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Bank Breaks CD Terms by Closing CDs Before Maturity
One of the concerns with long-term CDs is that the bank won't honor the terms of the CD. An important term is the right for an early withdrawal with a penalty specified in the disclosure when the CD was opened. The fear is that if rates shoot up in the next few years, banks will take steps to prevent early withdrawals by increasing the penalties or by just refusing the withdrawal requests.
Another important term is the maturity date. Unless the CD is callable, you expect that the CD will earn the specified interest rate until the maturity date as specified when the CD was opened. The only exception has been when a bank fails. By law the acquiring bank may decide to close the CD early. It looks like that's not the only exception. There has been a recent case in which a bank broke this contractual agreement. This is described in this blog post at Jumbo CD Investments.
Main Street Bank in Kingwood, TX used a clause in their disclosure to allow the early closures of the CDs. They claimed that they are being required by a consent order with the FDIC and Texas regulators to meet certain capital requirements, and this is the reason for the early CD closures. Here's the clause from the bank's disclosure:
Amendments and Termination - From time to time we may amend any term of this agreement upon giving you reasonable notice in writing or by any other method permitted by law, including, in appropriate circumstances, posting notice in our building. We may also close this account at any time upon reasonable notice to you and tender of the account balance personally or by mail. Notice from us to any one of you is notice to all of you.
We've seen some other banks include a similar clause in their disclosures which essentially turns the CDs into callable CDs, but this is the first time I've seen a bank make use of this clause to actually close the CDs early.
My contact at Jumbo CD Investments said they tried to work with the bank's CFO to see if the bank would at least honor some of the remaining interest they owed to the depositors. They suggested that the bank at least pay the depositors the difference in cost of what they expected to be earning and what rates they can currently receive now. The bank decided against this and is only paying interest up to January 3, 2011.
Not only did the bank decide to close the CDs, they did so on Christmas Eve. They sent out the letters on December 24th, and at the same time they returned the funds via wire transfer without any other warning. This appears to be a clear violation of Regulation DD:
§ 230.5 Subsequent disclosures.
(a) Change in terms--(1) Advance notice required. A depository institution shall give advance notice to affected consumers of any change in a term required to be disclosed under § 230.4(b) of this part if the change may reduce the annual percentage yield or adversely affect the consumer. The notice shall include the effective date of the change. The notice shall be mailed or delivered at least 30 calendar days before the effective date of the change.
Another disturbing issue of this is that the staff at Jumbo CD Investments isn't getting any help from the FDIC. Here's an excerpt from their blog post:
And shame on the FDIC for not doing their duty (and believe me this isn’t the first time) to protect depositors from unscrupulous banks that hide behind small print.
This case strengthens the concerns of many readers who fear these blanket clauses in the CD disclosures could be used by banks and credit unions to the detriment of the CD account holders. This concern was described in my blog post on the risks and benefits of long-term CDs and in this forum thread on Fort Knox FCU's early withdrawal penalty.
One interesting thing to note about Main Street Bank is that they appear financially healthy. I was disappointed to see that we gave Main Street Bank an overall health score of 4 out of 5 with a Texas Ratio of 5.01% based on September 2010 data. However, we're not alone. Bankrate.com gave them the top rating of 5 out of 5 stars. BauerFinancial won at the ratings in this case. They gave the bank a 2 out of 5 star rating. Calculated Risk Blog's unofficial problem bank list did list Main Street and their July 2010 FDIC consent order. I'm sure most of the CDs were opened before July, so this shows that even if a bank appears financially healthy, it doesn't mean you won't have to worry about the bank doing what Main Street Bank did.
In my opinion the regulations and the regulators are inadequate in the protection of depositors. There have been a lot of new regulations this year to protect borrowers, but nothing for savers. There needs to be regulations that ensure that banks can't use overly broad disclosure clauses to make major changes to CDs to the detriment of the CD account holders. It's bad enough that savers are having to live with these record low interest rates. We shouldn't have to worry about banks cheating us on our CDs.
I note, in the article headline, you said the "Bank Breaks CD Terms..." Actually, with that clause in there, that was the CD terms. So, they did not technically break the terms. Yet, that clause did not get it classified as a callable CD -- and I don't see why not.
My impression at this point is that pretty much ALL CDs have some such similar clause, although they may be more obfiscating than this one. This one at least actually specifically mentions closing the CD. I haven't seen all the banks' terms, but I haven't seen any that do not have such clauses, as obscure are they might be written.
I do not see how they bypassed the Reg D requirement for a 30-day notice, initiating the action of Dec. 24, and it being effective Jan. 3 or earlier. But you reference a "consent order." If that is a court order, that might be able to override the Reg D notice requirement. If merely an FDIC order, the FDIC might have other authority to make for less notice; the Reg D requirement you quote is on the financial institutions, not on the FDIC itself. That might provide a way around Reg D requirements.
