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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Your Rights When Your Bank Fails and a New Bank Takes Over

Your Rights When Your Bank Fails and a New Bank Takes Over

With bank failures so common these days, it's important that CD holders know that the new bank that takes over is allowed to lower the interest rates on existing CDs. The old rates are guaranteed to remain in effect until at least through the day of closure. There are a few relevant details in this FDIC article, What If Your Bank Fails?

By law, the acquiring bank can lower the interest rate on your deposit account, but you also have the right to withdraw the money without penalty. Many closed banks had been paying above-market interest rates on CDs (certificates of deposit) and other accounts. If your bank fails and the deposits are acquired by another institution, the accrued interest on your account through the date of the closing will be paid at your same rate. However, after that date, your new bank has the right to reduce interest rates, subject to certain restrictions.

In particular, for CDs and other non-transaction accounts, the assuming institution cannot pay a lower interest rate than what it offers to its existing depositors for similar accounts. The assuming institution also must notify you of any changes it intends to make in the interest rate or other terms of your account.

Note, the last sentence of the first paragraph states that your "new bank has the right to reduce interest rates, subject to certain restrictions." The article doesn't go into details about those "certain restrictions."

When Will New CD Rates Be Communicated and Take Effect?

The recent failure of Darby Bank & Trust Co. last Friday is highlighting these issues for several readers who had Darby's Step-Up CD. A reader described many of the details that he was told by the FDIC in this comment. The main issue now for Darby CD holders is when will the acquiring bank inform customers of the new rates (if rates will be changed) and when will the new rates take effect. Here's an excerpt of the reader's comment based on his conversation with a FDIC representative:

According to the FDIC, until the acquiring bank has decided to change the terms, the OLD terms are in effect -- and while the acquiring bank can change the terms at any time, they CANNOT make the changes retroactive. In other words, Darby failed today, on a Friday. If the acquiring bank doesn't decide to change the terms until, say, Monday, then the accounts are still supposed to receive the old Darby rates for Saturday and Sunday (until the new terms have been decided upon). According to the FDIC, they can't go back and give you the new terms for Saturday and Sunday if they didn't decide on the new terms until Monday. However, the new bank could have decided to change the terms at 5:00pm on today (Friday), but customers won't know about it until Monday (the next time there's business hours).

I hope that's the case, but there have been cases in the past in which acquiring banks have been inaccurate and slow in their communications.

Complications When Acquiring Banks Change CD Rates

The closures of Corus Bank and Irwin Bank last year provide examples of how acquiring banks often poorly handle CD changes.

Here's one example in which customer service reps did not communicate the new rates. This comment is from a reader who had a CD at Irwin Bank which failed on September 18, 2009.

I find it interesting that I happen to call Irwin on the 25th to inquire about my CD and was told no decisions had been made yet. However, on the 28th, I receive a letter in the mail saying effective the 24th my interest rate is now 1.5%.

The other complication is that the acquiring bank can decide on different terms for different customers. So that could be the reason why some have reported that there will be no changes on their CDs and others have reported that their rates will be cut.

The acquiring bank may decide that they want to keep certain customers. These are likely customers who are in the market area and/or who have other relationships with the bank (such as a checking account). In short, the acquiring bank feels that these customers are more likely to be profitable for them in the future. Those customers who are not deemed as profitable, such as out-of-market customers, may have their CD rates cut or their CDs closed.

Here's an example of how an acquiring bank can decide on different terms for different customers. When Corus Bank was closed and MB Financial Bank took over, MB Financial decided to close CDs for most customers who lived outside their market area (Chicagoland). MB Financial Bank kept the CDs opened for those Corus customers who lived in Chicagoland. However, even they had their CD rates reduced.

We should soon know if the closure of Darby Bank will be another example of slow and inaccurate communications. For Darby Bank customers, please keep us updated in the Darby Bank closure post of your experiences.

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Anonymous   |     |   Comment #1
"However, the new bank could have decided to change the terms at 5:00pm on today (Friday), but customers won't know about it until Monday (the next time there's business hours)...."

This comment makes me wonder what alternative arrangement the depositor could have made anyway.  September 25, 2009 was a Friday.  Unless this customer had been prepared to sprint down to Irwin and cash in immediately, he or she certainly didn't lose much because the acquiring bank held the CD for a few extra days.  I'll bet some out-of-territory depositors didn't receive their notifications until much later.   Face it, folks, bank failures can create difficulties, but this isn't one of them.  The FDIC is only obligated to pay off deposits "as soon as possible".  During this period, no depositor is legally entitled to anymore interest. So, the fact that this depositor received anything is a plus.
Shannon   |     |   Comment #2

RE: When Will New CD Rates Be Communicated and Take Effect?

I'm afraid to say that banks can & do change rates retroactively, I've seen it done many times.  (My company deals with bank closures all the time because our clients have CDs at thousands of banks across the country.) For example, Western Commercial Bank who just closed on 11/5/10 told us on Monday morning 11/8/10 that at the moment rates had not been changed & asked us to follow up on 11/15/10 to see where things stand.  So yesterday, 11/15/10, they decided to retroactively drop rates, with the lower rate in effect since the 11/5/10 bank closure.  And not only that, they wanted an original letter snail mailed to them to close the account.

