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Larger CD Early Withdrawal Penalties

POSTED ON BY

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.

Bottom Line

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.

  Tags: CD rates, Pentagon Federal Credit Union

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Comments
25 comments.
Comment #1 by Inforay posted on
Inforay
PenFed never made ANY disclosure with regard to their 10-year C.D.  When I opened it and received the paperwork I carefully looked to see what the early withdrawal penalty was and there was no disclosure.  They only had disclosures for up to the seven-year CD.  I kept the paperwork.  Can a bank/credit union not provide a disclosure of the early withdawal penalty but still charge a penalty?  I thought under the Truth in Lending Act they were supposed to make all the disclosures available up front. If there had to be an early withdrawal penalty on a 10-year CD I would take the position that since there were no disclosures  they can't take out a penalty.

5
Comment #2 by Anonymous posted on
Anonymous
PenFed

I requested and received the new disclosure for the 10 year CDs. It is the same (360 days) EWP as the 5 and 7 year Cds.

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.

2
Comment #3 by Anonymous posted on
Anonymous
PenFed

I meant to say 365 days.

1
Comment #4 by lou posted on
lou
Ken,

You mentioned that NCUA is investigating Fort Knox. How do you know? Did you talk with them?

3
Comment #5 by KenBDG posted on
KenBDG
@Lou

Yes, I and another reader have been in contact with an official from the NCUA Office of Consumer Protection. The last email I received is that it's "currently under review by the NCUA."

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Comment #6 by Anonymous posted on
Anonymous
Yes!!  This should be investigated.  Banks and Credit Unions should not be able to create "contracts" with wording that consumers need have to make informed financial decisions, and then be able to change those contractual terms whenever they like and apply them retroactively. 

This in essence makes the contract and its language totally useless.  Actually more then totally useless in that it allows the institutions to provide the illusion of contractual deal without it actually being one.

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Comment #7 by me1004 posted on
me1004
Its nice the NCUA has finally woken up -- maybe. Maybe we will now get a final word on whether these retoractive clauses are legitimate. We already now know they are there and CUs and banks will act on them, but that never meant they were legal or within NCUA (or FDIC) regulations. And if they actually are legal, well, they shouldn't be and the NCUA should issue a new regulation barring them.

Perhaps these disclosures should be required as a matter of routine to first get NCUA approval -- so situations like this do not arise again. The NCUAS is supposed to be there for oversight. What kind of oversight is it to pay no attention whatsoever unless and until a lot of people on this Website raise hell about it?! 

I just hope the NCUA actually investigates and does something -- unlike the other banking regulatory agencies, which just push paper around, and if the bank says they are not doing anything wrong, then they agency closes the case without considering anything.

Of course, if the NCUA says the retroactivity is not allowed, it might be a moot issue for opening new longer term accounts to get higher rates, if the banks all increase their penalty, most especially if they adopt the One West model.

4
Comment #8 by Anonymous posted on
Anonymous
Regarding PenFed's 10-year CD, I didn't sign any disclosure saying that I agree to a 365-day early withdrawal penalty. In fact there is no mention at all of any penalties for the 10-year on the paperwork they sent me to sign and return. So, if the time comes that I have to break this CD, I will fight tooth and nail to not have to pay a penalty! They should have gotten their paperwork right to start with...

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Comment #9 by Smokeboat (anonymous) posted on
Smokeboat
Game the system....close the loophole.  Your move.

1
Comment #10 by Mike posted on
Mike
Suggested next move: less people will take out long term cds. So the banks will have to raise rates to make up for the stiff penalties. So...ill be waiting. Your move, banks. :-)

2
Comment #11 by Anonymous posted on
Anonymous
Will not work, Mike.

Bernanke would just order the Feds to print more money and lend it to the banks at "0" interest rates.

 

2
Comment #12 by Mike posted on
Mike
Yes... except he's already doing that, and rates are moving up slightly. If I understand your argument, then I ask, why are the banks offering any cds at all? They have all the money they could want from helicopter Ben...right?

1
Comment #13 by mak1118 posted on
mak1118
I received an e-mail back fronm the ncua and they said they forwarded my e-mail onto the office that supervises

Fort Knox, the e-mail is: region3@ncua.gov. I asked Fort Knox if the 180 day EWP is now the final EWP to which 

I was told the ceo can change it whenever he decides to.

6
Comment #14 by bbug (anonymous) posted on
bbug
Now that we have an e-mail address for the NCUA (post #13), perhaps someone (Ken?) can draft an e-mail protesting the action of Fort Knox and make it easy for readers to complain.

I've already sent one from the point of view of a senior citizen. For what it's worth:

I am outraged that this credit union is changing the penalties on existing CDs.   This should not only not be allowed, it should be illegal.   Please do not permit them to get away with this. It's hard enough on us seniors who are earning next to nothing in the current interest rate environment.    

 

4
Comment #15 by bbug (anonymous) posted on
bbug
Also,I would suggest that, rather than burying a suggested e-mail here, it would be prominently displayed in a separate topic. This outrage deserves to be fought forcefully, not meekly.

