Content: The Account Opening Disclosure

An account with a “variable rate” is any account for which the institution does not commit to give 30-days’ advance written notice of a decrease in the interest rate. In other words, you have a fixed-rate account if you include language in your account agreement saying you will give the depositor 30 days’ advance written notice of interest rate decreases. Otherwise, the account is “variable rate.” [12 CFR 1030.2(v); 12 CFR 707.2(z)] (In addition, the Regulation DD and Part 707 Commentaries list as a specific example of a variable-rate account a Certificate of Deposit that permits one or more rate adjustments prior to maturity at the consumer’s option. [Commentary, 12 CFR 1030.2(v)-1; Commentary, 12 CFR 707.2(z)-1])

If the account is variable rate, you calculate the APY by using the formulas specified above, but you assume that the first interest rate that will be in effect on the account will apply for the entire term of the account (again, assuming a term of one year for accounts with no stated term). [12 CFR 1030, Appendix A, Part I.C.] For example, if, on the day the account is opened, you are paying 4.56 percent on the type of account the consumer or member opened, you calculate the interest component of the APY formula by assuming that you will pay 4.56 percent on the account for the entire term.

Credit unions paying dividends on non-term share accounts should, as described above, select the dividend rate as of the last dividend declaration date, or a prospective rate, or both, and assume the selected rate or rates will be in effect for the entire term. The resulting APY figure may be somewhat misleading since the interest rate will probably fluctuate and the disclosed yield is probably not what the consumer or member will earn on the account. But the disclosures describing the variable-rate feature (which we will describe later) are intended to educate the consumer or member regarding the fact that the actual yield may be different because of rate fluctuations.

Many variable-rate accounts are offered with “premium rates” or “teaser rates.” These are interest rates that apply for a limited period of time after the account is opened and are higher than what the institution is paying on existing accounts of the same type. For example, an institution may induce a consumer or member to open an account by offering a rate of 7 percent for the first month the account is opened, after which the account will earn what existing accounts of the same type earn. The 7 percent figure, let’s say, is one percentage point higher than what these existing accounts are currently earning.

Regulation DD and Part 707 say the APY on these accounts should be calculated in the same way “stepped-rate” APYs are calculated, as described below. [12 CFR 1030, Appendix A, Part I.C.] You calculate the interest component assuming the premium rate will apply for the scheduled period and the rate that would have applied, except but for the premium rate will apply for the remainder of the term. In our example, you would calculate the interest component of the APY formula by assuming a 7 percent rate applies for the first month, and a 6 percent figure applies for the remaining term.

A “stepped-rate” account is one with two or more rates that apply in succeeding time periods where the rates are known at the time the account is opened. [12 CFR 1030.2(s); 12 CFR 707.2(w)] For example, an account has a stepped rate if the institution agrees to pay 4 percent per year for the first three months, 5 percent per year for the next three months, and 6 percent per year for the remaining six months of a 12-month time account. According to the Regulation DD and Part 707 Commentaries, a type of account that is not a stepped-rate account, and is instead a variable-rate account, is a Certificate of Deposit permitting one or more rate adjustments prior to maturity at the consumer’s option. [Commentary, 12 CFR 1030.2(v)-1; Commentary, 12 CFR 707.2(z)-1]

When calculating the APY for a stepped-rate account, you simply calculate the interest component of the APY formula assuming that each interest rate will be in effect for the period of time your contract says it will. [12 CFR 1030, Appendix A, Part I.B.] In our example, you plug into the APY formula the amount of interest the account would earn when you pay 4 percent per year for the first three months, 5 percent per year for the next three months, and 6 percent per year for the remaining six months.

So, although you will actually apply more than one interest rate, and you know what those interest rates are, you will disclose only one APY figure.

A tiered-rate account is one to which the institution applies different interest rates depending on the level of the principal balance in the account. [12 CFR 1030.2(t); 12 CFR 707.2(y)] For example, an institution might apply a 4 percent rate to balances less than or equal to $1,500; 5 percent to balances above $1,500, but less than or equal to $2,500; and 6 percent to balances above $2,500. The rule is that you must disclose an APY (or a range of APYs) for each tier.

