Yesterday afternoon readers reported receiving an email from Darby Direct informing them that they would no longer be able to make additional deposits to their 36-month Step Up CD after February 28, 2010. Here's an excerpt from the email:
As a valued customer, we would like to inform you about changes to your Darby Direct 36 Month Step Up CD. The last day to make additional deposits to your 36 Month Step Up CD is Sunday, February 28th. Following this date, no additional deposits can be made. For account disclosure information, please click here.
This brings up an important issue with CDs. Can a bank unilaterally change the account disclosure during the term of a CD? This appears to be what happened at Darby Direct. If you refer to the new account disclosure from the link above, it states the following:
[X] You may only make deposits into your account___until February 28, 2010
However, a reader made a copy of the original disclosure when he opened the CD in 2009, and this line was checked "You may only make unlimited deposits into your account" but the rest of the line was blank. There was no "until February 28, 2010". Also, there was an additional line that appeared as follows: "[X] You may make unlimited deposits into your account."
This is not only an important issue for those with this Darby Direct CD, it's also an important issue for anyone with a CD. There are many other important provisions in a CD account disclosure besides rates and maturity. Most CDs don't have add-on features, however, most allow early withdrawal with a penalty. Can a bank refuse to allow an early withdrawal even if there's no mention of that refusal right in the account disclosure? Can a bank increase the early withdrawal penalty? With the risk of interest rates shooting up in the next few years, this is a major concern for all those considering long-term CDs.
I do not know the laws for these issues and what the legal recourse might be. I found some relevant but general information from the OCC site helpwithmybank.gov. One of the Q&As of the site mentioned CD account disclosures:
Interest rates have gone up, but the bank refuses to raise the rate on my time certificate of deposit (CD). Why?
When you buy a CD, you enter into a contract involving a fixed amount of money (principal) for a predetermined period of time (the term) and an agreed-upon interest rate and yield. The bank is simply honoring the terms of the contract; it is not obligated to change those terms when interest rates change.
Please refer to the Account Agreement you received when you bought the CD for the terms and conditions of the account.
It appears the OCC is implying that the CD account disclosure is a contract which must be honored by both the bank and the account holder. It's important to note that the OCC is not the primary regulator for Darby Bank. According to the FDIC, Darby's primary federal regulator is the FDIC.
Another issue with Darby Bank is that it's not in the best financial health. It has been operating under this FDIC Consent Order (pdf) since December 18, 2009. In the order there are restrictions to brokered deposits and deposit yields. The order also has names of Georgia and FDIC regulators who may be another point of contact if Darby refuses to honor the original account disclosure.
There have been past cases in which banks and credit unions have changed their additional-deposit policies during a term of a CD. I don't know if the CD holders had any success in forcing the institutions to honor the original account disclosures. Last year a commenter mentioned that Vineyard Bank reneged on the add-on provisions of certain of its CDs. The bank was in bad financial shape, and it was seized by regulators. Another example was at United Services Credit Union in 2006. Readers reported that the credit union reneged on the terms of its flex CD.
Update 2/25/10: The reader BestCashCow reported the following in the Open Discussions Thread:
Regarding Darby - I have spoken to the FDIC about this type of issue. According to the FDIC, Darby can't change the terms of the initial disclosure unless they specify in the disclosure that it is subject to change. They also need to state that near the term they plan to change. So, they can't say the CD allows unlimited deposits on page 2 and then say this is subject to change on page 5. I don't see that anywhere in the amended agreement. I don't have the initial PDF but if there is no "subject to change" language then Darby shouldn't have altered the agreement. I'd contact the FDIC. the Fed or your local banking commission.