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Newspaper Ads with Very High CD Rates and the FDIC's Crack Down


With the FDIC pressuring Ally Bank to lower deposit rates, I'm glad to see other news from the FDIC that should help savers. Yesterday before the FDIC's press releases on the bank closures, it issued this press release on its settlement with an insurance company that the FDIC claimed had misused the FDIC logo and seal and misrepresented insured financial products.

If you've ever wondered about those CDs advertised in newspapers with very high rates, this press release should interest you. These ads typically list CD rates several percentage points above market rates. Some examples of these ads are available online at The Oklahoman and at the Tyler Morning Telegraph. One of these ads lists a 5.25% APY 3-month FDIC-insured CD. The small print often has a subtle mention of a maximum deposit: "Deposit amounts exceeding minimum may be subject to yield other than advertised." Another part of the small print gives a hint of how they can pay the high rate: "promotional incentive may be included to obtain yield."

The ads describe these CDs as FDIC-insured so it can appear that the ad is from a bank. Sometimes they do state in the small print that their company is a "financial services firm that locates FDIC insured banks." Most of these companies are careful to avoid misrepresentations that cross the line. It appears the company cited by the FDIC crossed the line by using the FDIC logo.

The FDIC provides some interesting background on how this company operates. Here's an excerpt from the press release:
Amerilife's CD ads promised an interest rate on the CDs higher than the rates offered by any bank, and prominently displayed the FDIC logo and seal, giving the impression that Amerilife was an insured bank. When a consumer went into an Amerilife office to purchase the advertised CD, Amerilife helped the consumer sign up for the CD on a bank's website. Amerilife then forwarded a bonus payment plus the consumer's check to the bank as the CD principal. The total amount created the rate of return advertised by Amerilife. The advertisements, however, misrepresented the actual terms and conditions under which the bank offered the insured CDs.

Note that they provided a bonus payment, and this created the rate of return advertised. Here's an example of how a bonus can raise the effective interest rate:

Example of an Advertised CD:
  • Maximum deposit: $10,000
  • 3-month CD
  • Advertised rate: 5.00%
  • Real interest rate from the bank: 1.50%
  • Bonus payment: $87.50
How the Advertised CD Rate is Calculated:
  • Actual interest earned from bank: 0.015*10,000/4 = $37.50
  • Bonus plus bank interest: $87.50+$37.50 = $125
  • New rate of return after bonus: ($125*4/$10,000)*100 = 5.00%
Why do they pay a bonus? In my opinion, this bonus is like what timeshares offer. It's a way to introduce customers to their products. That's why these companies will often ask you to come into their offices. Also, it should be noted that advertising a 5% CD makes it appear that you're getting more than a $87.50 bonus.

For this case, the company did more than just meet with the customers. Here's what the FDIC describes:
As part of its marketing campaign, Amerilife advertised above market-rate certificates of deposit (CDs) in 80 newspapers nationwide. Amerilife generated customer lists with information from those who responded to the ads in order to later contact the consumers and attempt to sell them uninsured annuities.

As this Bankrate article describes, most financial planners are against annuities. Also, consumer advocates like Clark Howard often warn people against them.

Most of these companies are not scams, but if you're considering taking advantage of these "bonuses", make sure you don't get pressured into buying an annuity or some other product that you didn't intend to buy.

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  |     |   Comment #1
This is a very good article. For some time now, local newspapers in my area (So CA) have been running similar ads from financial services companies. Even my elderly aunt questioned me recently about the honesty of the ads.

I told her that most independent banks/S&L/CU's rates can be competitive, but some won't be due to their lack of lending demand to put the funds raised into. On the other hand, It always seems to be that large banks particularly in SO CA are paying very very low rates, so skip them all together.

So, I further indicated to my aunt that any local bank offering way above competitive rates is probably either a non-FDIC insured institution, or a ruse to get her financial information for future annuity sales. There are exceptions like odd-term CD's, reward checking accounts, or if a Bank is in desperate liquidity need.

Just keep up the good work on postings like this.

OC Steve
  |     |   Comment #2
FDIC is operating on orders from the FEDs to knock down anyone paying over 2% interest. This is a dictatorship and not a free market economy, when everything is debated under closed doors. Artificially low rates will hurt the economy more then liberal interest rates.
  |     |   Comment #3
Very interesting concept. I have no objections with a third party injecting in a bonus so that my final return is effectively a much higher interest rate. This third party is really adding to my principle to create a new principle. That principle is still FDIC insured, unless the added principle goes over the FDIC limits, but for my own purposes, I would make sure to stay will within the 250K limit. So I have no objections with regards to what they're doing by adding to my principle.

However, I have a HUGE objection with them trying to sell me unsolicited crap. That is not acceptable. If they're going to advertise a CD with an effective X%, fine. Let me have at the CD application and we're done. I don't want to listen to their timeshare or annuity solicitations.

I appreciate the warning as to their true motives for such a high % offer. Duly noted.
  |     |   Comment #4
Artificially low rates will hurt the economy more then liberal interest rates.

This is such an ignorant statement. Again, my encouragement for all to take at least a basic ECON college course.

Classical economic theory suggests that a low interest rate will stimulate demand and growth. Business and consumes will borrow more to invest, spend and consume.

High interest rates will decrease the demand for borrowing. It will thus restrict growth and consumption.

Everyone here wants a high rate of return because they're trying to obtain the highest return for their savings. But as a borrower--either business or consumer--I would want LOW, LOW interest rate. If rates are too high, I won't borrow. If I don't borrow, the bank certainly won't offer you a high interest rate as a saver. In fact, if no one borrows because interest rates are too high, you--as a saver--won't even be getting .25%. Rates need to be low to stimulate demand for loans.

The problem with anyone's claim that the FED or FDIC is artificially keeping rates low is completely disingenuous in that the FDIC has always allowed interest rates to be artificially HIGH by providing FDIC insurance. Many of the banks that have failed--in fact every one of them that I had CDs invested in 2008 failed--did so because they offered outrageously high interest rates. They certainly would NOT have had the number of customers had they had to rely on their on financial strength. They were able to obtain customers with their interest rates because of the FDIC imprimatur. So we knew if they failed, the FDIC would come and save us. So we didn't care. Thus the FDIC artificially subsidized rates higher by guaranteeing all banks, even the crazy and soon to be insolvent banks.

The banking industry is not a free market system at all. And it is purely due to the FDIC insurance for everyone. Because the FDIC is insuring banks, of course the FDIC needs to control the risks the banks take on by offering crazy interest. The FDIC has a duty to limit the %.

All of this doesn't mean jack with regards to your freedom to choose banks or investment institutions which are NOT FDIC insured. Why don't you invest in a 9% NON-FDIC insured CD offered by some institutions in the Bahamas? Why? Because you want the protection of the FDIC. Well what happen to your stance of a free market economy? Why are you trying to exploit the subsidization of the government when it benefits you, but crap on them when they try to restrict the excessive risks of the markets?

If you or anyone wants FDIC insurance then you need to accept certain restrictions in exchange for this benefit of guarantee. Otherwise you're free to invest in a purely free market system where you can obtain a rate of return of 9% in a NON-FDIC insured bank, but lets just see if you can actually get your principle back.

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