It could be labeled something like:

Do Your Part In Stopping Changes To Early Withdrawal Penalties On Existing CDs

5
Comment #16 by eric2 posted on
eric2
This is the canary in the coal mine, folks.

Me, I'm not waiting around to find out that the regulators may talk a good game to Allan Roth but aren't actually going to prohibit institutions from doing this. I just closed all my Ally long-term CDs today...not going to take any chances.

1
Comment #17 by mak1118 posted on
mak1118
I am trying to close one of my 4 cds at Fort Knox because they gave me a grace period of 90 day EWP but I must act today and when I just wrote them to close one that is earning 2.75% that is in a regular account they wrote me back that they want me to close my IRA cd  but that is getting 3% and I can't write the EWP loss off my taxes because that one is in my IRA.

1
Comment #18 by bbug (anonymous) posted on
bbug
mak1118,

If they gave you a grace period on your regular account, I don't see how they can dictate which account you must close. Ask them to show you the agreement clause that permits this. I doubt there is such a clause.  Argue with them. Threaten them with a letter to their CEO and the regulatory authorities.

1
Comment #19 by mak1118 posted on
mak1118
bbug-It was my fault I kept e-mailing them the wrong account and when I finally realized it they were gone,I wrote them a follow up e-mail and will post their answer when I find out on Monday. I kept sending them my IRA account# instead of my regular account # so that is probably why they kept writing me back about my IRA,but I told them I wanted to close my regular account cd instead and I gave them the total of the cd which is different then the Ira cd and they have my name so they could have looked up my regular account so again I am not sure and will post on monday. Thanks

1
Comment #20 by Anonymous posted on
Anonymous
I got home today, picked up my mail and in it was my Third Federal Qtrly CD statement.  I also received a "Notice of Change" all CDs with terms of 3 yrs will now have a 1 yr penalty vs the previous 180 day penalty.  Does not effect existing accts. 

I think all the bankers went to a conference and decide to tighten the ****s, due to possible higher inflation and the fact that some of the 5 yr CDs were better deals than 1% savings accts.

6
Comment #21 by moneysaver posted on
moneysaver
One thing these kinds of changes has meant for me is a change in the $ amounts of my new/recent CDs...

In the past, I wouldn't have fretted much about taking out a large single CD with a particular bank or CU, especially since I never expect to withdraw my funds early... And I've only done so once in the past, for relatively small amount.

But now, just to be on the safe side, when I'm taking out new CDs even with the same institution, I always break up the CDs into smaller amounts, usually $5K or so...

That way, if I ever need to withdraw the funds, I can do with with a relatively minimal penalty and without having to worry about whether the bank/CU does or doesn't allow partial withdrawals.

BTW, I'm talking about withdrawals to cover some unexpected need for cash funds, not liquidating a bunch of CDs to chase higher rates. Obviously in the past few years, there have been no higher rates to chase.

I'm just hoping my current long-term high rate CDs, taken out before rates nosedived, will cover me at least until the rates for new CDs begin to recover in the coming years.

 

 

4
Comment #22 by Anonymous posted on
Anonymous
eric2 - #16

I totally agree with your decision. If Allen Roth chooses to believe, without reservation, the smoke that the unnamed regulators are feeding him, then that demonstrates his gullibility and desparate need to get some news flash type of info for his next column. Glad you used your own common sense instead of relying on unfounded musings such as his. Congrats.

2
Comment #23 by Anonymous posted on
Anonymous
I think it is only a matter of time before people begin to realize that banks (and credit unions) are run by the greediest of human beings, who want to award themselves high salaries and bonuses, while providing as little to their depositors as possible.  Credit unions, like Ft. Knox, are even more nefarious, because to hide their executive operator's true intentions, they cloak the whole operation in a huge scam that says you are "members" rather than customers.  What club, other than a credit union, would **** its membership by doing the type of thing Fort Knox is doing?

Bottom line, get the heck out of the banks, and, by all means, DO NOT BUY CDs!!  Savers need to start recognizing that they are the fall guys whose pockets are being picked to support the government and the speculators who are parasites upon the government dole.  The only place to be right now is in gold, silver, and platinum.  But the precious metals on any dip, and, in the meantime, forget about CDs.  They are as bad as bonds, and will leave you wiped out, as hyperinflation devastates this economy.  Sleep well with the knowledge that you own something of real value, and not just little pirces of toilet paper, Bernanke-bucks.

1
Comment #24 by Anonymous 23 (anonymous) posted on
Anonymous 23
I meant to say "Buy the precious metals on dips, and, in the meantime, forget about CDs.  Put your money in the highest paying money market or savings or checking account you can find, preparing to mobilize in order to protect what you have against the depredations of the government and the speculators who are robbing you with quantitative easing and market manipulation"

1
Comment #25 by Anonymous posted on
Anonymous
Hmmm???

I seem to recall Gold selling in the $1000 an ounce range, then diving to $300.

Something to think very seriously about.

Took 20 YEARS since then to get where it is now. 

I will stick with my CD laddering and sleep well every night.  IF hyper inflation does become a reality, I will then add more rungs to my CD ladder at much higher interest rates.  It is not guaranteed to not loose any purchasing power, but at least I will not loose my principle.  That is precisely why I monitor this site so much.  CD LADDERING.

 

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