November 5, 1997
Bob Wilson, Senior Vice President
Mississippi Credit Union System
P.O. Box 9575
Jackson, MS 39286
Dear Mr. Wilson:
You ask whether your annual percentage yield (APY) calculations
on noncompounded share certificates with a maturity of more than
one year are correct. Yes, your APY calculations are correct.
On noncompounded share certificate accounts with a maturity of
more than one year, the APY is less than the stated dividend rate.
However, NCUA will not take exception to credit unions disclosing
an APY equal to the dividend rate for noncompounding certificate
accounts with maturities greater than one year that require interest
distributions at least annually.
BACKGROUND
You provided several correct examples of APY calculations, using
calculations prescribed by the Federal Reserve Board, for noncompounding
share certificates with a maturity of more than one year where
the result is that the APY is less than the declared rate: 5-year
share certificate, dividend rate 5.75%, APY 5.18%; 3-year share
certificate, dividend rate 5.60%, APY 5.31%; and 18-month share
certificate, dividend rate 5.40%, APY 5.33%.
DISCUSSION
The Truth in Savings Act, 12 U.S.C. ยงยง 4301-4313, requires
credit unions to provide disclosures about their share and deposit
accounts, including an APY on dividend- and interest-bearing accounts
calculated under a prescribed method. The APY is the primary
uniform measurement for consumer comparison shopping among bank,
thrift, and credit union share and deposit accounts. The APY
measures the total amount of dividends a credit union pays on
an account based on the dividend rate and the frequency of compounding.
12 C.F.R. Part 707, App. B. The APY is expressed as an annualized
rate, based on a 365-day year. For multi-year share certificate
accounts that are noncompounding, the APY formula produces an
APY lower than the stated dividend or interest rate.
In order to address this situation, the Federal Reserve Board
(FRB) issued the attached interim rule that permits banks and
thrifts subject to the FRB's Regulation DD on Truth
in Savings to disclose an APY equal to the contract interest rate
for certificate accounts with maturities greater than one year
that do not compound, but require interest distributions at least
annually. 60 Fed. Reg. 5128 (1995). The FRB interim rule, which
became effective on January 18, 1995, requires institutions that
use this exception to disclose to customers in account disclosures
and advertising that interest cannot remain on deposit and that
the payout of interest is mandatory. Accounts that prohibit the
withdrawal of interest or that permit, but do not require, the
withdrawal of interest are not affected. The FRB adopted the
interim rule to limit any consumer confusion and to allow more
effective comparison shopping by consumers. The FRB has not yet
made this interim rule final, although it remains effective for
banks and thrifts.
NCUA's Truth in Savings rules must be substantially similar to
the FRB's Truth in Savings rules. 12 U.S.C. 4311(b). NCUA staff
has been waiting for the FRB to finalize the interim rule before
bringing a similar proposal to the NCUA Board for consideration.
In the meantime, NCUA supervision staff need not take exception
to credit unions with share certificates that disclose an APY
as being equal to the dividend rates for noncompounding multi-year
share certificate accounts that require interest distributions
at least annually. If a credit union advertises the dividend
rate and APY as being the same for these accounts, it should also
give the other disclosures required by the FRB's interim rule.
This exception is a very narrow one. When it is not available,
NCUA requires credit unions to disclose the accurate APY calculation
properly, which is lower than the stated rate for noncompounding
certificates with maturities for more than one year. Examiners
will likely bring this exception, when it exists, to the attention
of the appropriate credit union officials for their corrective
action.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MSC:sg
SSIC 3253
97-0916
Enclosure
cc: Region III