Truth in Savings Act: What it is, How it Works, Why it Exists

What Is the Truth in Savings Act

The Truth in Savings Act (TISA) is a federal law designed to help promote competition between depository institutions and make it easier for consumers to compare interest rates, fees, and terms associated with savings institutions' deposit accounts.

The Truth in Savings Act was passed by Congress on December 19, 1991, as part of the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991. The act was implemented under Federal Regulation DD.

Understanding the Truth in Savings Act

The Truth in Savings Act established uniform guidelines for how banks and other financial institutions disclose information about deposit accounts to individuals. These disclosures are designed so that consumers can make meaningful comparisons among banks. The act helps consumers to make informed decisions about the accounts offered at depository institutions.

The Truth in Savings Act applies to individuals opening personal accounts. However, the act does not apply to business accounts, corporate accounts, or organizations (such as nonprofits) that open a business deposit account.

What's in the Truth in Savings Act

The intent of the law was to provide consumers with protection and information on the terms of new savings and certificate of deposit accounts they wish to open. Under the law, the financial institution must disclose whether there are fees such as for wire transfers, returned checks, check printing, and stop payment orders. Other key pieces of information that must be disclosed include:

• The interest rate and whether the rate is fixed or variable
• How interest is calculated and when interest begins to accrue
• Minimum balance requirements and balance computation method
• Early withdrawal penalties, if any, and disclosure of the penalty and conditions for when it's assessed
• Changes to the terms of the account
• Maturity date of the account, which is typical for a certificate of deposit (CD)

If an account holder withdraws the interest earned, it impacts the annual percentage yield (APY), which is the rate of return if the interest is reinvested until the term ends. Typically, withdrawing interest creates a lower rate of return since the interest gains are paid periodically instead of being reinvested. As a result, both the interest rate (if interest withdrawals are made) and the APY must be disclosed.

After an account has been opened, the bank must also continue to provide clarity to read communications to its customers. This includes providing customers with regular updates on the amount of interest their accounts should be accruing.

\Furthermore, bank advertising falls under the jurisdiction of the act. This is to ensure that the marketing and ads banks present to the public are not misleading. For example, an account's interest rate and annual percentage yield (APY) must be disclosed in all of its advertising, including billboards, in print publications, online, and other media.

Why the Truth in Savings Act Was Established

The passage of the law came in the wake of the Savings and Loan Crisis, which occurred from the 1980s through the 1990s. The failure of the multitude of savings and loan associations, along with the related losses across the economy led to the introduction of a host of federal regulations and new laws, including the Truth in Savings Act. The purpose of introducing the new statutes was to grant more authority and power to the FDIC in response to the crisis.

The various legislation, including the Truth in Savings Act, was meant to create more transparency for consumers and hold financial institutions accountable with standards of practice that might deter a repeat of the circumstances that led to the crisis.