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Fed Meeting Preview and Deposit Rate Forecast - Oct 25, 2023Risks and Benefits of Long-Term Certificates of Deposit
As I've mentioned several times this year, long-term CDs can be much better deals than short-term CDs even if you think interest rates will rise substantially in the next year or two. If interest rates stay low, the long-term CDs are better since the interest rates are much higher than short-term CDs. If interest rates rise substantially, you can close the long-term CD early. You'll be hit with an early withdrawal penalty, but for many banks and credit unions, the early withdrawal penalty is mild. With a mild early withdrawal penalty, the long-term CD closed early can return more than short-term CDs that you hold to maturity. It can also be better than just keeping your money in a savings account.
Two institutions which have competitive long-term CD rates and mild early withdrawal penalties are Ally Bank and Pentagon Federal Credit Union. Last week I reviewed their rates for both cases: 1) if the CDs are held to maturity, and 2) if the CDs are closed early.
As I mentioned in that post, there are two risks with this long-term CD strategy:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD
Some banks include in their disclosures the right to refuse an early withdrawal request. For the second risk, it's not as clear. When we first learned of Ally Bank's early withdrawal penalty of only 60-days of interest, several readers were informed by Ally bank reps that Ally had the right to change the early withdrawal penalty on existing CDs with 30-day notice. I investigated this, and received assurance from Ally Bank's public relations director that Ally would not change the early withdrawal penalty on existing CDs (see post). A reader looked into this issue with Fort Knox FCU, and its compliance office claimed it held the right to change the early withdrawal penalty on existing CDs with just a 30-day notice. The concern is if one institution can make such a claim, other institutions in the future might also make this claim. If inflation and interest rates shoot up in a year or two, banks will have a big incentive to assert such a claim to prevent customers from withdrawing their money from their low-yield CDs.
I've worked with Allan Roth of the CBS MoneyWatch The Irrational Investor blog on this issue. Allan has done a well-researched post, CDs as Bond Bubble Protection - Revisited. On the question of whether an institution can change CD terms, such as the early withdrawal penalty, he received opinions from an attorney and spokespersons from the FDIC and NCUA. All had the opinion that the institution would not be able to "unilaterally change the early withdrawal terms." However, the reader who first looked into this topic thinks the issue is still muddy since the disclosures have terms that appear to give the institutions blanket allowance to make changes with a 30-day notice.
One thing that is clear is when the institution states in the disclosure that an early withdrawal can only be made with their consent. In those cases, you could be stuck in the CD until maturity. As Allan mentioned in his post, it's very important to read the CD disclosure before you open the account. Also, you should keep a copy of the disclosure.
As I mentioned in this previous post, there have been reported cases of banks making use of this type of clause and preventing customers from making early withdrawals. If interest rate shoot up in the future, we may see more of these cases.
They generally start this kind of magic when the rates shoots up or about to shoot up. At that time, its good for us to break the CD.
Am I missing anything here in my interpretation?
In fact, the disclosures I have read -- from both Fort Knox FCU and from Ally Bank -- say they CAN change any account in mid-CD. They say they must give notice, and you have the option during that notice time to close (but the early withdrawal penalty already in place apparently would still apply).
From Fort Knox:
Account Rates and Fees. Our payment of dividends on your account(s) is subject to the account rates, fees, compounding and crediting policies and balance requirements set forth in this Agreement. We may transfer from any of your account(s) any charges or costs in connection with the operation and maintenance of account(s) as stated in this Agreement or the Schedule. You agree that we may change the Schedule at any time upon proper notice as required by law.
The schedule apparently is the fee schedule, apparently including the early withdrawal penalty.
From Ally:
18. Service Fees
While there are no monthly service fees, there may be service fees that apply to certain requests or actions. Please see our Fee Chart, Appendix A. These fees may change from time to time and in accordance with applicable law. We will provide you notice to the extent required by law.
Those fees seem to include the early withdrawal penalty.
