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PERSONAL FINANCE / KATHY M. KRISTOF

Consumer Groups Protest Provisions in Banking Bill

September 14, 1996|Kathy M. Kristof

Consistent interest rate data, including the standard annual percentage yield (APY) figures used by banks, would be threatened by legislation rapidly moving through Congress, consumer advocates say.

A last-ditch effort to finish a banking bill before the winter recess has revived a long-threatened move to pull the teeth out of the Truth in Savings Act, primarily by restricting the ability of consumers to sue banks.

The 1992 act requires that banks disclose the fees they charge and the rates they pay to consumers in a standard fashion. Before that act's passage, somewhere between 10% and 20% of the nation's banks participated in at least one of a list of misleading tactics that can confuse and cost consumers money, industry experts acknowledge.

Consumers Union, publisher of Consumer Reports magazine, estimates that Americans would lose between $300 million and $600 million each year if banks are not strongly discouraged from such practices.

Bankers say there is no such move afoot. The bill being proposed would not change the disclosure requirements mandated by by the Truth in Savings Act.

"This is meant to protect lenders from being subjected to costly class-action suits that result from innocuous, minor, technical mistakes made under a highly complicated regulation. Nothing more," says Charlotte Birch, spokeswoman for the American Bankers Assn. in Washington.

However, Consumers Union is taking the matter very seriously. "The threat is all too real because the banks are demanding this consumer protection rollback in exchange for bearing some of the cost of the S&L cleanup," says Michelle Meier, counsel for government affairs at the group.

What's the truth?

Last week, an amendment was tacked on to a banking bill aimed at replenishing funds to pay for the savings and loan bailout. The bill would require that banks pay part of the costs of the cleanup, which infuriates bankers, who argue they'd be forced to bail out their competitors, and it would provide some "regulatory relief" in exchange.

Part of that regulatory relief would deal with Truth in Savings.

Technically, the bill would not change the substantive disclosure requirements of Truth in Savings, which are:

* Restrictions prohibiting banks from advertising that a product, such as a checking or savings account, is free when there are significant strings attached.

* Requirements forcing banks to disclose all fees relating to their deposit accounts.

* And, perhaps most important, mandatory use of a uniform method for calculating and advertising interest rates paid on deposits.

Before the law was passed, somewhere between 10% and 20% of the nation's banks used one of a number of interest rate calculations that allowed them to overstate the interest rates they actually paid on deposits, according to a Federal Reserve Board study. The most popular of these was something called the "investible balance" method.

The investible balance calculation is somewhat complex, but what it did was allow banks to pay interest on only a portion of the consumer's deposit. Another portion was deemed "uninvestible" because banks are required to maintain reserves for loan losses. (Banks are required to maintain financial reserves so they don't lend out or reinvest every dollar deposited. But the vast majority of banks consider reserves an ordinary cost of doing business, and that is factored in to the interest rate they decide to pay on deposits before those rates are advertised.)

For instance, a bank that used the investible balance method might advertise a 6% rate but pay that rate on only 95% of a customer's deposit. A consumer, unaware of how investible balances work, might choose that account over a 5.9% account offered at another bank and find out too late that his or her 6% deposit paid only $5,700 in interest on a $100,000 deposit, whereas the 5.9% account would have paid $5,900.

When Truth in Savings was enacted, this deceptive practice was banned. All banks are now required to calculate interest using a standard method called the annual percentage yield, or APY, that allows side-by-side, apples-to-apples comparisons.

The proposed legislation wouldn't change that. What would be changed is that the civil penalties for violating Truth in Savings would be repealed.

Now if a bank violates the law, consumers have the right to sue to recoup lost interest, plus there is a statutory penalty ranging from $100 to $1,000. Under the proposed law, consumers couldn't sue. They would have to complain to bank regulators--and get these regulators to respond--in order to get their money back.

However, the bill would not give already overburdened bank regulators any additional money to launch consumer affairs offices to handle depositor questions or complaints regarding Truth in Savings. It would not authorize money for consumer education that would tell people how the new rules would work or who could handle their complaints.

"We care about the civil penalties because we want people to get their money back," Consumers Union's Meier says. "But we also think the threat of lawsuits helps keep banks honest."

Indeed, it is just a threat. Birch says no suits have actually been filed under Truth in Savings.

If you feel strongly about the proposed changes, call or write your representatives in the House and Senate. Either can be reached through the U.S. Capitol switchboard at (202) 224-3121. The addresses: U.S. House of Representatives, Washington, DC 20515; U.S. Senate, Washington, DC 20510.

Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kathy.kristof@latimes.com on the Internet.

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