There are two ways an institution can operate a tiered-rate account. In the first, which Regulation DD and Part 707 refer to as “Tiering Method A,” the institution pays a single rate of interest on the entire principal balance; the particular rate is determined by looking at the principal balance. [12 CFR 1030, Appendix A, Part I.D.] For example, using the numbers from the previous paragraph’s example, if a customer has a balance of $4,000, the institution would apply a 6 percent rate to the entire $4,000 balance.

In the second method, called “Tiering Method B,” the institution pays interest at a particular rate only on the portion of the balance that is within the tier associated with the rate. [12 CFR 1030, Appendix A, Part I.D.] So, in our example, a person with a balance of $4,000 would earn interest at 6 percent on $1,500 (which is the portion of the balance in the highest tier); 5 percent on $1,000 (which is the portion of the balance in the middle tier); and 4 percent on $1,500 (which is the portion of the balance in the lowest tier).

If you use Tiering Method A, you must show a single APY for each tier. [12 CFR 1030, Appendix A, Part I.D.] You calculate the interest component of the APY formula for each tier by assuming a balance within each tier and applying the applicable interest rate. For example, using our figures from above, you might assume a balance of $1,000 to compute the APY for the first tier, a balance of $2,000 to compute the APY for the second tier, and a balance of $3,000 to compute the APY for the third tier. You would have to disclose the APY for each tier in conjunction with the appropriate tier.

Model language for disclosing the APY using Tiering Method A can be found in Appendix B of both Regulation DD and Part 707.

If you use Tiering Method B, you must show a range of APYs for each tier. [12 CFR 1030, Appendix A, Part I.D.] This is because the actual yield earned by a consumer or member will be less if the balance is at the low end of a particular tier than if it is at the high end. Using the tiers we specified above, if a consumer or member maintains a balance of $1,600, the annual percentage yield will be less than if the consumer or member had maintained a balance of $2,400—even though both balances are within the same tier. This is because a balance of $1,600 has only $100 earning interest at the 5 percent level (the balance exceeds the $1,500 tier cutoff by only $100), but a balance of $2,400 has $900 earning interest at 5 percent (the balance exceeds the $1,500 tier cutoff by $900).

Institutions using Tiering Method B must assume, when calculating the interest component of the APY formula, a principal balance of the lowest and highest amounts possible in each tier. They must then disclose the two resulting APYs in conjunction with the appropriate tier. [12 CFR 1030, Appendix A, Part I.D.] In our example above, the institution may assume any balance for the first tier. (Only one APY is required for the lowest tier, since the APY would be the same regardless of the balance maintained within the first tier.) It would assume balances of $1,500.01 and $2,500 for the second tier, and a balance of $2,500.01 and some higher figure for the third tier. (If the account has a maximum balance, you must use that amount as the higher figure in the highest tier; if the account has no maximum, you may use any amount in the tier. [12 CFR 1030, Appendix A, Part I.D.]) The final disclosure of APYs would look something like this:

This special rule applies only if the account: (1) is a time or term share account, (2) has a stated maturity greater than one year, (3) does not compound interest on an annual or more frequent basis, and (4) requires the consumer to withdraw interest at least annually. Not long after Regulation DD was issued, someone noticed that applying the usual APY formula to accounts that met these conditions resulted in an APY that was less than the annual interest rate. In January of 1995, the Federal Reserve Board amended Regulation DD to say that the APY may be disclosed as equal to the interest rate. [12 CFR 1030, Appendix A, Part I.E.] The FRB provided the following example:

If an institution offers a $1,000, two-year Certificate of Deposit that does not compound and that pays out interest semi-annually solely by check or transfer, at a 6 percent interest rate the annual percentage yield may be disclosed as 6 percent.

Some of these accounts may also be stepped-rate accounts (as defined two sections above). In that case, the institution may disclose the APY as equal to the composite annual interest rate. The composite-rate calculation is done by multiplying each interest rate by the number of days it will be in effect, adding these figures together, and then dividing by the total number of days in the term. [12 CFR 1030, Appendix A, Part I.E.]

The second piece of rate information your disclosure must contain is the “interest rate,” using that term. [12 CFR 1030.4(b)(1)(i)] As with the annual percentage yield, it is not enough to simply disclose the correct rate figure; you must disclose it in conjunction with the correct term—in this case, “interest rate.”