The question that really needs answering is whether these "blanket allowances" can actually be used in mid-CD to change the terms. There are other points of law that would affect this, so what they seem to say on their face might not necessarily be what can happen. But Roth's article did not get this answer.
Meanwhile, in fact, several people in the past several months have reported that their banks have increased their early withdrawal penalty in mid-CD! The latest posting of such came in comments on this site just last week, with the poster saying BB&T bank had just done so to his CD. This certainly would seem to mean that either they violated the law or there are no legal points blocking "blanket allowances" from being used to change the early withdrawal penalty in mid-CD.
And notice, these reported changes in mid-CD have been happening in this economic climate with rates only going down, so no incentive for people to pull out. Just wait a couple years when rates are going up, and maybe significantly so, and a lot of people suddenly want to start pulling their money out of the longterm CDs in midterm! The banks will have great incentive then to block that, either by substantially increasing the early withdrawal penalty to just denying the withdrawals. That is, this is a real risk going forward that must be weighed seriously -- each person must make their own decision on it. Some CSRs or public relations person's assertions that they would not apply that is not reliable.
This is truly ONLY if one assumes that the next several years look similar to the past several years. However, if one studies the history of Fed Funds during the 1970's and early 1980's, this statement is false and misleading.
For example, Fed Funds rose from 4% to 13% in the 24 month period 1972-1974. It also rose from 4.5% to 20% over the 3 year period from 1976 to 1979. In that first period, CPI inflation rose from about 3% to 12% in only 2 years; and in the second period CPI inflation rose from about 6% to 14.5% in only two years.
It's important to keep these historical precedents in mind ... and not make blanket statements using words like "cannot."
I don't remember that any one here reported that this has actually happened -- just that the CU's Compliance lawyer said that they reserve the right to do so.
Did I miss something?
However, the FULL quote from Roth is:
"One comment specifically mentioned that Fort Knox Federal Credit Union in Fort Knox, Kentucky, unilaterally changed the terms of existing CDs."
That comment he is referring to is from DepositAccounts. I am the one who made ALL the comments about Fort Knox -- and I NEVER said that. I said are you remember, that Fort Knox said it CAN do that, not that it has done it. I have no idea whether Fort Knox lately or ever has done it.
But again, it is not very important whether Fort Knox has done it. We have SEVERAL other contributors over the past six to eight months or so who say it has happened to them, one just last week saying it just happened at BB&T bank! So, the bottom line is: it does happen, whether legal or not.
When this first arose some months back, I and we thought it an aberration and that that bank was doing something illegal, breaking a contract. But now it appears it might very well not be illegal, and regardless many banks are doing it. This could very well even be a strategy now, to draw people in with a false promise of low penalty, but then switch later when interest rates start rising, either locking you in or getting enough more penalty from you to make you sorry.
Anonymous #10: yes, that seems to be the case, precisely! That is why what we thought was a great idea to get into longterm CDs at short term rates might not be such a good idea after all! So, buyer beware -- you will be taking on risk you previously did not think you were accepting.
A bank does not have to mail or email you any "notice", it can post it on its website, that is, if you know where to look for it each and everyday!
Did BB&T bank give you a option to redeem your CD at your original penalty, or were you stuck with the new penalty?
I asked them if I could change the interest rate they paid me unilaterally at any time just as they were doing with the penalty if I gave them 30 days notice but they did not find that to be very amusing.
They made it very clear that they could change anything about the CD they wished so long as they gave me 30 days notice, but they were unwilling to provide me with the same option.
Everyone just needs to understand that when you enter into a CD contract the banks reserve the right to change that contract any way they wish at any time.
Banks have all the power but they have it because their customers have allowed them to have it. I went into my local branch about 5 days after I received the letter and they told me that I was the only person who questioned it up until then. So long, as bank customers go along meekly with whatever the banks do, they will continue to do it.
It would not surprise me at all, that there would be banks that refuse to allow CD's to be closed early under any circumstances if they think thy can get away with it and keep their customers.
