Dedicated to Deposits: Deals, Data, and Discussion

Downsizing of Mutual Bank CD Rates


Mutual Bank was closed by regulators on July 31st, and the FDIC arranged for United Central Bank to assume all of the deposits. When I reported on this failure, the FDIC didn't provide any information on United Central Bank's decision about Mutual Bank CD rates. When a bank fails and another bank takes over, that new bank is allowed to lower rates on existing CDs of the failed bank. The CD holders are free to make an early withdrawal without a penalty. With all the bank closures this year along with the very low interest rate environment, this CD downsizing is becoming more common. Unfortunately, it's also occuring for the former Mutual Bank CD holders.

Mutual Bank had long offered competitive CD and money market rates nationwide. Two years ago they were offering long-term CDs with rates near 6%. Several readers have reported receiving a letter from United Central Bank regarding its decision on Mutual Bank CDs. Rates are being downsized. Below is an excerpt from a reader's email:

I received a letter today dated August 3,2009 from the CEO and President of United Central Bank Keith Ward. One of the things the letter says is that if you have a CD or IRA you may withdraw all or part of the balance in your CD without penalty at any time prior to the maturity date. Also effective Tuesday, September 1,2009 the interest rate on your CD or IRA will change according to the following rate schedule:

60 mo @ 2.90 APY
48 mo @ 2.90 APY
36 mo @ 2.55 APY
24 mo @ 2.35 APY
18 mo @ 2.25 APY
12 mo @ 2.25 APY
6 mo @ 2.00 APY
3 mo @ 1.75 APY

Not all readers have reported receiving the above letter, so it may not apply to all Mutual Bank CD holders. Please leave a comment if you have Mutual Bank CDs and didn't receive this letter or if you've received other information from United Central Bank.

The good news this year in terms of bank closures is that very few depositors with over the FDIC limit are losing any money. Most of the closures have involved an all-deposit transfer to a new bank. However, depositors are losing their rate lock from their CDs which is costly. So the health of a bank is an important consideration when you're shopping for CDs even if you plan to stay under the FDIC limit.

Update 8/13/09: Regarding the legality of United Central Bank making these CD rate cuts, this Press-Enterprise article on the CD cuts that occurred after two California banks failed reported the following:
David Barr, a spokesman for the Federal Deposit Insurance Corp., said CD rate adjustments were made possible by national legislation enacted in 1989, in the wake of a savings and loan meltdown that saw several U.S. institutions go under.

Barr said the FDIC does not track how often the clause is exercised. But the intent was to prevent potential acquiring banks from being scared off by the responsibility of paying prohibitively high interest rates enacted by failed institutions in their waning days.

  Tags: Mutual Bank, United Central Bank

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