Posted By: pchandler
Reg DD - 01/12/12 05:01 PM
If a customer gets an interest check monthly should you disclose interest is compounded monthly? Our disclosures state interest is compounded quarterly, but actually it is not compounded. How should it be disclosed?
Posted By: BrendaC
Re: Reg DD - 01/12/12 05:29 PM
Yes, your APY should reflect monthly compounding. The APY is based on the assumption that the money remains in the account.
A regulatory mandated UDAP lol
But if the customer is getting a check on a monthly basis, then there is no compounding, correct? The disclosure should then say that you don't compound.
We generally disclose that we don't compound, the interest is either sent to them by check, transferred to another internal account or ACHed to another institution.
Posted By: pchandler
Re: Reg DD - 01/12/12 08:02 PM
There is that part that says it is assumed that interest is left on deposit and it was confusing. Thanks.
Posted By: BrendaC
Re: Reg DD - 01/12/12 08:28 PM
Reg DD Part I. Annual Percentage Yield for Account Disclosures and Advertising Purposes
A. General Rules
In determining the total interest figure to be used in the formula, institutions shall assume that all principal and interest remain on deposit for the entire term and that no other transactions (deposits or withdrawals) occur during the term.
Posted By: Andy_Z
Re: Reg DD - 01/13/12 04:13 PM
Brenda is spot on. You don't want to do various disclosures for all possibilities.
The disclosure might say figures don't lie, but liars figure, and here are our assumptions per the FRB.
Posted By: BrendaC
Re: Reg DD - 01/13/12 04:53 PM
Doug - There is an exception to the "assumption" rule IF the bank REQUIRES the interest be paid out (as opposed to allows the customer to elect interest be paid out).
"This assumption shall not be used if an institution requires, as a condition of the account, that consumers withdraw interest during the term. In such a case, the interest (and annual percentage yield calculation) shall reflect that requirement."
So, for example, if your institution has two almost identical CDs, one of which pays 2.00% payable monthly but only to another account or by ACH out, and the other of which pays 2.00% compounding monthly, the APY on the first will be 2.00% and the APY on the second will be something like 2.02%.
[BTW, I recognize that 2.00% rates are high, but the effect of compounding at more realistic 1.00% levels aren't great enough to provide an illustration.]
so true!