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Downsizing of Mutual Bank CD Rates


Mutual Bank was closed by regulators on July 31st, and the FDIC arranged for United Central Bank to assume all of the deposits. When I reported on this failure, the FDIC didn't provide any information on United Central Bank's decision about Mutual Bank CD rates. When a bank fails and another bank takes over, that new bank is allowed to lower rates on existing CDs of the failed bank. The CD holders are free to make an early withdrawal without a penalty. With all the bank closures this year along with the very low interest rate environment, this CD downsizing is becoming more common. Unfortunately, it's also occuring for the former Mutual Bank CD holders.

Mutual Bank had long offered competitive CD and money market rates nationwide. Two years ago they were offering long-term CDs with rates near 6%. Several readers have reported receiving a letter from United Central Bank regarding its decision on Mutual Bank CDs. Rates are being downsized. Below is an excerpt from a reader's email:

I received a letter today dated August 3,2009 from the CEO and President of United Central Bank Keith Ward. One of the things the letter says is that if you have a CD or IRA you may withdraw all or part of the balance in your CD without penalty at any time prior to the maturity date. Also effective Tuesday, September 1,2009 the interest rate on your CD or IRA will change according to the following rate schedule:

60 mo @ 2.90 APY
48 mo @ 2.90 APY
36 mo @ 2.55 APY
24 mo @ 2.35 APY
18 mo @ 2.25 APY
12 mo @ 2.25 APY
6 mo @ 2.00 APY
3 mo @ 1.75 APY

Not all readers have reported receiving the above letter, so it may not apply to all Mutual Bank CD holders. Please leave a comment if you have Mutual Bank CDs and didn't receive this letter or if you've received other information from United Central Bank.

The good news this year in terms of bank closures is that very few depositors with over the FDIC limit are losing any money. Most of the closures have involved an all-deposit transfer to a new bank. However, depositors are losing their rate lock from their CDs which is costly. So the health of a bank is an important consideration when you're shopping for CDs even if you plan to stay under the FDIC limit.

Update 8/13/09: Regarding the legality of United Central Bank making these CD rate cuts, this Press-Enterprise article on the CD cuts that occurred after two California banks failed reported the following:
David Barr, a spokesman for the Federal Deposit Insurance Corp., said CD rate adjustments were made possible by national legislation enacted in 1989, in the wake of a savings and loan meltdown that saw several U.S. institutions go under.

Barr said the FDIC does not track how often the clause is exercised. But the intent was to prevent potential acquiring banks from being scared off by the responsibility of paying prohibitively high interest rates enacted by failed institutions in their waning days.

Related Pages: Mutual Bank, Boston

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Anonymous   |     |   Comment #1
I have a 60 month Mutual Bank CD and received a letter from United Central Bank on Monday, August 10.
With 15 months remaining of the 60 month term, it's like now having a 15 month CD @ 2.9%. Not near the 5.50% I was getting, but not bad for a 15 month CD in today's rate climate.
I did think the withdrawal terms were generous. Not being required to lock it it for the remainder of the term.
Anonymous   |     |   Comment #2
I received this on Monday as well. I only have a month left on my 24 month CD. Will just take it out at maturity.
Anonymous   |     |   Comment #3
I had reported in the original thread on Mutual's closing being emailed by one of their branch managers that the terms of my original CD would not be changed... And, of course, this week, I too received the same UCB letter in the mail saying my rate would be cut to 2.9% as of Sept. 1.

I have about one year left till maturity on a 4-year CD, so I'll be withdrawing those funds and putting them into a rewards checking account paying 4 to 4.5%. I wrote a followup email today to the Mutual branch manager saying...hey...what's up with this???

Of course,UCB's decision to do this hacks me off, and equally so being given apparently bad assurances by one of Mutual's branch managers. Needless to say, they will be losing me as a customer PERMANENTLY....
Anonymous   |     |   Comment #4
I was upset that my 5.8% 60-month C.D. is now going to pay only 2.9%. When I called U.C.B., I was told that the FDIC had approved this rate change. When I purchased the C.D. from Mutual Bank, there were several banks offering rates over 5% and I could have got a C.D. at a higher rate, elsewhere. I feel that this is a breach of contract. Does any provision of law give the FDIC the authority to approve a breach of contract and can the government authorize this? Is there any legal recourse? Sometime back I recall going on the Mutual Bank website and it had indicated that they did not have exposure to the sub-prime market and were solid and stable. It is unfair that the depositor has to pay an early withdrawal penalty to access his own funds, but the banks can acquire assets without following the same terms of the original contract.
Anonymous   |     |   Comment #5
Regardless of the reason, Mutual Bank failed. The acquiring bank, in this case, UCB, isn't going to follow the same policies and be obligated to the same expenses including high interest rate pay outs, etc. and potentially failing themselves.

Just like a corporation going into bankruptcy, obligations to share holders and bond holders become mute. I wouldn't criticize the FDIC too much. At least we didn't loose any money, can still earn a little interest, and can withdraw our CD money at any time from now until maturity without incurring an early withdrawal penalty.
Banking Guy
Banking Guy (anonymous)   |     |   Comment #6
I've updated the post with an excerpt from a recent news article on this issue of rate cuts after a bank fails. It looks like legislation was passed to allow the FDIC and the acquiring banks to break existing CD contracts.
Anonymous   |     |   Comment #7
On August 10, I received the same letter from United Central Bank. I called them on Thursday and learned that they decided not to change the rates for IRA CD's.
Anonymous   |     |   Comment #8
Thank you for addressing the issue of national legislation enacted in 1989 which allegedly allows a bank which purchases assets of a failed bank to change rates on CDs in breach of the depositor's contract with the original bank. I thought that this type of recourse was only possible in a bankruptcy proceeding where the bankruptcy trustee could reject executory contracts under the supervision of the bankruptcy court. Are you aware of this particular legislation or where I might find it? I would like to review it to see if there was some type of expiration date to this sweeping power given to an institution which takes over another to breach contracts without court supervision. Thank you.
Anonymous   |     |   Comment #9
i also received the notice concerning the adjusted rate on my cd,,tried to fax my local branch but conviently the fax there was not working..i think we should look into a possible class action concerning this matter..
Anonymous   |     |   Comment #10
Local branch manager was willing to match an available quarter point higher rate rather than have us close our accounts.