As to whether it is legal for your bank to declare this as Interest income, TurboTax can't answer this question because legal issues is an out of scope topic. However, the following may be helpful:
Internal Revenue Code I.R.C. Title 26 §61
For federal income tax purposes, gross income means all income from whatever source derived... Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded.
DMarkM1 is correct. Since the bank issued a 1099-INT to you, the IRS received one also. Regardless of whether it is interest income or not, and whether or not a 1099 had been issued, it would still be income to you, and the IRS would still want to know about it.
