NEW YORK — There they go again.
Some banking institutions are faking the amount of interest they're paying on customer deposits. You think you're earning more than is actually the case.
The government is tut-tutting about this deceptive advertising blight. In a 1989 letter to an angry saver in New York, the associate general counsel of the Federal Reserve Board, Oliver Ireland, called ads of this type misleading and a violation of federal rules. Recently, a senior Fed attorney told me that the Fed stops this practice whenever it's spotted -- although, he says, they don't spot it much.
The Fed must need glasses. I've found this deception in several states, and none of the bankers I spoke with believed they were violating any rules.
Here's what's going on:
The banks' expenses are rising fast. They're paying higher premiums into the deposit insurance fund. And many have to raise more capital in order to stay in business. At the same time, a portion of certain deposits must be held as reserves, in no-interest accounts.
One way for banks to pass on these costs to their customers is by reducing interest rates. But for competitive reasons, they'd rather not do this openly, says Gail Liberman of the Bank Rate Monitor. So some have resorted to subterfuge. They're advertising an attractive rate on money-market accounts and interest-paying checking, but not paying that rate on your whole deposit.
Take the Sunburst Bank in Grenada, Miss. It's advertising 5.25 percent on its Super NOW checking accounts. But no interest at all is paid on 13.3 percent of these deposits, says Bill Reed, vice president of operations. Customers' actual rate of interest: only 4.55 percent.
On money-market deposit accounts, Sunburst pays no interest on 1.3 percent of your money. So your stated yield of 5.35 percent shrinks to an actual payment of 5.28 percent. Sunburst advertises only its stated rates, explaining that they're paid on the "investable balance" -- defined as "current balance less floats, less Federal Reserve requirement and FDIC insurance as applicable."
Even if you're the one in 1,000 who understands those words, you might think that the Federal Reserve requires the interest reduction, which is not the case. Furthermore, the ads don't disclose your true return. You do not know you're being clipped.
The same holds true at many other banks. Deposit Guarantee National and Trustmark National, both based in Jackson, Miss., pay no interest on 16 percent of depositors' personal checking ++ (NOW) accounts and 4 percent of their money-market accounts. Neither discloses the net rate in ads. Deposit Guarantee's James Chapman says that "it would be confusing" to customers if they were told what was going on.
Trustmark's checking account is advertised at 5 percent, but after withholding, depositors earn 4.28 percent. The disclosure reads, "The net interest earning balance is the daily collected balance less 16 percent, which represents the Federal Reserve requirement, the cost of FDIC insurance and other costs."
The senior Fed attorney (who wouldn't let his name be used) says that ads are "probably false and misleading" if they state the nominal interest rate without also showing the true interest rate in type just as large.
HomeBanc in Atlanta pays no interest on 12 percent of its checking deposits but makes no reduction on money-market accounts. Interest checking with a stated rate of 5.5 percent actually earns 4.64 percent.
At Barnett Bank, based in Jacksonville, Fla., NOW accounts at the headquarters branch pay a nominal 4 percent but only 3.52 percent after the reduction. The nominal rate was posted at the bank but then taken down, says Barnett's Bob Stickler, because some employees thought it deceptive. Now, no rate is posted. Competitively, "we would hurt ourself" by showing the true rate, Stickler says, because other banks don't.
Moral: Always ask your bank if it's paying interest on all of your deposit and, if not, what your true rate is. Report any misleading ads to the Legal Division, Board of Governors, Federal Reserve System, Washington, D.C. 20551. The Fed says it will check every one of your complaints.