WASHINGTON -- Four senators vowed this week to introduce legislation that would block banks from offering a new tax-deferred, insured certificate of deposit.

Opposition is growing on Capitol Hill to the retirement CD, which was designed to help banks compete with annuities. A powerful House committee chairman protested the product last month.

Lawmakers' concerns fall into three main areas.

First, they question whether consumers will understand how the CD works and how much deposit insurance it carries. Second, they wonder whether the product would give banks an unfair competitive advantage over insurance companies. Finally, lawmakers ask whether the product is too risky for banks to offer safely.

Letter Sent to Regulators

In a June 20 letter, Sen. Christopher J. Dodd, D-Conn., Sen. Alfonse M. D'Amato, R-N.Y., Sen. Richard H. Bryan, D-Nev., and Sen. Lauch Faircloth, R-N.C., asked bank regulators to withdraw their approvals of the retirement CD.

The letter, sent to Comptroller of the Currency Eugene A. Ludwig and acting Federal Deposit Insurance Corp. chairman Andrew C. Hove Jr., also promised legislation.

"We are developing, and soon will introduce, legislation to prohibit the sale of this investment product," the four Senate Banking Committee members wrote.

Reluctant Approval

The OCC and FDIC sanctioned the retirement CD in separate letters dated May 12. Both agencies had reservations about the product and placed restrictions on its use. But neither could find any legal means to stop its introduction.

Thus, the agencies are now in the position of defending a bank product that they do not enthusiastically support.

House Energy and Commerce Committee Chairman John D. Dingell, in a May 25 letter to the agencies, demanded that regulatory approval be "withdrawn immediately." The Michigan Democrat also requested answers to 12 questions by June 13.

The FDIC responded on time, mainly defending its approval by explaining that the agency has no choice but to insure accounts that qualify as deposits.

Patent Pending

The Comptroller's office has yet to reply to Mr. Dingell's inquiries but is expected to do so any day.

The retirement CD was developed by American Deposit Corp. The Pine, Colo.-based concern has a patent pending on the product, with hopes of licensing it to banks nationwide.

American Deposit president Richard E. Fasold said that hundreds of banks have requested information about the retirement CD. The only bank actually selling it is Blackfeet National Bank, a $12 million-asset institution in Browning, Mont.

Blackfeet president Jack Kelly said in an interview Tuesday that the bank has sold "just a few" retirement CDs. "We're just getting going," he said. "I can't tell you how successful it's going to be."

The retirement CD requires a minimum $5,000 initial deposit. The interest rate is set for the first few years but then may fluctuate above a 3% floor. Interest income is not taxed as it accumulates, according to American Deposit.

The depositor selects a maturity date, when up to two-thirds of the principal and interest may be withdrawn. The bank then pays out the balance in monthly installments that are guaranteed to continue as long as the customer lives.

The FDIC said it would insure up to $100,000 of money deposited and interest earned but ruled that payments to customers beyond what was invested are not insured.

Longevity Problem

In their letter, the senators asked how well Blackfeet would be able to estimate the risk of depositors' living longer than expected and collecting more than they had invested in the CD.

"The OCC and FDIC also seem too willing to take it on faith that a small national bank [armed with a software program] will have the business acumen and operational know-how to handle the risk of underwriting this annuity product," the letter stated.

If the CD spreads to other, larger banks, the senators said, the FDIC is handing them a "substantial competitive advantage over similar annuity products that do not come with a government guarantee."

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