Credit unions forced to fess up under new law


September 26, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

NEW YORK -- Good news for savers. The government is forcing a reluctant credit-union industry to do the right thing.

At issue has been the new "truth-in-savings law," which took effect last June for banks and S&Ls. Credit unions sought an exemption from the law's main goals. After first favoring the exemption, the National Credit Union Administration (NCUA), which regulates the industry, concluded that no loopholes were allowed. Under final NCUA rules, promulgated this month, the whole truth is expected of credit unions, too.

The truth-in-savings legislation requires depository institutions to pay interest on every dollar you keep on deposit every day (no cheating, by paying zero on a portion of your money, as happened before the law was passed).

The law further orders that savings yields be computed in a standardized way. Formerly, yields could be figured in dozens of ways, which made it impossible to tell which bank actually paid the most. Now, all institutions have to publish an "annual percentage yield" (APY). By comparing APYs, you can readily tell who is paying the better rate.

In the ads in this newspaper, you'll find the APY for savings and checking deposits at banks or S&Ls. Some credit unions are also on board. The rest of the credit-union industry, however, doesn't have to convert to the new system until Jan. 1, 1995 -- nearly 15 months away.

What's wrong with many credit-union interest-rate disclosures? Plenty. Some 60 percent to 70 percent of the industry may be overstating the interest you earn.

For example, a credit union might advertise 3.5 percent interest but pay that rate only on the lowest balance in your account for the quarter. Money you withdraw before the end of the quarter won't earn anything at all.

Another example: Money deposited after the 10th of the month might earn nothing until the following month (this type of account is known as a "rollback.") Rollback accounts, although advertised at 3.5 percent, might pay only 3.1 percent, on average.

Yet another example: Your credit union might pay interest ("dividends," in credit-union parlance) only on $5 increments in an account. If you have $554 in savings, you might earn interest only on $550.

Surveys show that, in general, credit unions pay higher interest rates on savings than you'll get from banks or S&Ls. But that conclusion is based on the advertised rate, not on the lower net rate that savers actually earn after adjusting for low-balance and rollback accounting.

It may be that credit unions do indeed pay more, in real dollars and cents. But right now, you can't tell. The true comparison won't be clear until 1995, when all depository institutions are required to calculate their yields in exactly the same way.

Credit unions fought to retain their low-balance and rollback accounts. They're lucky they lost. Had they gotten their wish, they'd have attracted a lot of bad publicity, as the only institutions still advertising misleading rates. Furthermore, the credit unions with honest interest-rate disclosures would have been at a disadvantage, relative to those that paid lower effective rates but obscured the fact.

Ralph Swoboda, president of the Credit Union National Association (CUNA), the industry's trade group, deplored the NCUA decision, citing the "hardship" the law would cause 1,735 credit unions that still post interest rates by hand. But what about the 6,000 to 7,500 larger -- and computerized -- credit unions that could be disclosing straightforward interest rates and choose not to?

Credit unions that still hand-post interest represent less than 5 percent of the assets, says CUNA spokesman Jerry Karbon. A typical example is a 200-member credit union, run by volunteers at a hospital or church. It accepts small deposits and makes $100 or $200 loans.

Such groups may be adopted by larger credit unions. Or they might use new software, to be developed by CUNA, that will run on any computer (for example, in the church office) and will post proper interest payments.

Larger credit unions will have to come clean, too. All savers will benefit from the truth.

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