the month--you wouldn’t earn interest on that amount for the whole month.

* Investable balance. The bank paid interest on only a portion of your deposit--usually 90%. Banks argued that this method was fair because they had to set aside about 10% of each deposit in “reserve” accounts that don’t earn the bank any interest but are required by regulators. If the bank didn’t earn interest on the money, why should consumers? bankers argued. Consumer groups said the practice was misleading because bankers were effectively paying a lower rate than what was advertised.

* Low balance. This, the worst practice, allowed banks to pay a stated interest rate on just the lowest balance in your account during the period. If, for example, you had $1,000 on deposit for 29 days, but withdrew all but $50 on the 30th of the month, the “low balance method” would allow the bank to pay interest on only the $50.

Q. How does Truth in Savings change that?

A. It requires banks to disclose the “annual percentage yield” on all savings accounts. If they want, banks can also list an interest rate calculated by a different formula. But APY must be included too.

APY is a standard calculation that takes into account the rate, frequency of compounding, amount deposited and other variables. If you want to make apples-to-apples comparisons, ignore other interest figures and compare only APYs. In other words, banks don’t have to throw out the screwy calculations; they just need to provide a consistent one.

Q. How does Truth in Savings affect fees?

A. Banks can’t say an account is “free” or “no-cost” if there are strings attached. In other words, if it’s only free when you keep a minimum balance, it’s not really free. It’s also not free if there are no monthly check charges but they charge you to use an automated teller machine.

Q. Does that mean banks have to eliminate the fees they charge on so-called free accounts?

A. No. It means they have to stop calling them free accounts. When you get your next statement for XYZ Bank’s “free checking” account, for example, you may find the bank has renamed the account “low-cost checking.”

Q. Under Truth in Savings, could I ever earn less interest on my account than what’s been advertised as the annual percentage yield?

A. Yes. Let’s say you have a checking account that pays interest only if you maintain a minimum balance. The APY is calculated based on the assumption that you would always maintain that minimum balance. If you don’t, you’ll earn less than the advertised APY.

Q. Do these rules affect all financial institutions?

A. No. Right now they affect only banks and savings and loans. With some exceptions, the rules eventually will affect credit unions too, but probably not until next year. Mutual fund companies are specifically exempted, even though some do offer bank-like products such as interest-bearing checking accounts.

Q. What do I do if I think my bank is breaking the rules?

A. First call the bank and inquire. In certain instances, misunderstandings are likely. But if the bank doesn’t give you an adequate answer, report the problem to the bank’s regulators, which could be the Comptroller of the Currency, the State Banking Department or the Office of Thrift Supervision. A bank representative should be able to tell you which regulator is appropriate.

Q. This law sounds great. But if it was passed in 1991, why is it just now going into effect?

A. While the law’s intent was simple, the actual rules needed to implement the law are not. In fact, bankers say, putting this law into action is one of the most complex jobs in banking history.

The upshot is that bank regulators had to establish rules to implement Truth in Savings, put the rules out for comment, wait, revise and issue final regulations. Final rules were complete last September, at which time the implementation date was set for March, 1993. However, because of widespread confusion, regulators said banks didn’t have to comply until June 21.