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It's Time to Fight for Your Interest

By Jane Bryant Quinn
Sunday, April 21 1996; Page H02


Unless savers care enough to protest -- loudly and in writing, to their senators and representatives -- Congress may gut a hugely important consumer law. It's called the truth-in-savings law. Thanks to this five-year-old law, savers get an honest accounting of the interest rate they earn. Bankers can no longer fudge.

In the bad old days (not so long ago), you couldn't tell which savings deposit was the best deal. That's because there are lots of ways to figure yield. Given a choice between two certificates of deposit -- one at 4.9 percent, one at 5 percent -- you'd probably pick the latter. Yet because of the way the bank did its internal calculations, the 4.9 percent CD could actually have paid you more.

The truth-in-savings law created a standard interest rate calculation known as the "annual percentage yield" (APY). Under this law, banks can handle their rates internally any way they want. But they all have to use the same calculation when announcing their rates to the public.

The standard APY is a simple, straightforward concept that any saver can grasp. It's the amount of money you'd earn on $100, kept in the bank for a 365-day year, expressed as a percentage. For example, if the advertised APY is 5.09 percent, you'd earn $5.09 annually for every $100 on deposit.

That makes it a cinch to tell who's paying the most on any savings deposit, be it a savings account, a certificate of deposit or an interest-paying checking account. The winner is the account with the highest APY.

I suspect that savers haven't truly appreciated this change in law. When banks used to tell you "5 percent," you probably assumed that you were earning $5 on a $100 deposit. At the very least, you assumed that "5 percent" meant the same at every bank. You never imagined that some so-called 5 percent accounts were paying $4.90 or even as little as $4.40.

Now, banks are using your guilelessness to try to erase the APY. They say that consumers never demanded this change in the first place. They say that savers ignore the disclosures. They say that APY is too complicated for you to understand.

Nessa Feddis, a senior attorney for the American Bankers Association, says that banks support the section of the truth-in-savings law that requires them to pay interest from the day a deposit is credited to your account. Previously, for example, some banks paid interest only on 88 percent of your deposit, without disclosing that fact in an intelligible way.

Feddis concedes that a uniform APY calculation helps consumers but says that it needn't be required by law. "Most banks will disclose it anyway," she said.

Funny, they didn't disclose it before the truth-in-savings law was passed (except in states such as New York, which required it). And if banks would disclose APY anyway, why are their lobbyists spending a fortune to get rid of it?

Banks have an interest in making it harder for you to discover the truth, said Richard Morse, professor emeritus at Kansas State University and the father of truth-in-savings.

The proposal that passed the House Banking Committee (as part of a proposed restructuring of the nation's financial industries) gets rid of many other saver protections.

For example, banks could once again define "one year" in different ways (by switching to a 360-day year, they can pay less interest on savings than if they use a 365-day year). They could once again advertise "free checking" even if transaction fees were charged. They'd no longer have to disclose the true amount your savings had earned, after paying fees. And you wouldn't be able to sue institutions that violated the law -- wiping out the possibility of class action lawsuits.

Also, about 1,500 small, noncomputerized credit unions could continue paying interest only on the smallest balance in your account each month, rather than on your full deposit.

The Senate bill retains some consumer protections. But it, too, wipes out lawsuits, exempts small credit unions, and relieves banks from disclosing the true amount your account has earned, after paying fees.

I urge you to write to Congress in the law's defense. But it may be an uphill battle. Lobbyists' money always talks, and in this Congress its voice is especially loud.

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