Regulation DD and Change in Terms

Issue/Inquiry

The Bank has purchased another financial institution. It will be converting the deposit products of that institution to its own.  The changes will apply to nine products and consist of the following:

• A $25 maintenance fee if the balance falls below a certain amount (old product had either no fee or a $10 fee)
• Multi-tiered interest (old product had one tier on five of the products)
• An increase in the minimum balance required to earn interest on four of the products

A letter will be sent 30 days prior to the change, providing customers with the new Truth-in-Savings Act (“TISA”) terms on the account.  If the letter describes in detail what is changing, does the Bank need to provide a TISA disclosure with the letter?  If the Bank begins only offering the new products to new customers during the 30-day period, does it need to update its website product pages on the first day it offers the products to new customers?

Response Summary

The changes can go into effect immediately for new accounts, provided that they are reflected in the account opening disclosures. For existing accounts, advanced notice must be given before the changes go into effect. The proposed letter will be an appropriate method of doing so. The website should be revised to reflect the changed terms, with a footnote indicating the effective date of the changes for existing accounts.

Response Detail

For new accounts, a financial institution can apply the changed terms immediately, provided that they are reflected in the new account disclosures, as required by Regulation DD:

• Annual percentage yield and interest rate
• For variable rate accounts:

• • The fact that the interest rate and annual percentage yield may change
  • How the interest rate is determined
  • The frequency with which the interest rate may change
  • Any limitation on the amount the interest rate may change

• The frequency with which interest is compounded and credited, and, if consumers will forfeit interest if they close the account before accrued interest is credited, a statement that interest will not be paid in such cases;
• Any minimum balance required to open the account, avoid the imposition of a fee, or obtain the annual percentage yield disclosed;
• An explanation of the balance computation method used to calculate interest on the account and a statement of when interest begins to accrue on noncash deposits;
• The amount of any fee that may be imposed in connection with the account (or an explanation of how the fee will be determined) and the conditions under which the fee may be imposed;
• Any limitations on the number or dollar amount of withdrawals or deposits
• For time accounts:

• • The maturity date
  • A statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment;
  • Effect of withdrawal of interest prior to maturity
  • A statement regarding whether or not the account will renew automatically at maturity, whether there is a grace period, if it will, or whether interest will be paid after maturity, if it will not, and the customer does not renew the account

• The amount or type of any bonus, when the bonus will be provided, and any minimum balance and time requirements to obtain the bonus. 12 CFR §1030.4(b).

For existing accounts, advanced notice must be given to affected consumers regarding any changes in the terms that were disclosed at account opening that may reduce the annual percentage yield or adversely affect the consumer. The notice shall indicate the effective date of the change, and be mailed or delivered at least 30 calendar days before that date. 12 CFR §1030.5(a).

The Change in Term notice may be provided with or on the periodic statement or in another mailing. If a financial institution provides notice through revised account disclosures, the changed term must be highlighted in some manner. Official Interpretations, 1030.5(a)(1) – 1.

Prior notice is not required for:

• Changes in the interest rate corresponding to changes in the annual percentage yield for variable-rate accounts
• Changes in fees assessed for check printing
• Changes in any term for time accounts with maturities of one month or less. 12 CFR §1030.5(a)(2).

In this case, the imposition of a maintenance fee and an increase in the minimum balance required to earn interest will change the terms that were disclosed when the account was opened and adversely affect consumer accountholders. Therefore, such changes can go into effect for existing accounts only after advance notice is given to the consumers.

Whether the addition of tiers will reduce the annual percentage yield is a question to be determined by the Bank. However, given that such tiers were required to be disclosed in the account opening disclosures and their addition will make the application of the rate of interest to the amount on deposits more complex, it should be regarded as having an adverse effect on the consumer and, thus, advance notice must be provided before it goes into effect.

The proposed letter describing the changes will be appropriate; a revised disclosure is only an optional method for providing advance notice, and is not required.

As noted, the changed terms can go into effect for new accounts immediately, provided that they are reflected in the TISA account opening disclosures.

The Bank should also revise its website to reflect the change in terms, with an asterisk referring to a footnote that will indicate the effective date of the changes for existing accounts.

This entry was posted on Monday, July 2nd, 2018 at 6:00 am.