Definition/Example of the Truth in Savings Act
How the Truth in Savings Act Works
History of the Truth in Savings Act
Definition/Example of the Truth in Savings Act
The Truth in Savings Act requires financial institutions to provide certain disclosures about deposit accounts available to consumers. It mandates banks to be transparent about the fees they charge and the rates they pay on savings accounts, checking accounts, and other deposit accounts.
How the Truth in Savings Act Works
The Truth in Savings Act serves one purpose: to ensure that consumers are fully informed when making banking decisions. Specifically, the law requires depository institutions to provide written information to consumers about their deposit accounts, including:
- Annual Percentage Yield (APY) and the time period for which the rates will be in effect
- Interest rates, including how the rate is determined and whether it is fixed or variable
- Interest compounding and frequency of crediting
- Minimum deposit requirements to open and minimum balance requirements, if any
- Transaction limitations for deposits or withdrawals
- Early withdrawal penalties and when they may apply
- Maturity dates for time accounts (such as certificates of deposit)
- Policies regarding the renewal of certificates of deposit
- Changes in account terms
- Policies for opening and closing accounts
- Any applicable fees and when they are assessed
History of the Truth in Savings Act
The Truth in Savings Act was established as part of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 and is implemented by Regulation DD for all depository institutions – except credit unions. Regulation DD should not be confused with Regulation D, which imposes reserve requirements on certain deposit accounts.
The FDICIA was developed in response to the savings and loan crisis of the 1980s. Savings and loans, also known as thrifts, were important components of the mortgage market at that time. In 1979, the Federal Reserve decided to reduce the money supply, leading to a sharp increase in interest rates.
The increase in rates meant that savings and loans had to pay more to savers while earning less on fixed-rate mortgage loans. This led to significant losses for the savings and loan industry, resulting in the failure of many institutions. At the same time, there was a wide gap between the amounts needed to restore savings and loans to liquidity and the funds available to do so in the savings and loan insurance fund.
The bottom line was that the federal government realized by the end of the 1980s that the savings and loan industry needed a regulatory overhaul to avoid a repeat of the crisis. Along with the creation of the Office of Thrift Supervision, the government enacted the FDICIA, which led to the establishment of the Truth in Savings Act.
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Sources:
– FDIC. “Frequently Asked Questions about Deposit Insurance.” Accessed December 16, 2021.
– FDIC. “Part 1030 – Truth in Savings (Regulation DD).” Accessed December 15, 2021.
– Federal Reserve History. “Savings and Loan Crisis.” Accessed December 15, 2021.
– FDIC. “The Savings and Loan Crisis and Its Relationship to Banking.” Accessed December 16, 2021.
Source: https://www.thebalancemoney.com/truth-in-savings-act-5213386
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