In my post on the details of CD early withdrawal penalties, readers commented that Fort Knox Federal Credit Union had changed their early withdrawal penalty, and this change applied to existing CDs. Since there were some conflicting reports in the comments, I asked the VP of marketing at Fort Knox FCU if this new early withdrawal penalty applies to all CDs, even ones that were already opened before the early withdrawal penalty change. The reply wasn't 100% clear, but it supports what readers said in the comments that the change does apply to existing CDs:
Fort Knox Federal Credit Union announced on January 1, 2011 that effective February 15, 2011, the early withdrawal penalty on certificates with maturities greater than 24 months will be forfeiture 180 days dividends whether earned or not. The EWP applies to all applicable Fort Knox Federal Credit Union CDs on the effective date.
The previous early withdrawal penalty was 90 days of dividends on all certificates.
The Right to Make This Change?
This change was inline with what reader me1004 described in this this October thread. In that thread, me1004 warned that Fort Knox FCU was making the case that it had the right to change early withdrawal penalties on existing CDs. He included the reply he received from Fort Knox FCU:
We can change the early penalty at any time. If you have a CD with us at the time of the change we have to give you a 30 day notice which would give you a chance to with drawn at the currect withdrawal penality.
Some clauses in the membership agreement could be construed to give the credit union the right to make this type of change. One clause is on page 6, Section 8 "Account Rates and Fees":
You agree that we may change the Schedule at any time upon proper notice as required by law.
Another clause is on page 13, Section 29 "Miscellaneous":
The terms and conditions of any account, including the method of determining dividends, may be changed by the Credit Union upon written notice, or as required by applicable law.
I don't see anything in the section on term share certificates on page 34 and 35 which says the early withdrawal penalty could be changed on existing CDs.
I can't say if this would stand up in court. It does seem unfair to me to overturn an important term (the early withdrawal penalty) that's explicitly specified based on generic clauses that are in different sections of a large document.
I haven't been able to receive a legal opinion from an expert about what's allowed or not allowed based on a membership agreement or an account disclosure. However, the general opinion from experts is that early withdrawal penalties should not change on existing CDs.
Last year I submitted this question to Ask a Banker website. Here's an excerpt from their reply:
Increasing the penalty for closing a CD early is not a normal change. Call the bank and ask to speak to a bank officer about this. They shouldn't be able to do it any more than you could tell them you have reduced the penalty to 45 days. Again, an allowance to modify the CD contract unilaterally would be very unusual.
In the article CDs as Bond Bubble Protection - Revisited, Allan Roth received the same general opinions from spokespersons of the FDIC and NCUA. Allan summed up the responses he received:
in the eyes of the regulators, no institution can unilaterally change the early withdrawal terms.
Unfortunately, these general opinions may not be of much help for specific cases, but they do show that such changes are not generally acceptable.
Immediate Impact of This Change
About a year ago, Fort Knox FCU was offering 3.50% APY on 5-year CDs. So how will this change in the early withdrawal penalty affect the rate of returns? It will depend on when the CD is closed early. The longer one waits, the smaller the effect will be. Below is a table that shows the impact of this change for a Fort Knox FCU 5-year CD that was opened last year when the APY was 3.50%.
|Year of Early Withdrawal||3.50% APY CD w/3mo Penalty||3.50% APY CD w/6mo Penalty|
|year 5||3.50% (no penalty)||3.50% (no penalty)|
Risk of Changes by Other Institutions?
Closing a long-term CD early and taking a small early withdrawal penalty can result in a higher rate of return than a short-term CD that's held to maturity. As seen in the case of Fort Knox FCU, this strategy has some risks. I don't know how significant a risk this is for other institutions. The concern is that if interest rates shoot up, banks and credit unions will have a much larger incentive to make these changes.
One institution known for its small early withdrawal penalty is Ally Bank. When we first learned of Ally Bank's early withdrawal penalty of only 60-days of interest, several readers were informed by Ally Bank reps that Ally had the right to change the early withdrawal penalty on existing CDs with 30-day notice. I investigated this, and received assurance from Ally Bank's public relations director that Ally would not change the early withdrawal penalty on existing CDs (see post). Of course, this doesn't eliminate the risk. To reduce the risk that all of your money will be stuck in low-yield long-term CDs if rates shoot up, you might want to consider CD ladders and using multiple banks and credit unions.
Wronged by Your Credit Union or Bank?
If you have experienced a problem with your bank or credit union that you have not been able to resolve, it may be time for you to contact the regulator of your financial institution. The NCUA provides instructions for submitting complaints on federal credit unions. For other types of banks and credit unions, I have details and links in my post, How to File a Complaint Against Your Bank or Credit Union.
Many times complaints to regulators don't help, but there have been some success stories. In one example a bank changed the terms of its add-on CDs for existing CDs. A reader wrote a complaint to the FDIC which was the primary federal regulator of the bank. It appears his letter helped get the bank to rescind the disclosure change.