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TIS Compounding and Crediting

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  • #37771
    mbmills
    Participant

    Our CDs are set up for monthly compounding and monthly crediting back to the CD. However, customers can elect to receive their interest via check or transfer to another account on a frequency of monthly, quarterly, semi-annually or annually.

    During a recent CD special, we noticed that our TIS disclosures were not disclosing the correct APY when a customer elected to have their interest sent via check or transferred to another account on a frequency greater than monthly. The TIS disclosures were indicating that interest was not being compounded. While it is true that there is no compounding when the customer elects the interest to be paid out, it is my understanding that compounding and APYs are to be disclosed on the assumption that interest remains on deposit until maturity.

    Therefore, regardless of what crediting option is selected by the customer, I believe that the TIS disclosure should always say that “Interest will be compounded monthly” as well as indicate that the APY assumes interest remains on deposit until maturity and that a withdrawal will reduce earnings. However, when disclosing the crediting frequency on the TIS, should we disclose how the interest will actually be handled based on the customer’s election (i.e., credited to the CD, paid via check quarterly, transferred to another account monthly, etc.)?

    Appreciate any feedback!

    #37784
    kboatwright
    Participant

    Based on what I am understanding from your question your concerned that:
    1. You are not disclosing the APY correctly on the CD TISA disclosure (out of curiosity, do you use a provider?) and
    2. Should the disclosure explain how the interest is to be credited – by check, credited back to the CD, into another account.

    1) You are correct that you should be disclosing the frequency with which your CD compounds, and it is in most cases reflected in the
    annual percentage yield (APY). However, the assumption for the APY is it will be calculated based on leaving the interest in the CD for its
    entire term.

    If the depositor is going to take periodic disbursements of interest, such as monthly or quarterly payment then the money will not fully
    compound which causes the difference in how the APY will be disclosed and pay interest. A couple of things:
    a. When advertising the CD, the rules state that you must disclose the APY (230.8 (c)(2)) under the assumption that the interest
    will be going back into the CD, and this may be where some of the confusion lies.
    b. When providing the account disclosure at account opening, disclose based on how the account operates. So, in this case, you may
    have the interest rate the same as the APY or slightly different if they are taking disbursements other than monthly. (230.4(b)(1)(i))
    c. Disclosure for advertising and at account opening should clearly state “Withdrawal of interest prior to maturity” as applicable:
    a) A statement that the annual percentage yield assumes interest remains on deposit until maturity and that a withdrawal
    will reduce earnings for accounts where –
    (I) Compounding occurs during the term, and
    (II) Interest may be withdrawn prior to maturity or
    b) A statement that interest cannot remain on deposit and that payout of interest is mandatory for accounts where:
    (I) The stated maturity is greater than one year,
    (II) Interest is not compounded on an annual or more frequent basis,
    (III) Interest is required to be paid out at least annually, and
    (IV) The annual percentage yield is determined in accordance with section E of Appendix A of Regulation DD.

    2) Yes, you should be explaining how the interest will be managed.

    #37791
    mbmills
    Participant

    Yes, we do use a provider for our TIS disclosure. With this CD special, the advertised APY was 2.50%. However, if the customer elected to receive the interest quarterly or semiannually, the APY calculated on the disclosure was 2.49%. For “Compounding and Crediting Frequency,” the disclosure was conditioned to say the following (in addition to indicating that the APY assumes interest remains on deposit):

    Interest will not be compounded on this account. Interest will be mailed to you by a check quarterly.

    However, based on research, I was thinking that we still need to disclose that interest will be compounded monthly, but paid out at the frequency elected by the customer. And the APY would still be disclosed as 2.50% since it assumes interest is not withdrawn until maturity.

    It’s been a little confusing for staff and customers to have seen an advertised APY of 2.50%, but only see 2.49% on the TIS disclosure. We just want to be sure we are disclosing correctly. With deposit rates being low for so long, we hadn’t seen this issue until we ran the higher rate special.

    #37811
    kboatwright
    Participant

    I agree with you. Based on everything I researched last week. You should be disclosing the interest rate of 2.50% not 2.49% per section (230.4(b)(1)(i)) and indicating what you stated “Interest will not be compounded on this account. Interest will be mailed to you by a check quarterly.” That will make it very clear to the customer.

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