Banks and credit unions have started to realize that their long-term CDs can be too good of a deal due to their mild early withdrawal penalties. As I've descried in previous posts, a long-term CD closed early can be better than a short-term CD. We recently learned the risk of this strategy when Fort Knox Federal Credit Union raised their 5-year CD early withdrawal penalty on existing CDs. As I described in my review of this change, many consider this to be unfair. The NCUA is currently investigating.
Most banks and credit unions that have raised their EWPs are only making the changes effective on new CDs or CDs that have renewed. That is the appropriate way to raise an EWP, but it's still bad news for savers in this awful interest rate environment. With the possibility of inflation and interest rates surging higher in a couple of years, no one wants to be locked into a low-yield long-term CD. The larger the EWP, the more you're locked into the CD.
PenFed 5-Year CD
The latest credit union to raise its EWP is Pentagon Federal Credit Union. Readers had mentioned this last week, and I just confirmed this with my PenFed contact. PenFed's EWP has increased on its 5-year CD from 180 days to 365 days of dividends. It now matches the EWP of the 7-year CD. All 5-year CDs opened or renewed on or after March 15, 2011 will receive PenFed's new certificate agreement that includes the new terms with this new penalty. No changes will apply to existing CDs. PenFed will soon be posting this new disclosure on its website. When I last checked this morning, the old disclosure was still on the website. Update 4/8/2011: PenFed has placed the new disclosure on their website. Here's a link to the EWP disclosure. Note, it does include the 10-year CD, and it does have the same penalty as the 7-year CD.
I also asked if the new disclosure will include 10-year CDs. Even though PenFed never made the 10-year CDs available to all members, many who were able to participate in the Watch It Grow promotion opened these 10-year CDs. Since the old disclosures didn't mention the 10-year term, there's some concern about the 10-year CD EWP. My PenFed contact assured me that it's the same as the 7-year CD (up to 365 days of dividends). Hopefully, we'll see this in writing with the new disclosure.
OneWest's Certificate of Deposit
I described how OneWest Bank increased its EWP in this February post. This change was much worse for depositors since OneWest included what it calls a "market adjustment" in the penalty. This allows OneWest to make the penalty as high as it wants in order to cover the costs of replacing the CD. In short, this can eliminate any advantage for the depositor to close the CD and replacing it with a better CD if rates rise.
One thing readers and I confirmed with OneWest is that this larger EWP only affects new CDs. It does not affect existing CDs. Here's what I received from OneWest:
The changes to early withdrawal penalties occurred in the summer of 2010. The changes are effective for accounts opened on or after June 14, 2010 or renewed on or after July 19, 2010. By opening or renewing an account with us or using the service on or after the effective date, you are deemed to have agreed to such changes.
When interest rates start to rise, we may see more banks and credit unions raise their early withdrawal penalties. Hopefully, they'll take the honorable approach like PenFed and OneWest by raising it only on new CDs. For those shopping for new CDs, make sure you check with the bank or credit union for the latest EWP before you open the CD.