From now on, by federal law, free checking really must be free.
Under the Truth in Savings Act, which takes effect today, banks and savings institutions must offer clear, complete and uniform disclosures of the terms of their deposit accounts _ both checking and savings.
Advertising must not be misleading or incomplete. For instance, checking advertised as free can carry no hidden charges or conditions.
"Any account advertised as free after June 21 cannot be what I call a "free, asterisk' account," said Ed Mierzwinski, a lobbyist for the U.S. Public Interest Research Group, one of the consumer organizations that pushed for the law.
"It cannot charge regular maintenance or per-check fees or require balance minimums to avoid fees," he said. However, banks and S&Ls still can charge free-checking customers for a box of checks and for automated teller transactions.
The act also bans the so-called "investable balance" method to pay interest. Under the method _ most prevalent in Florida, Maryland, Virginia, Georgia and North Carolina, according to Mierzwinski _ a bank might advertise a 3 percent rate on savings accounts but pay it only on 90 percent of the balance, effectively reducing the rate to 2.7 percent.
Major banks in Florida like Barnett Banks, NationsBank and SunBank had used this method of figuring interest in recent years.
Low-balance methods of calculating interest no longer will be permitted. Under one such system, customers earn interest only on their lowest daily balance for the month, instead of the average daily balance. Or, under another, an account dipping below the minimum balance for one day would lose interest for the entire month.
"Truth in Savings will require banks to pay interest on a consumer's full balance, each day," Mierzwinski said.
Another important change, according to consumer advocates, is the inauguration of annual percentage yield, or APY, a standardized method of expressing interest, taking into account the rate and compounding.
"Consumers will be able to compare apples to apples," said attorney Michelle Meier of Consumers' Union.
Financial institutions were able to calculate interest any way they wanted to before the act, said Chris Lewis, director of banking policy at the Consumer Federation of America, a nonprofit consumer group in Washington.
One bank might pay interest based on a 365-day year, while another used a 362-day year.
Now, everyone must base the rate on a 365-day year and use the APY as the new common measurement.
Customers no longer will have to try to figure out if 2 percent compounded daily is better than 2.2 percent without compounding. A hundred dollars deposited in an account, paying an APY of 2.24 percent, will earn $2.24 in one year. A higher APY always means more interest.
In addition to providing clear and uniform disclosures of fees, interest rates and conditions before an account is opened, banks will be required to notify customers by mail before certificates of deposit roll over to a new rate.
Bankers fought the new regulations, not because they oppose disclosure, but because of the heavy cost of regulating disclosure so precisely, said lobbyist Edward Yingling of the American Bankers Association.
"A number of community bankers have talked about the incredible cost of buying the software to start up. . . . And they're very concerned that it's so complicated that it will be very difficult not to make mistakes and it may actually confuse customers more than it helps them," he said.
Institutions that violate the rules would be subject to lawsuits from individual customers and from groups of customers bringing class-action suits.
Yingling said bankers are particularly angry that one of their primary competitors _ mutual funds offered by securities firms _ will not be required to make similar disclosures.
"This could have the perverse tendency to push money out of the banking system into products that have the weakest disclosure," he said.
Diane Casey, executive director of Independent Bankers Association of America, said some banks may pass the cost of complying with the rules on to customers in the form of higher fees. And disclosure requirements may encourage other banks to cut back on the account choices they offer, she said.
Consumer advocates conceded banks face some added costs during the transition to the new laws but said their ongoing costs of compliance should be little different from the cost of administering deposit accounts now.
The Truth in Savings Act, sponsored by Rep. Esteban Torres, D-Calif., and Sen. Chris Dodd, D-Conn., was passed by Congress in December 1991.
Credit union regulators are writing their own rules, based on those applying to banks and S&Ls. They will take effect in June 1994.
Key provisions of Truth in Savings regulations taking effect today at banks and savings institutions:
Full disclosure: Banks and S&Ls must fully and clearly disclose the fees and terms of their deposit accounts _ both checking and savings. Advertising must not be misleading or incomplete. For instance, checking accounts advertised as free really must be free, with no balance requirements or per-check or monthly fees.
Annual percentage yield: Interest paid on deposits accounts must be expressed as an annual percentage yield, which takes compounding into account.
Interest payment: Deposit customers must receive interest on their full balance every day. The practice of paying interest on only part of an account is banned. Also forbidden: Paying interest only on the lowest daily balance during a month and withholding an entire month's interest if an account ever drops below the minimum balance.
Certificates of deposit: Customers holding certificates of deposit must be notified by mail before the certificates roll over to a new interest rate.
Penalties: Financial institutions violating the rules will be subject to fines and could be sued by customers.
Exceptions: The rules don't apply to mutual funds. Similar regulations applying to credit unions don't take effect until June 1994.
_ Associated Press