All that to say, don't get your hopes up that banks won't retroactively drop rates.  More often than not, they do drop the rate as soon as their able.  But do keep in mind, that sometimes the rate it drops to is better than you can find if you were to close the CD & reinvested it somewhere else.
BKS AZ   |     |   Comment #3
Why are banks allowed to break account agreements? Unless the Goverment forces a financial institution to aquire another bank, they should be rquired to honor ALL of the account agreements.....including CD rates and terms.......or PAY the customer an early withdrawal penalty if they decide to break the CD. Every bank(including the most profitable) have long term CD rates they are still paying that are substantially higher then current market rates.......GET OVER IT!!!!!
SaverGuy99   |     |   Comment #4
OK, I wrote the original post, and I only posted what I was told by numerous different FDIC employees. In the end, 3 different FDIC employees in 3 different sections told me that a bank COULD change rates at any time, but could NOT make those changes retroactive (before the bank officially set their new policy/rates). I called: the FDIC group for Darby Bank, the FDIC group for Tifton Bank, and the main FDIC consumer line, and was told the same thing by all 3 agents when I asked this question.

I don't doubt that a bank might try to get away with something that it thinks it can get away with. Darby Bank tried to do that, when they tried to change the terms of their CD midstream by suddenly not allowing anymore deposits (to what was an add-on CD). Some of us (including myself) made an official complaint to the FDIC, it got handled through their Atlanta office, and in the end, Darby had to abide by the rules, and recinded it. The bank you mention probably figures people are going to think it's not worth it to them to either (a) know that they're not supposed to or (b) bother to take legal action over a (relatively) small amount of money. But if it's important to you or your clients, you might want to call the FDIC, because there was no discrepancy there when I talked to 3 different agents about it: the acquiring bank CAN change the terms at any time, but they CANNOT make it retroactive before they've officially changed the terms. All I can tell you is what the FDIC is telling me.

As far as the example where I used only a weekend's worth of interest, that was probably a bad example, as if a bank hasn't made a decision on the day it takes over, it can often be like a week or two (I just used that as an example to illustrate).

Bancxman   |     |   Comment #5
BKS AZ  Technically, assuming banks do not break account agreements. They either ratify them or offer alternative terms. Remember, once a bank fails, all accounts cease to accrue interest.  The FDIC can then pay insured depositors in one of two ways: Directly by check or through a "transferred' deposit to another insured institution. In transferring deposits, the FDIC, in effect, appoints the assuming bank to be its paying agent.  As part of the deal,  the assuming bank can offer depositors any deal it wishes, including cutting rates on CDs.  In other words, assuming banks are not legally required to assume the deposit obligations of a failed bank at prevailing rates, unless they expressly choose to. If the depositor declines a rate cut, then the assuming bank is only obligated to pay that depositor the accrued value of its deposit ON BEHALF OF THE FDIC. Normally, this would be the value of the deposit at the time the failed bank was closed.  However, assuming banks may throw on some interest of their own until a deposit is paid. Moreover, forcing potential acquirors to assume deposits at existing rates would likely either cause them to dratically lower their bids to acquire both the assets and liabilities of failed banks or kill such deals altogether. This would have a corresponding effect of forcing deposit rates even lower because the FDIC would then have to charge banks even higher deposit insurance premiums to keep its fund solvent. In short, depositors really can't blame assuming banks for losing a good deal on a CD, especially if the CD was from a bank that was half underwater.
Shannon   |     |   Comment #6
@SaverGuy99 -  Good points.  And to clarify/add to my original post, the thing that seems to be the biggest part of the problem is that banks don't make an official decision for a few weeks.  There is no standard in place when they are required to "officially" change rates.  So it becomes a little bit of a gamble... should we close it now assuming that they're not going to offer a decent rate or even keep rates the same?  Or should we just close it now before wasting anymore time letting the funds sit with the potential of earning only 0.15% once they officially decide to drop rates.

Bottom line, I wish the FDIC would put in place a requirement for banks to make the official rate decision by a certain date.  The week following the closure perhaps? 
ChrisCD   |     |   Comment #7
@saverguy -- interesting about Darby and that the FDIC got involved.  My experience has been they only get involved with getting your funds back, not "contractual disputes".  Recently a bank tried to drop rates a 2nd time.  I called the FDIC was told they weren't the actual agengy responsible for that bank, but the OTS was.  I called them and they were no help at all.  They said I would have to file a complaint and it could take 60-days to get resolved.

The one potential caveat for the bank, is the bank management may claim to have decided to drop rates on the day they took over, but didn't communicate that decision to tellers and such.  And of course letters are often sent two to three weeks later.

With so many bank closures the FDIC really should set some rules that are written in stone.  Give a bank an inch, it seems they will take a mile.  :O)

And Heaven-O to Shannon.
Anonymous   |     |   Comment #8
I got this from a typical FDIC contract for the assumption of insured deposits by with an assuming bank:

2.2 Interest on Deposit Liabilities. The Assuming Bank agrees that, from and after Bank Closing, it will accrue and pay interest on Deposit liabilities assumed …at a rate(s) it shall determine; provided, that for non-transaction Deposit liabilities such rate(s) shall not be less than the lowest rate offered by the Assuming Bank to its depositors for non-transaction deposit accounts. The Assuming Bank shall permit each depositor to withdraw, without penalty for early withdrawal, all or any portion of such depositor's Deposit, whether or not the Assuming Bank elects to pay interest in accordance with any deposit agreement formerly existing between the Failed Bank and such depositor… The Assuming Bank shall give notice to such depositors as provided in Section 5.3 of the rate(s) of interest which it has determined to pay and of such withdrawal rights.


The phrase "from and after Bank Closing, it will accrue and pay interest on Deposit liabilities assumed …at a rate(s) it shall determine" is clear; i.e. assuming banks can set whatever rates they wish. However, as a matter of law (not contract), once set, they can't retroactively change them. In light of this, I don't see how Western could apparently pull off a retroactive rate decrease.    Moreover, since Section 5.3 gives the banks 7 days to notify depositors of the prevailing rates, I also can't see how Western would have been able to wait as long as it did. There must have been something more to that.