When banks and thrifts across America fling open their doors this morning, they will do it more candidly, more sincerely, more honestly then ever before. They will usher in an era of disclosure and user-friendliness not seen in this country since . . . well, not seen in this country.
No more hidden fees. No more word games with interest rates. No more cleverly worded ads that say just enough, but hint at so much more.
Today marks the start of Truth in Savings, the sequel to the 24-year-old Truth in Lending law. It requires banks and thrifts to disclose -- in clear language -- a wide range of information about every deposit account they offer to consumers. Credit unions probably will have to comply within a year.
Whether consumers will want or read all this information is another issue. The American Bankers Association, in a statement last week, bristled that the new law "again demonstrates Congress' penchant for swatting flies with sledgehammers."
Small banks in particular complain about the costs of complying. And many bankers bemoan that this federally mandated ray of sunshine won't illuminate the products and advertisements of the banks' toughest opponents.
"I don't see the same standards being applied to the insurance industry, or the brokerage industry," says Michael Macielag, president of Chesapeake Bank & Trust Co. in Chestertown. "Those are our competitors."
There is a move afoot in Congress to apply more consumer-oriented laws to nondepository institutions, such as mutual fund and mortgage companies. For now, though, customers will have to content themselves with the flood of information due to arrive from their banks.
The law requires banks and thrifts to tell depositors about any and all fees for an account, minimum balance requirements, exactly how much their money will earn over time (using a new, standard calculation), when their certificates of deposit are about to come due, and when they plan to change the rates on their accounts.
"This was specifically because of all the new products that have been around in the last decade," says Nancy Alcalde, a staffer for Rep. Esteban E. Torres, D-Calif., who sponsored the law. "It was confusing for consumers who wanted to shop around for the best rates."
Some banks added to the confusion. Arising out of the Southeast, for instance, was the perfectly legal but ethically questionable "investable balance" ploy.
Banks that used the investable balance method paid interest only on a portion of your money, typically 88 percent. (Interest was not paid on the percentage of deposits that banks are required to set aside in noninvestable reserves.) The bottom line: An account ostensibly earning 5 percent interest generated a return of 4.4 percent.
Another bit of creative banking involved the method of calculating monthly interest payments. Some banks assumed that the lowest daily balance during the month was the typical daily balance and calculated depositors' interest based on that assumption.
This was all laid out for the consumer in technical fine print. But for those who don't spend their free time reading bank statements, such tactics created the false impression that depositors actually would earn an advertised interest rate.
Two major elements of Truth in Savings should put a stop to misleading interest rate claims and calculations. The first is called Annual Percentage Yield, or APY. It's the phrase all banks and thrifts will be required to use when stating the terms of an account.
APY, although a fairly complex calculation, is basically how much money a $100 initial deposit would earn after one year, regardless of how the bank compounds interest, or whether the account features a high introductory rate that drops after three months.
If two thrifts advertise the same APY on a certain account, you can rely on the fact that deposits at either one would yield the same amount of money at the end of the year. It's the banking industry's version of supermarkets' unit pricing.
One exception: A penalty can still be assessed for falling below a minimum balance requirement, but that will have to be stated clearly upfront.
The second major element limits banks and thrifts to one of only two possible methods of determining how much of your deposit will earn interest.
The daily balance, as the name suggests, requires that interest be calculated each day based on the amount of money in the account that day.
The average daily balance method, meanwhile, allows a bank to average the daily balances over a specific time frame and pay interest based on those averages. The bank will have to state which method it uses.
More disclosures: If an account offers different rates for different amounts of investment, or "tiers," no longer will a bank be able to tout the highest rate and ignore the others, just to get you in the door. The rates and terms for all tiers must be advertised with equal prominence.