I have no problem at all with any rules banks wish to have on NEW CD's, but changing the rules in the middle of the contract is just plain wrong.
I no longer do any business with BB&T and would not do any with any other bank who did something similar. Unfortunately, most customers stay with the same bank no matter how they are treated because they are too lazy or just plain unwilling to shop around to find quality bank services.
So long as the banks who treat customers poorly still have customers, there is no incentive for them to treat their customers any other way.
It is much like voting for politicians and then being outraged when they do something you don't like and then going to the polls and voting for the same people again.
Customers have to take ownership for the decisions they make. If I had stayed with BB&T, I could hardly complain about being treated poorly or unfairly in the future.
If you read the language, you will note that it refers to fees and applicable law. Of course they have the right to change fees on their schedule such as bounced checks, etc. me1004 disagrees with both the FDIC and the NCUA as to whether they have the right to change a contract.
I feel the NCUA and FDIC is better researched than any personal attack. I have about as much chance of convincing me1004 of his error as I do convincing an annuity salesman he's getting rich from selling bad product to the elderly.
Yet what you wrote tells the reader that if that one paragraph specifically talking of penalty for early withdrawal does not say that it can be changed at any time, then they cannot change that penalty. You fail to see the parts of the disclosure that provide for changing anything at all, which would include the early withdrawal penalty. You failed to get input on whether that broad assertion in the disclosures can even be applied in mid CD or whether that would constitute an unfair contract that would not meet legal standards. You looked at the one paragraph, considered a broad statement about contracts generally, and made a conclusion -- misguiding the readers.
I'm not disagreeing with the FDIC or the NCUA. I haven't even heard their considered analysis of this matter, as you did not present it. I would like to hear that analysis. But meanwhile, it certainly appears that the banks and CUs are, in fact, changing these rules, such as early closure penalty, in mid-CD, despite that one paragraph you rely on saying nothing about them being able to do that.
I have no idea where you see me taking anything personally in this.
Regarding your comment:
Thank you Anonymous 23. And AllanRoth #22 -- you still fail to understand that the FDIC and NCUA have NOT told you anything at all about the right of the institutions to change their fees/penalties in mid-CD. You did NOT understand what they said.
I'm pretty sure you weren't part of the conversation so your conclusion is emotionally based. Do you think I wouldn't confirm what I wrote with the FDIC and NUCA?
As mentioned, I will never convince you of anything and that isn't my goal. You are free to anonymously post misinformation.
Yes, I am doing that. A fraction of a point is significant for my overall account balance.
If you care to contact me directly and identifying yourself, I'd be happy to show you regulators thought my article was accurate - [email protected]. Speaking of accuracy, it's AllanRoth rather than AllenRoth.
As previously noted, I checked the statements I made with the FDIC and NUCA and named the sources. Rather than throw out insults, I merely pointed out that Me1004 cannot logically draw the conclusions he made unless he was on the calls with the FDIC and NCUA. Feel free to contact me directly if you want some additional facts. I'm sorry my article didn't fit your mental model.
Good luck to you and Me1004.
http://www.depositaccounts.com/forum/thread/2810-fort-knox-fcu-early-withdrawal-penalty-refusal-to-allow-closure.html
thread, I did receive an email from a Fort Knox FCU manager stating that unless I owe FCU money, they WILL allow me to withdraw money and the penalty is 90 days. I did tell them that unless they can give me something like this in writing (email accepted), I will not open my CDs there and she agreed to send me the email.
Other readers may want to do the same thing before opening accounts there or at other institutions (I had done it in others too) to ensure they will have something in writing / email stating these conditions will not change. Normally I talk to someone at customer service who would try to assure me that they cannot change the penalty and of course they will let me withdraw money. But if they cannot send me an email, I ask to talk to a manager, and manager (also trying to assure me of the same thing) CAN send something like the email I had mentioned in my post.