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APY for DDA Tiered Rate

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Question: 
We are going to offer a DDA tiered rate paying 2.75% on the first $10,000 if qualifications are met (10 debit card transactions - 1 direct deposit or debit - access Internet banking once during the monthly cycle),.25% on balances over $10,000 if qualifications are met and .05% on all balances if qualifications are not met. It has a $100 to open minimum but interest will be paid on all positive balances. How do I disclose the APY? On the top tier do I use the $100 (min to open) to disclose the amt used to obtain the APY or can I use $1? On the middle tier - do I have to take into consideration the first $10,000 earned the higher rate?
Answer: 

First, be very precise and careful in your disclosures on this program both in your advertising and in your account disclosures. Familiarize yourself with regulators' UDAP concerns about "rewards checking" accounts to ensure you will be providing all of the information you should to avoid criticism.

As for your Truth in Savings (Regulation DD) disclosures, the lower balance tier should be reflected as affecting balances of $10,000 or less (don't mention the $100 or even $1 amounts, since your rate applies to the full range of balances from $0.01 to $10,000.00). For balances over $10,000, your description suggests you will be using the "Tiering Method B" requirements in Appendix A of Regulation DD, which assumes you pay the higher rate on the first $10,000 and the lower rate on just the amounts over the $10,000 amount. That means you will disclose a range of APYs starting with the APY on the first $10,000 and then a low-end APY based on the interest earned on a fictitious "top of balance range" amount. If you have an actual maximum balance on these accounts, use that amount. If you don't, pick a reasonable number. Some banks use $100,000; others went to $250,000 when the FDIC coverage cap went to that amount.

In the examples of Method B in Appendix A, the APY range runs from lower to higher rate (one example has a range of 5.61% to 5.91%). That's because the assumptions in the example are that the consumer gets a higher rate for higher balances. For your product, you pay a lower rate above $10,000, so your APY range should start with the higher APY and go to the lower APY.

First published on BankersOnline.com 10/15/12

First published on 10/15/2012

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