Credit unions paying dividends (as opposed to interest) should disclose a “dividend rate” using that term. [12 CFR 707.4(b)(1)(i)] Furthermore, credit unions that pay dividends cannot legally commit to a dividend rate on accounts other than term share accounts. So, if you pay dividends and are making disclosures for an account other than a term share account, you have three options: (1) disclose a dividend rate that was paid as of the last dividend declaration date, (2) disclose a prospective dividend rate, or (3) disclose both—a rate as of the last dividend declaration date and a prospective rate. Whichever option you choose, the rate or rates you disclose should be labeled as either a rate as of the last dividend declaration date or as a prospective rate. [12 CFR 707.4(b)(1)(i)(B)])

The “interest rate” is the annual rate of interest paid on an account. It does not reflect compounding. [12 CFR 1030.2(o); “dividend rate” defined at 12 CFR 707.2(l)] Remember—it is an annual rate. Even though, in practice, you may calculate interest by applying a daily, monthly, or quarterly rate, you must disclose the “interest rate” as an annual figure. The Regulation DD and Part 707 Commentaries say you may, in addition to disclosing the annual interest rate, disclose the corresponding periodic rate. [Commentary, 12 CFR 1030.4(b)(1)(i)-1] The number you disclose must be rounded to the nearest one-hundredth of one percentage point. It must be expressed to at least two decimal places. (In the account opening disclosures, the interest rate may be expressed to more than two decimal places.) [12 CFR 1030.3(f)(1)]

As with the annual percentage yield, the disclosure of the interest rate gets more complicated in the case of a variable-rate account, a stepped-rate account, and a tiered-rate account. (See the text in the previous section for definitions of these terms.) If the account is variable rate, you must disclose the interest rate that applies at the time the account is opened. [12 CFR 1030, Appendix A, Part I.C.] (Credit unions paying dividends on non-term share accounts would disclose the rate as of the last dividend declaration date, a prospective rate, or both, just as if the account were not variable rate.) Although that figure may be misleading because it will probably apply for only a short time, the variable-rate disclosures we will describe later will alert the consumer to that fact. If the account has a “premium” or “teaser” rate (an introductory and temporary rate which is higher than the rate earned by existing accounts of the same type), you must disclose the premium rate, the period of time it will be in effect, and the interest rate that would have applied but for the application of the premium rate. [Commentary, 12 CFR 1030.4(b)(1)(i)-4]

If the account is stepped rate, you must disclose each interest rate that will apply to the account and the time periods during which each rate will apply. [Commentary, 12 CFR 1030.4(b)(1)(i)-4] For example, if you will apply 4 percent for the first three months and 5 percent for the next nine months on a 12-month time account, you must disclose those rates and time periods.

If the account is tiered rate, you must disclose the high and low balances of each tier, together with the interest rate that will apply to each tier. [Commentary, 12 CFR 1030.4(b)(1)(i)-3] For example, your disclosure might look like this using Tiering Method A:

(Again, the APYs shown in this example are for illustrative purposes only and were not calculated under Regulation DD or Part 707 formulas. Institutions would choose between the daily balance and average daily balance methods.)

A disclosure for Tiering Method B might look like this:

(As before, the APYs shown in this example are for illustrative purposes only and were not calculated under Regulation DD or Part 707 formulas. Institutions would choose between the daily balance and average daily balance methods.)

Variable-rate account disclosures

An account has a “variable rate” for purposes of TISA if the institution does not commit to give the consumer or member 30-days’ notice in writing of any interest rate decreases. [12 CFR 1030.2(v); 12 CFR 707.2(z)] If an account has a variable rate, you must disclose: (1) the fact that the interest rate and annual percentage yield may change; (2) how the interest rate is determined; (3) the frequency with which the interest rate may change; and (4) any limitation on the amount the interest rate may change. [12 CFR 1030.4(b)(1)(ii)(A)-(D)]

[12 CFR 1030, Appendix B, Part B-1(a)]

(Again, Part 707 model language is slightly different, but says essentially the same thing.)

