Take Care When Changing Deposit Policies

As banks contend with increased deposit insurance assessments, they are repricing services to cover costs--both by cutting rates on deposit accounts and by adding or raising fees on them. These developments take place in a political context in which truth in savings legislation seems a likely bet for enactment sooner rather than later. If and when such a law passes, it will create the deposit-side equivalent of the Truth in Lending Act, probably requiring banks to disclose an APY (annual percentage yield) that equalizes differences in fees and rate calculation methods so customers can compare the advantages of one account against another. I recall attending my first congressional hearing on truth in savings proposals in about 1974. Assuming that it was the first one held, this concept has had, so far, a 17-year gestation period. One reason it has not been adopted to date is policymakers' recognition of the complexity of implementing the idea. Time for review. The impetus for passing such legislation increases whenever banks raise fees or lower rates in ways that are difficult for customers to see and evaluate. This is a good time to survey the existing rules that apply when you change the rates or terms on deposit accounts, and to describe some of the steps banks are taking voluntarily to keep customers informed. Rule 1: In most cases, there's no rule. Surprisingly, in a regulatory environment where disclosure requirements seem to apply to everything, nothing mandates that banks disclose to current depositors that they are lowering interest rates or raising fees. There are exceptions, as described in subsequent rules, for certain specific kinds of changes, but in the main, banks are free to act without notice. Many banks find this hard to believe. Many are uncomfortable with the potential for customer complaints if no information is provided. Accordingly, some banks are taking the following voluntary steps: * Notifying customers in monthly statements. This direct approach is fairly certain to satisfy customers that the bank is adequately disclosing, but it obviously risks rousing the customers' anger regarding the change. To blunt that criticism, banks taking action due to increased premiums generally explain so in a cover letter. * Posting a lobby notice. Many banks see this step as a compromise between no disclosure and statements stuffers. Putting up posters a month or more before the change will go into effect would seem to constitute reasonable notice. Doing so may generate less customer concern than does an individually mailed statement. Rule 2: Make disclosures if you change the method of calculating rates on a savings account. Under what's left of Regulation Q, banks must notify customers if they change the manner in which the interest on savings--but not demand--accounts is calculated. The Federal Reserve Board's official interpretation of Reg Q states that every bank should inform customers, at the time they open a savings or time account, of the method used to compute and pay interest. The interpretation specifically says that this disclosure should include notification if the bank will not pay interest on deposits made after the beginning of an interest payment period or on withdrawals made after the end of one. The interpretation goes on to say that if the bank makes any change in such calculation methods that will be less favorable to the customer, it should mail notice to each depositor at his last known address. There is no explicit timing requirement. Rule 3: Disclose changes affecting electronically accessed accounts. Regulation E requires that banks make specific advance disclosures regarding accounts subject to the Electronic Funds Transfer Act. Financial institutions must mail or deliver written notice to the consumer at least 21 days before the effective date of any change in terms or conditions, if (among other things) the change would cause increased fees or liability. …