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Attention American Express Bank CD Holders And CD Holders In General

Saturday, January 23, 2010 - 12:04 PMAmerican Express Bank, FSB. - Details
Attention American Express Bank CD holders and CD holders in general...

I recently received an updated account agreement from American Express Bank, which is supposedly duplicated here: http://personalsavings.americanexpress.com/deposit_terms/ .  There is a section dealing with early withdrawal of CDs.  Basically, the previous early withdrawal penalty section (which I don't have a copy of) is being deleted and replaced with a new one.  Which applies if you withdraw all of your principal balance OR if the account is closed for any other reason.  The new penalty is THE GREATER of X months OR The Cost Recovery Value (CRV) on the withdrawn amount (if applicable).  Here is how CRV is defined:

The CRV estimates the interest cost that we would incur if we were to replace your early withdrawn or closed CD with another replacement CD.  The replacement CD would be of a term that is closest to but not greater than the remaining term on your original CD.  To calculate the CRV, we take the difference between the (lower) APY on your original CD and the (higher) APY on the replacement CD and apply this difference to your withdrawn amount, multiplied by the number of years (or partial year) remaining on your withdrawn or closed CD. (If the APY on the replacement CD is less than or equal to the APY on your original CD, there is no applicable CRV on the withdrawn amount.  If we are offering more than one APY to the general public for a replacement CD with a term that is closest to but not greater than the remaining term on your original CD, at the time of your early withdrawal or early account closure, we will use the lowest APY we are offering to the general public for a replacement CD to calculate any applicable CRV.)

I haven't had enough coffee yet, but the way I read this... Say you open a $50,000 5-year CD paying 3.0% interest (and aren't reinvesting the interest, just to keep the calcs easier).  Without this CRV recovery clause, if you withdraw the CD after one year you would have to pay 6 months * $125 interest/month = $750 early withdraw penalty.  Lets say a year from now American Express Bank is offering a four year CD paying 4.0%.  If they must replace your withdrawn $50,000 with such a CD, they will have to pay 1% more in interest per year for four years = $500 * 4 = $2000 which will become your penalty.  You wouldn't be paying 6 months of interest as a penalty, you'd be paying ** 16 months ** of interest as a penalty.  The way the letter is written, it appears this would only apply to CDs renewed or opened on or after February 20, 2010.

I've never encountered this type of Cost Recovery penalty before.  Has anyone?  I presume it is one way in which banks are going to heed the "prepare for the possibility of higher interest rates" warning.  I suspect more will push all of the risk onto the CD holder.  I hope there is no way for any of them to do that retroactively, as in to existing CDs.
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May 9, 2010
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