Disclosure of minimum balance requirements and computation

TISA allows only two methods for calculating interest. [12 CFR 1030.7(a)(1)] The first is the “daily balance method.” Under this method, you apply a daily rate (one-365th of your annual interest rate, or one-366th in leap years) to each day’s principal balance in the account. [12 CFR 1030.2(i); 12 CFR 707.2(h)]

The second method is the “average daily balance method.” Under this method, you apply a periodic rate (such as a monthly or quarterly rate—one-twelfth or one-fourth of your annual rate) to the average daily balance in the account for the period (one month if you apply a monthly rate, one quarter if you apply a quarterly rate, etc.). The average daily balance is computed by adding together all of the daily balances in the period and dividing by the number of days in the period. [12 CFR 1030.2(d)]

We look at these methods in more detail in the chapter in the second part of this manual that has to do with ongoing duties under TISA. Right now, we are interested in the fact that your initial disclosure must have an explanation of whichever of these methods you choose to use.

The third component of balance information is a disclosure of when interest begins to accrue on noncash deposits (e.g., checks). [12 CFR 1030.4(b)(3)(iii)] This is considered “balance information” since it tells the consumer or member how soon after deposit the institution begins to count a check deposit as part of the principal balance for interest-computation purposes.

TISA requires that you begin to accrue interest on a deposit no later than when you are required to do so under the Expedited Funds Availability Act (EFAA). [12 CFR 1030.7(c)] The EFAA and its implementing regulation, Regulation CC, require institutions (other than some credit unions) to begin to accrue interest on a deposit to a transaction account no later than when the institution itself receives credit on the item. [12 CFR 229.14(a)] The effect of TISA imposing the same requirement is that the requirement now applies to a broader range of accounts. EFAA generally only applies to transaction accounts; TISA applies to all types of deposit accounts held by consumers or members. (See the section above, “Institutions and Accounts to Which TISA Applies.”)

Our understanding is that most institutions either begin to accrue interest on a check deposit immediately (on the day it is deposited) or under the time frame imposed by EFAA, but not at some in-between moment. Regulation DD supplies model clauses for both of these methods.

Interest begins to accrue no later than the business day we receive credit for the deposit of noncash items—for example, checks. (Maximum EFAA time frame.)

Interest begins to accrue on the business day you deposit noncash items—for example, checks.

[12 CFR 1030, Appendix B, Part B-1(e)]

(Two notes to credit unions: First, the Part 707 model language is, again, slightly different, but says essentially the same thing. Second, we noted above that the EFAA requirement did not apply to some credit unions. Specifically, the EFAA allows credit unions that offered “rollback” or “in-by-the-tenth” accounts to continue to offer them, even though interest or dividends on some deposits to such accounts would not begin to accrue as quickly as required on other accounts. However, the NCUA, in issuing the final Part 707 regulation, determined that “rollback” accounts were contrary to the requirements of TISA because they have a “low balance” feature. Therefore, although the EFAA has an allowance for these accounts, the NCUA has prohibited them. [Commentary, 12 CFR 707.7(a)-1.i.])

1. The maturity date

Your disclosure for a time or term share account must state the maturity date. [12 CFR 1030.4(b)(6)(i)] If you give the disclosure in response to a request, you only need to show the term of the account (e.g., six months or 180 days) since you will not know an exact maturity date. [12 CFR 1030.4(a)(2)(ii)(B)]

If the time account may be “redeemed” at the institution’s option (i.e., the institution may “call” or pay off the account early), the disclosure must state the date or circumstance under which the institution may redeem. [Commentary, 12 CFR 1030.4(b)(6)(i)-1]

Early-withdrawal penalty

You must give: (1) a statement that a penalty will or may be imposed for early withdrawal, (2) an explanation of how the penalty is calculated, and (3) the conditions for assessing the penalty. [12 CFR 1030.4(b)(6)(ii)]

According to the model clauses, the statement may simply read: “We [will/may] impose a penalty if you withdraw [any/all] of the [deposited funds/principal] before the maturity date.” [12 CFR 1030, Appendix B, Part B-1(h)(ii)]

The explanation of how the penalty is calculated depends, of course, on the type of penalty you will assess. If you assess a flat fee for early withdrawals, you can simply disclose the dollar amount of the fee. If your early-withdrawal penalty is the interest the time account would earn over a given period of time, you may simply say that: “The fee imposed will equal _______ days/week[s]/month[s] of interest.” [12 CFR 1030, Appendix B, Part B-1(h)(ii)]

Although Regulation DD and Part 707 require that you disclose early-withdrawal penalties that you may or will impose, the regulations do not require that you permit early withdrawals. Some institutions simply do not permit early withdrawals, even if the consumer or member would be willing to suffer a penalty. TISA does not require these institutions to change. It merely requires those institutions that do allow early withdrawals that may or will be subject to a penalty to disclose the penalty.

