New York -- Once more, dear friends, a report from the front, where the battle for honest interest-rate disclosure is being waged.
I'm a hardened correspondent, having covered this so-called "truth-in-savings" fight for nearly 20 years. Sometimes the consumers' side has gained ground, but mostly not. Savers still can be easily fooled as to how much they're earning on their accounts.
But a new low in slippery evasion is now catching fire all over the country -- and may provide the firepower needed to push a truth-in-savings bill over the top. Such a bill has just been crafted by Representative Esteban E. Torres, D-Calif., with important amendments from Representative Jim Slattery, D-Kan. It should
come up for debate in Congress this fall.
The evasion makes use of a ploy known as the "investable balance." A bank using this trick might announce that it's paying 5 percent on checking accounts. You'd naturally assume that you'd earn $50 for every $1,000 on deposit. You'd be wrong. Instead of paying interest on the full $1,000, the bank might be paying on only 84 percent of your money, or $840. So you're actually earning a net of $42, or 4.2 percent.
That's perfectly legal, as long as the method of figuring interest is disclosed. But the law requires only a footnote that says, in effect, "interest paid on the investable balance." If you ask what that means, the bank has to tell you how the investable balance is figured.
But the law does not require the bank to calculate your net interest rate. It has to say "5 percent on your investable balance," but it doesn't have to say, "That means a net rate of 4.2 percent."
In reporting this column, I found that most banks will disclose the real net rate, if asked. But some would not. Furthermore, some banks aren't even disclosing, properly, what "investable balance" means.
Take C&S/Sovran Bank, for example, which is based in the Southeast. A month ago, I called Sovran's main branch in Norfolk, Va., and asked what it paid on its money-market and checking accounts. The customer service person quoted the rates without disclosing that they were paid on only 88 percent of your money. That's against the rules.
When I told Mike Smith, the bank's vice president of corporate communications, about the infraction, he said he would talk to the branch manager. I called the branch again later and was indeed told that interest is paid on the investable balance, but the customer service person was inaccurate about it. He still didn't explain that only 88 percent of my deposit would earn interest. I suspect that the personnel of other banks are just as badly informed.
And just try asking C&S/Sovran for the true net rate that you will earn on your deposit. The bank won't tell you. "We are disclosing what federal and state law requires," Mr. Smith says. You have to figure out the net rate yourself.
If Mr. Torres' truth-in-saving bill passes, however, these evasions will be illegal. The bill would, among other things:
* Require banks to pay the stated interest rate on your full deposit. If the bank can afford to pay only 4.2 percent instead of 5 percent, it has to tell you so. It can't pretend to pay 5 percent while actually paying less.
* Require banks to figure the annual percentage yield on savings in a
uniform way. That would let you compare one bank with another to see which is really paying more. Today, two banks can advertise "5 percent," yet one might pay significantly more than the other.
The Torres proposal isn't perfect, says the high priest of interest-rate disclosure, Richard Morse, professor emeritus of Kansas State University. Among Mr. Torres' stated purposes is to make it possible for consumers to verify the accuracy of their interest payments. That's a wonderful goal; consumers could then police their own accounts. But as the bill now stands, not enough information will be disclosed for you to make an exact calculation, Mr. Morse says.
Nevertheless, the Torres bill is by far the best that consumers have been offered in years.