What it means
Before the law, institutions advertised interest rates in different ways, which made it hard to compare accounts. Some quoted rates that ignored how often interest was added, and some advertised teaser rates without mentioning fees.
The Act requires a consistent method so that customers can see the true return. The central figure is the annual percentage yield, or APY.
It shows the total interest earned on a deposit over a year, including the effect of compounding, which is earning interest on interest already added. Because compounding is built in, two accounts with the same stated rate but different compounding frequency will have different APYs.
The Act also requires disclosure of the minimum balance needed to open the account or earn the stated rate, the fees that may be charged, and how interest is calculated. Institutions must give this information when an account is opened, in account statements and in advertisements.
Advertising rules are strict as well. If an advert quotes a rate, it must give the APY and the main conditions, and it must not be misleading.
For example, an advert for a rate that applies only to balances above $25,000 has to say so. The law is administered mainly by the Consumer Financial Protection Bureau for banks, and by the National Credit Union Administration for credit unions.
For businesses, the Act matters for treasury teams comparing deposit accounts, and for any company that markets deposit products to customers. The Act does not set interest rates or tell institutions what to pay.
It only requires that terms are stated honestly and in a standard way, leaving the competition on price to the market.
In practice
Real-world examples.
Example
A bank advertises a savings account at 4.8% APY. The advert has to mention any minimum balance and fee that could reduce the return, so customers can compare it with a rival offer.
Example
A small business owner compares two business deposit accounts. One pays a higher rate but charges a $15 monthly fee, and the disclosure helps her see that the other account leaves her with more at the end of the year.
Example
A credit union sends new members a document showing how interest is calculated, the balance required, and the fee for early withdrawal from a one-year certificate of deposit. The document also states whether the rate can change during the term.
Formula
Calculation
APY = (1 + Interest earned / Principal) ^ (365 / Days in term) - 1
A saver deposits $10,000 for a full year of 365 days and earns $510 of interest. APY = (1 + 510 / 10,000) ^ (365 / 365) - 1 = 1.051 - 1 = 0.051, or 5.10%.
A second account pays the same stated rate but compounds more often, and earns $512 on the same $10,000. Its APY is 512 / 10,000 = 5.12%, so the second account is slightly better, which is what the APY figure is designed to show. Without it, a customer comparing only the stated rates might wrongly think the two accounts were the same.Case study
Seen in the real world.
Lakeshore Community Bank is an illustrative, fictional bank that launched a promotional savings account advertised as "5% interest". The compliance officer noticed that the advert did not state the APY or the $5,000 minimum balance needed for the rate.
The officer asked marketing to revise the advert to show the APY of 5.12%, because the 5% rate was compounded monthly, and the minimum balance clearly. The change delayed the campaign by three days and cost about $2,000 in reprinting.
The illustrative lesson is that the cost of compliance was small compared with the risk of enforcement and complaints. Lakeshore now has a standard checklist for deposit advertising, and customers can compare its accounts with others on the same basis. The compliance officer also trains new marketing staff on the checklist each year.
Watch out
Common mistakes.
- Comparing the stated rate of one account with the APY of another, which mixes two different measures.
- Ignoring fees and minimum balances, which can wipe out the interest earned.
- Assuming a high advertised rate applies to every balance, when it may apply only to a particular tier.
Questions
People also ask.
What does the Truth in Savings Act require?
Clear disclosure of rates, APY, fees, balance requirements and other terms for deposit accounts.
What is APY?
It is the yearly return on a deposit including compounding, expressed as a percentage so that accounts can be compared. A higher APY means more interest for the same deposit.
Does it cover loans?
No, loans are covered by the Truth in Lending Act, while this Act covers deposit accounts such as savings, checking and certificates of deposit.
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