If an early withdrawal would cause you to “reclaim” a bonus paid on the account, you must disclose that fact as an early-withdrawal penalty and the circumstances under which you would reclaim the bonus. [Commentary, 12 CFR 1030.4(b)(6)(ii)-2.iii.]

The conditions for assessing the penalty, the third element of the early-withdrawal penalty disclosure, is simply a statement that the penalty will be assessed if the consumer or member makes an early withdrawal. [12 CFR 1030.4(b)(6)(ii)] See the model language quoted above.

The first statement required by this rule is necessary only if interest compounds and the consumer or member may withdraw interest before maturity. [12 CFR 1030.4(b)(6)(iii)] Remember, the annual percentage yield you disclose takes into account the effects of compounding. If the consumer or member withdraws interest that would otherwise compound, the consumer or member will actually receive a smaller yield than you disclosed. This statement is intended to warn the consumer or member of that fact.

The first statement is not needed if you require the consumer or member to withdraw interest as it is paid (or if you mail an interest check). Since compounding will not occur, the effects of compounding will not be reflected in your annual percentage yield calculation any way.

This first statement is also not required if you prohibit the consumer or member from withdrawing interest early (even if you make the usual exceptions in the case of the death or incapacity of the depositor, etc.). Since the consumer or member cannot withdraw interest early, he or she cannot lose the effect of compounding and the statement would not be relevant.

The model language for this disclosure is simply: “The annual percentage yield assumes interest will remain on deposit until maturity. A withdrawal will reduce earnings.” [12 CFR 1030, Appendix B, Part B-1(h)(iii)] Again, the Part 707 model language is slightly different, but says essentially the same thing.

The second statement required by this rule is necessary only if the account: (1) does not compound interest on an annual or more frequent basis, (2) has a stated maturity greater than one year, and (3) requires interest payouts at least annually. [12 CFR 1030.4(b)(6)(iii)] If these conditions are met, the institution can disclose the APY as equal to the annual interest rate. [12 CFR 1030, Appendix A, Part I.E.] (The normal APY formula would produce an APY that is less than the annual interest rate.) If the institution discloses the APY as equal to the annual interest rate, the disclosure must also state that interest cannot remain on deposit and that payout of interest is mandatory. The model language reads: “This account requires the distribution of interest [dividends] and does not allow interest [dividends] to remain in the account.” [12 CFR 1030, Appendix B, Part B-1(h)(v); 12 CFR 707, Appendix B, Part B-1(I)(V)]

This rule requires that you disclose whether or not the time or term share account will “automatically” renew. [12 CFR 1030.4(b)(6)(iv)] To “automatically” renew means to renew without any affirmative action on the part of the consumer or member; in other words, the account will renew for another term—unless the consumer or member notifies you that it should not.

You must disclose whether or not the account will renew automatically. If it will, you must also disclose whether or not you provide a “grace period.” [12 CFR 1030.4(b)(6)(iv)] A “grace period” is a period of time after the maturity of the account during which the consumer or member can withdraw the funds without incurring a penalty. [12 CFR 1030.2(m); 12 CFR 707.2(o)] (Without a grace period, the consumer or member would have to notify you before maturity that the account should not renew or cash in the account on the maturity date. Any attempt to withdraw funds after the maturity date would be subject to an early-withdrawal penalty.) If you provide a grace period, you must also disclose its length. [12 CFR 1030.4(b)(6)(iv)] (You should also know that other federal regulations prohibit grace periods longer than ten days. [12 CFR 204.2(c)(1)(i), fn 1(f)])

If the time or term share account is not automatically renewable, you must disclose whether interest will be paid after maturity if the consumer or member does not renew the account. [12 CFR 1030.4(b)(6)(iv)]

Following are the Regulation DD model clauses for these disclosures:

This account will automatically renew at maturity. You will have [______ calendar/business] days after the maturity date to withdraw funds without penalty.

This account will automatically renew at maturity. There is no grace period following the maturity of this account to withdraw funds without penalty.

This account will not renew automatically at maturity. If you do not renew the account, your deposit will be placed in [an interest-bearing/a noninterest-bearing] account.