As anyone in compliance can attest to, there are myriad consumer compliance regulations. For bankers, these regulations are regarded as anything from a nuisance, to the very bane of the existence of banks. However, in point of fact, there are no bank consumer regulations that were not earned by the misbehavior of financial institutions in the past. Like it or not these regulations exist to prevent bad behavior and/or to encourage certain practices. We believe that one of the keys to strengthening a compliance program is to get your staff to understand why regulations exist and what it is the regulations are designed to accomplish. To further this cause, we have determined that we will from time to time through the year; address these questions about various banking regulations. We call this series “Why IS there….”
Like all of its consumer brethren, the Truth in Savings Act (“TISA”) was enacted to address significant problems that consumers were experiencing with financial institutions. Moreover, the history of the regulation is a familiar one. First, there were practices that left consumers confused and misinformed about the value, cost and benefits of deposits accounts. Next, there was an outcry about the practices which resulted in congressional hearings. Eventually regulation was passed that was designed to set standards in this area and TISA was born!
TISA has a history that is a bit more interesting than some of the significant consumer regulations. The law was first passed in 1991, but the implementing regulations took close to two years to design and implement. Once the rules were implemented, there was a still a great deal of confusion in the immediate years that followed, and amendments to the Act were added that delayed its implementation. Since its implementation there have been some “fine-tuning” amendments such as adding the ability to make disclosures electronically, but the basic thrust of the regulation has remained. The most significant change to the regulation occurred in 2006 which guidance was published that covered the manner in which information is disclosed to customers about overdraft fees.
Why was there a need for TISA?
In the early 1990’s the financial services industry had just gone through a tremendous upheaval as several important industries have either failed or gone through significant contraction. The Savings and Loan industry had all but come to an end. As the economy contracted the competition for the deposits of consumers became fierce. Deposits are of course, the life blood of financial institutions. Deposits generally supply the liquidity of financial institutions and are the funding source for loans.
Fierce competition for deposits meant that financial institutions began to do all they could to stand out to potential deposit clients. Many institutions engaged in aggressive advertising of rates that they would pay on deposits and unfortunately, in many cases, the advertising did not tell the full story at all. Consumers soon found out even though they thought they were getting a certain rate of return on their deposits, there in fact many “catches” to the interest rate
Four Really Bad Practices
TISA was aimed at three particularly misleading practices in particular;
- Interest Timing
- Investible Balance
- Low Balance
- “Free” Checking
Interest Timing: Was the practice of offering a rate on a deposit without clearly informing the customer that if the deposit was not made by a certain time, the rate would not apply for the month. For example, I offer you a rate of 10% on your $1,000 deposit. However, I neglect to mention to you that if the deposit is not made by the 10th of the month the rate for the whole month will be 2%. In extreme cases, the borrower who missed the deposit deadline would never earn the higher rate advertised.
Investible Balance: This is the practice of paying interest only on the portion of the deposit that that financial institution deemed “investable” after having to set aside required reserves. In some cases, using this practice banks would actually pay interest only on 80 percent of the balance of your deposit. As in the above example, your deposit is $1,000. The financial institution would argue that $200 of that deposit must be set aside for capital purposes and can’t be used to make money, therefore, only the remaining $800 would receive interest.
Low Balance: A third practice that regulators (and consumers) found vexing was the “low Balance” method of calculating interest. Using this method, the amount of interest that was calculated was based upon the lowest balance of the account during the month. If your account maintained its $1,000 balance for 29 of the 30 days of the month and then you made a withdrawal of $900 on the 29th day, interest would be calculated on the remaining $100 balance.
“Free” Accounts: Many accounts that were advertised as free, would also come with strings attached based upon the collected balance in the account. A series of charges would be applied anytime that the balance of the account went below an amount set by the financial institution. Many of these free accounts ended up being more expensive than other accounts.
These practices and several other lessor tactics employed by financial institutions in advertising made it nearly impossible for consumers to shop to find the best deal for their deposits.
One Additional Concern- Overdrafts
After the first version of the ACT was passed, a further concern came to light, fees charged on overdrafts. In many cases, financial institutions were allowing for the payment of items that overdraw accounts “as a courtesy”. However, the term “courtesy” came with significant fees. In some cases, the financial institution engaged in practices that would pay the largest check first and then charge fees for each subsequent overdraft. For example, suppose five checks are presented to an account that had a balance of $1,000. The checks total $1,300. One check is for $1,200 and the other checks are for $100, $75, $50 and $25. Financial institutions were paying the first check and then charging an overdraft fee for each of the other checks. Under the rules of TISA, only the $1,200 check would come with an overdraft fee, because the other checks would be paid first.
The Main Point of TISA
The significant changes that TISA brought about include the creation of the Annual Percentage Yield or APY. The requirement here is that the way an institution quotes an interest rate has to be uniform. Financial institutions had to base their disclosures on this calculation and must calculate interest as disclosed. In this manner a customer can compare one institution to the next and make an informed decision about where they will put their money.
TISA and UDAAP
Although the regulations do not contain significant penalties for noncompliance, in recent years, examiners have tied the Unfair Deceptive Abusive Acts or Practices (“UDAAP”) regulations to TISA. In cases, when disclosures did not meet the standards established by TISA, violations of UDAAP have been cited. For example, when an account is advertised as “free” or low cost, when fees are actually charged that don’t match, a UDAAP claim can be filed. In addition, when terms of an account are mentioned in advertising or on the website of a financial institution aren’t mentioned, there can be UDAAP claims.
***For more information on ways to reduce the potential for TISA and UDAAP violation, please contact us at www.vcm4you.com ***