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Your Money | PERSONAL FINANCE / KATHY M. KRISTOF

Should You Rely on Math Skills of Local Banker?

June 02, 1996|KATHY M. KRISTOF

Joe Mintz is on a mission. The 77-year-old Dallas-based insurance agent wants to beat back a legislative attempt that would lighten interest rate disclosure requirements for banks.

In fact, he's trying to get regulators to expand bank disclosure laws, requiring financial institutions to clearly state--in real dollars--just how much you'll get back when you deposit money in a certificate of deposit.

Reform is needed for the simplest of reasons, he says. By and large, bank representatives give out inaccurate information when it comes to longer-term yields on certificates of deposit. Millions of senior citizens--the primary customers of long-term CDs--rely on this inaccurate information, and it can end up costing them hundreds--even thousands--of dollars, he says.

Consider Mintz's recent rate-shopping tour in Los Angeles.

He went to three local banks to check CD yields on a $50,000 deposit. He asked all the new-accounts officers the same questions: What's the rate? What's the yield? And what will that pay me if I deposit $50,000 and leave it alone for five years? Two out of three bankers gave him the wrong answer to the final question--and he has doubts about whether they'd be right about the first two answers, if it weren't for the 1991 Truth in Savings Act, which is now under legislative assault.

Notably, there's nothing particularly unique about Los Angeles bankers. Mintz did the same thing near his home in Dallas and in several other cities across the country. In all cases, the result was the same. Bankers were off--often by thousands of dollars.

By and large, the mistakes were innocent. In fact, banks mostly understated their dollars-and-cents returns because they failed to account for compounding of interest, Mintz notes. However, sometimes they overstated the return. One phone-based rate-shopping spree found Citibank overestimating its dollars-and-cents return by $3,000, he says.

Whether understating or overstating, the end result is often the same. Depositors frequently put their money in accounts that don't pay the best return, simply because they were misled by a math-befuddled banker.

Theoretically, thanks to the Truth in Savings Act, consumers can easily compare yields on certificates of deposit by looking for the annual percentage yield, or APY, which combines the interest rate and compounding periods to come up with a single yield. The APY is valuable because it makes it easy to compare different kinds of rates.

However, when you're trying to figure out the actual dollars-and-cents return, the APY may not help. It only provides a simple method of calculating your yield on deposits of precisely one year.

Consumers who want to deposit money for more or less time must be better at math than your average banker to determine precisely how much they'll take home. You can't just multiply a one-year APY by the period during which you'll be saving, because your deposit compounds further--you earn the stated yield on a higher deposit amount after the first year.

The bottom line: A $100,000 five-year certificate of deposit, with a 6% APY, would pay $33,822.56 in interest. Many bankers, however, simply multiply the first year's return--$6,000--by five years and inaccurately inform depositors that they'll earn just $30,000.

Still, even that's a stark improvement over how things were before Truth in Savings passed, experts note. Prior to 1991, banks would advertise simple interest rates and fail to mention that the advertised rate applied to only part of the deposit.

Or they might fail to mention how often interest was paid, which can significantly affect the final yield. In the end, consumers would think they were getting one rate but end up with a yield that was considerably lower.

Truth in Savings stopped those misleading practices by demanding that all banks disclose the annual percentage yield, and specified how this yield had to be calculated. It gave consumers the ability to make apples-to-apples comparisons when shopping for a place to deposit their money, instead of relying on the math skills of whoever answers the phone at their local bank.

However, now in the guise of "regulatory relief," Congress is considering a series of bills that would eliminate the need to disclose the annual percentage yield. Two House bills, HR-1858 and HR-2520, have already been approved by the House Banking Committee. Another, S-650, is awaiting action on the Senate floor.

While the three bills are somewhat different, they would all have the same effect, says Michelle Meier, legislative counsel at Consumers Union in Washington. Either by eliminating the need to disclose the annual percentage yield or by eliminating penalties for failing to disclose the yield, they would put consumers back in the pre-TSA days, when interest rate disclosures meant nothing.

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