Banks rap Fed's latest proposal on yield disclosure.

The Federal Reserve Board continues to grapple with how annual percentage yields should be calculated under Truth-in-Savings.

In comment letters filed last week, bankers continued to complain that Regulation DD is too costly, too burdensome, and too confusing.

The Fed's first stab at calculating annual percentage yields came in June 1993, when Regulation DD took effect. But bankers complained the proposal could give customers contradictory rates, because the yield could be less than the interest rate.

Try, Try Again

So last December the Fed issued another yield proposal that shows the effect of compounding as well as the value of receiving interest during the term of the account.

The Fed withdrew that proposal in May because some bankers said it would cost too much to implement. The central bank simultaneously issued a proposal that also would reflect the time value of money, but clarified that once interest is credited to an account it becomes part of the principal.

But other bankers requested that the December option be brought back. So on July 5 the Fed reinstated that alternative, but said it would affect only banks that offer noncompounding multiyear CDs that pay interest at least annually.

Under the proposal, those banks would disclose an annual percentage yield equal to the interest rate, whether or not interest payments were made annually.

Comments on the May proposal were originally due July 5, but the Fed decided last week to extend the deadline to Sept. 6.

Lots of Mail

The plan has already drawn 231 letters, almost unanimously against altering the yield calculation from its current form.

Bankers complained that the revisions would force them to either compound interest monthly, which would be expensive, or cease issuing monthly interest checks.

Most bankers said they could not afford to absorb the added costs. That's bad news for many elderly customers who live off fixed monthly income. And, said bankers, not being able to accommodate customers is not good for business.

'No-Win Situation'

Marjorie Shrader, senior vice president of First Peoples Bank, Jefferson City, Tenn., said the new calculation would cause her bank customers to go to larger competitors. "It will be a no-win situation for small community banks," she said.

The proposal angered many bankers who said that the revision would hurt consumers, rather than help them, as Truth-in-Savings is intended to do.

"The consumer would be better served by institutions who are allowed to structure their product to meet the needs of their consumers, rather than a nationwide law that would take away consumer privileges," said Darlene Lauer, vice president of BankWest, St. Francis, Kan.

Do Customers Really Care?

Bankers also said that customers had never expressed any interest in this issue, and would only be confused by a change. "The average customer... does not have a problem," said Robert Moyer, chief executive of Wilber National Bank, Oneonta, N.Y. "The customers have more trust in the banks and their customer service people than the Fed does. he stated."

Lloyd G. Harris, vice president at Chemical Bank, said the revision would force banks to set a lower interest rate on accounts. That would happen because the proposal requires the annual percentage yield at maturity to be the same as if the simple interest account were not forced to compound interest, he said.

Some bankers said just complying with the original law is hard enough. "Banks already have one hand tied behind their back by Truth-in-Savings," said Lonnie E. Clark, vice president of State Bank of Chandler, Minn.

Others said the whole idea of changing the calculation is ridiculous and a waste of time.

'A Dead-Dog Loser'

"Sorry I cannot be more positive in tone, but this one is just a dead-dog loser," said Robert W. Hinman, president of Northern Illinois Financial Corp., Wauconda, Ill.

Ted J. Montgomery, president of Union County National Bank, Liberty, Ind. said the Fed is spending too much time on this issue. "The Dark Ages were low-lighted by philosophers arguing about how many angels could dance on the head of a pin," he said. "Will we never learn?"

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