I respectfully disagree Jim. I believe compounding MUST be disclosed in this case. Here's an excerpt from our
Advanced Deposit/Operations Manual on this topic:
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Compounding vs. Crediting:Compounding occurs when the interest earned on an account begins to earn interest itself. The frequency of compounding is the frequency in which interest that has been earned is added to the balance of the account (principal). Whether the earned interest is or is not available for withdrawal is of no consequence to the compounding frequency.
Crediting is the process of making interest that has been earned available for withdrawal. The frequency of crediting is the frequency with which that process occurs. Whether or not interest begins to be earned on the interest that becomes available for withdrawal is not a factor.
Crediting of interest and compounding of interest are separate and distinct functions.
The greatest confusion about crediting and compounding occurs on time deposits disclosures where, at the customer’s request, interest is paid periodically to the customer either by check or by credit to another account.
Assume a time deposit on which interest is normally compounded and credited quarterly; however, at the customer’s election, the bank will transfer the earned interest to the customer’s saving account monthly. For the customer who elects that option, his or her disclosure must state monthly crediting, not quarterly crediting. A disclosure must describe the customer’s specific account, not the way an account of that type is normally processed.
The real confusion in this instance is the disclosure of compounding. The compounding frequency must be disclosed as quarterly. But, you are thinking, because interest is paid from the account monthly, it never compounds and the disclosure must be specific to the account. You are right and wrong. Compounding and annual percentage yields are disclosed on the assumption that the customer will leave the interest in the account until maturity. This is true even though you know the assumption is wrong. These are the two exceptions to the specific-to-the-account rule. Even though the customer has signed a request that the interest earned be sent to them by check monthly, the compounding frequency and APY disclosed must assume that interest is not withdrawn from the account until maturity. The only exception is when bank requires a customer to withdraw credited interest.
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