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CD Shopping Tips from the FDIC - Warning about Newspaper Ads with 5% CDs


The FDIC recently released its Spring 2009 Consumer News. One article of particular interest is their tips for shopping for a CD. Most of it covers basic info of what to look for when you're shopping for CDs such as early withdrawal penalties, renewal policies, CD ladders and brokerage CDs. And it reiterates the new extension of the $250K insurance coverage through 2013.

The article also mentions those CDs that are often advertised in newspapers with rates way above the competition. The ads typically state that the CD is FDIC insured, but the ads aren't from banks or a credit unions. The institutions usually have names that sound almost like a bank. Here's the advice in the FDIC article:
Beware of an advertised CD rate far above the competition. First, it could be a product issued by a company that is not federally insured and any money invested is at risk. Second, it could be a marketing ploy. "An offer of a very high interest rate may be a lure to promote the sale of non-insured products," said Richard M. Schwartz, an FDIC attorney who specializes in consumer issues. "Some non-bank companies are using the FDIC logo and good name to draw customers in the door for a bank CD, but sooner or later, they're going to try to lock them into a long-term investment that may not be in the customer's best interest."

In one variation, a company may advertise in the local newspaper a 5.0 percent interest rate for a six-month bank CD for consumers with $10,000 to invest. When a customer calls, he or she is told to come to the office to discuss the details. It turns out that the bank is paying only 2.5 percent - not 5.0 percent - but the sales person for the company offers to add enough money to the CD purchase to make up the difference. When the CD matures, there's no similar offer on a new CD and the individual can be steered into purchasing a non-insured investment that may be a poor choice for the consumer but very lucrative for the sellers.

One thing not mentioned by the FDIC is that it's typical that the advertised rate applies only to a maximum deposit. If the maximum is $10,000, and it's a 6-month CD, an extra 2.50% in the interest rate would only cost the financial company $125. The ads often say in the small print that the "promotional incentive included to obtain yield." So the financial company may provide you a $125 bonus that will effectively increase the FDIC-insured bank CD rate from 2.50% to 5.00%. This bonus is like what timeshares offer to people to come in and listen to a sales pitch. That's why it's common for these financial companies to require you to come into their office.

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Comments
4 comments.
Comment #1 by Anonymous posted on
Anonymous
In Las Vegas I have run across this scam. Ads are placed for a CD Broker offering rates higher than at any bank, with a footnote which says the advertised rate may include a bonus, and that other "guaranteed insurance products" are available.

What they are doing is soliciting people who have cash ready to invest. By definition the people who reply to the ad are ripe to be pitched variable annuities.

When you go you are hard sold an annuity, and only if you refuse steadfastly will they grudgingly let you open the CD. The CD costs them money. They pay a bonus to the bank at opening, to make up the difference between their advertised rate and the rate the bank offers.

Fine. The CD is opened by mail to an FDIC insured bank, and from then forward you deal with the bank for any servicing issues. You can log in to the bank's website to check your balance etc.

Now the CD matures. You decide not to roll over since the renewal rate is horribly low, and you get the money sent back.

Now you see the ad in the paper again and try to call and open another CD. You will not be given an appointment to see them. In fact they will screen your calls and put you into voice mail and never return a call. If you speak to someone you will be told repeatedly their schedule is busy and they need to call you back. And they never will. If you go in person to the office, you will be told that you must be seen by appointment.

This is deceptive advertising. They make around 7.5% commission on your principal if they sell long term annuities to people, and these come with surrender penalties that last 7 to 10 years. They are not in the business of opening subsidized CDs. They are in the business of selling commissioned products.

What I'm wondering is whether I should complain to the state Commissioner of Insurance, Dept of Financial Institutions, or FINRA, or all three.

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Comment #3 by Steve (anonymous) posted on
Steve
This doesn't really sound like a scam to me. You still end up getting the amount of money they advertised, right? Seems pretty much the same as any regular bank that gives you a special rate when you first open the CD, and when you renew the special rate is no longer available.

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Comment #4 by Anonymous posted on
Anonymous
Sounds like "bait and switch" type of selling to me!

 

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