I first mentioned on how the large Illinois credit union, CEFCU, decided to raise the early withdrawal penalty on existing CDs in this January 20th post. This action by CEFCU is getting more notoriety. Allan Roth at CBS Money Watch just published this article, Credit union's CD penalty switch punishes members. In the writing of the article, Allan spoke with the CEFCU's CFO, Chuck Walker. I found the following interesting in how the CFO tried to justify their decision:
He explained that the credit union is authorized to change the penalty under the 40-page agreement that members sign when they open a deposit account.
There it was -- one sentence buried at the end of section 14, page 22 of the deposit-account agreement. When I asked Walker whether he thought that all CEFCU members had read this document, he admitted that they probably hadn't. The way I read this sentence is that, after giving proper notice, CEFCU could even change the interest rate on existing CDs. But Walker claimed that the credit union doesn't have this right.
In my opinion, it's unfair for an institution to increase an early withdrawal penalty (EWP) on existing CDs based only on a vague and generic overriding clause. As Allan mentioned, this clause could give the institution the right to even lower the interest rate. It appears the CFO didn't understand the importance of the EWP. That might be the reason why Fort Knox FCU made this same change last year and why the NCUA ruled in their favor.
The EWP can be just as important as the interest rate if the CD holder has to close the CD early. For example, if the EWP goes up from 6 months to 12 months of interest, a CD holder would lose all accrued interest if the CD is closed early at one year. That would be like a 1-year CD with zero interest. If the EWP remained at 6 months of interest, it would be like a 1-year CD with an interest rate of about one half of the full interest rate of the CD.
Some have made the claim that it's unfair for customers to plan on an early closure of a CD. However, the disclosures clearly describe the early withdrawal penalties. We accept the penalties for the higher interest rate. If institutions want the right to increase the EWP on existing CDs, at the very least the institutions should highlight this possibility in the disclosure in the same section where the EWPs are listed.
Allan ended the article with a description of what he has done to combat this risk of an increasing EWP:
I get a written confirmation from the institution that the early-withdrawal terms can't be changed for the life of the existing CD. Never do business with any institution that reserves the right to change the terms of existing agreements.
I don't know how easy this would be at some institutions, especially those in which you conduct business online or by phone. If you had success in receiving such a confirmation, please leave a comment. Unfortunately, it looks like it may be the only way we can have some certainty that the institution will honor the early withdrawal penalties in their disclosures.
Did CEFCU Act Fairly?
Be sure to take the poll in Allan's CBS Money Watch article which asks "Do you think the credit union acted fairly to members by changing the terms of existing CDs?". Hopefully, when CEFCU and other institutions see how many people think this is unfair, they will think twice before trying this in the future.