Bottom line: anyone getting into longterm CDs as a tactic to get higher interest rates, with the idea they can close early, pay the early closure penalty and still end up with more interest than they would have gotten in a shorter term CD, better approach that tactic with caution and consideration of whether they will be able to suffer any loss if some such action as this happens. At least with this closure, the account holders will not have to pay the early closure penalty so should not lose to date, although with whatever lower rate they now get on that money, they might end up with less than they would have with shorter term CDs at the time they started this CD. But if instead of closure the early withdrawal penalty is substantially increased, that could very well completely undermine your strategy, leaving you facing an immediate loss over what you otherwise might have gotten in a shorter term CD or facing an outright loss of principal. Or, maybe the bank simply will not allow the early closure -- and if you need the money, you could be in big trouble. I think you would be unwise to use that tactic if you will not be able to go the full length of the CD in the event its terms change for the worse.
Re the comments about the FDIC doing nothing to help the depositors: unfortunately, it seems none of the regulators are doing that part of their jobs. For the past seven months, I have been dealing with the Comptroller of the Currency in a dispute with Citibank, and the regulator has done NOTHING useful or, in my opinion, even honest in addressing the issue. They require me to file all the details, and then they send that to the bank. The bank then takes months and months to bother to respond, and when it does, it is just a completely professional, in my opinion lying whitewash claiming innocence and falsely blaming me, and leaving out key details that would hurt them. The Comptroller of the Currency takes that letter and uses it to immediately close the case, and later notifying me of such! The bank said they are innocent, so they are innocent. They do not even question the bank. They do not even consider anything in the response that might be completely unbelievable. I have refiled twice so far, to no avail. They say I can provide proof. The only proof would be the tapes of phone calls with Citibank -- but the Comptroller refuses to ask for them, despite me calling on them to do so in every contact -- and by now they certainly have been destroyed.
And I have heard similar comments from others trying to get the regulators to do their jobs. So, don't expect any help -- the regulators are acting as the protectors and agents of the banks. We are on our own.
About the FDIC: I agree they're totally impotent and don't want to do anything to help the consumer. I've seen discussion here about a couple of other banks that disregarded rules (different ones) and didn't suffer anything for doing so.
Lesson: put your money where your mouth is, or might at least be heard (as on this blog). If enough folks learn about a bank scamming, it might have the intended consequence,
Bozo
Let these bums know you cannot **** the customers!!
m. Notice of Withdrawal. Pentagon Federal
reserves the right to require a written notice of
up to 60 days of the intention to withdraw funds
pertaining to this certificate. Such a
requirement, if imposed, may not extend the life
of the certificate beyond the established
maturity date.
cd :O)
As Ken says in the post, "regulations and the regulators are inadequate in the protection of depositors. There have been a lot of new regulations this year to protect borrowers, but nothing for savers". Borrowers got everyone's attention when they couldn't meet obligations and then the economy started to deteriorate. I don't anticipate the FDIC getting more actively involved with protecting savers' interests until they absolutely need to.
The lesson here is that we all need to be responsible for being our own best advocates at all times, especially when it comes to financial transactions. Financial institutions certainly know how to do this.
It's in our own best interests to be diligent about reading and extremely vigilant about making sure we understand all the terms in agreements in our lives, especially disclosure agreements relating to financial transactions. The devil, as they say is in the details, or as more commonly stated, "The large print giveth and the fine print taketh away". We will all continue to be presented with that lesson until we take it to heart.
Not to say that we might not still deposit the money into what amounts to a callable CD, but at least we do so with full awareness of the risks.
In those previous forums posts, we named a few banks we looked at, and they all had such clauses, including Ally, as specifically questioned above. And there have been some other posters over the past year who have complained about their banks doing such things.
In previous forum posts, the danger of this was basically pooh poohed by some as something the banks would never do, that it was just lawyers putting in boilerplate that meant nothing to actual business practices. I knew that was wishful thinking. I argued that the CEOs know full well what is in the clauses and will use them as they please.
In fact, we are in a circumstance now that could bring these clauses into big play in the next couple-few years. A lot of people have been using the tactic of going into longterm CDs for the higher rate, with the idea of closing and absorbing a small early withdrawal penalty when interest rates rise and moving to a higher rate, leaving them with more interest accrued than they would have had otherwise. But when rates do rise -- and they will in the next couple of years, and presumably substantially -- and a lot of people start the end play of that tactic, trying to close their CDs, they should expect the banks to respond accordingly and exercise these catchall phrases. The banks are not going to sit by idly as they lose all their deposits and let themselves be run out of business! These are unique economic circumstances we are facing, now and going forward.
So true!
If a bank can close a CD based on a clause in the general disclosures of the bank, can in turn a depositor break a CD penalty-free when the bank changes the general disclosures?
It seems ot be a clerical checklist exercise; 1. Receive complaint.
2. Forward complaint to credit union 3. Did consumer and NCUA receive response from credit union?
End of process!!!
No item 4, were issues resolved by the credit union letter?
35 years of doing major personal banking and 25 years of doing cash management for large corporate treasurer departments and I am appalled at the way the NCUA handled this!
Why are we paying government employees to do this caliber of work?
Anyone who is a victim of this bank should consult an attorney about his or her legal rights. Because of the tiny size of these cases, it is unikely that you could interest a lawyer in this on an individual basis, but he can give you a lot of information on your rights, and, often, the first consultation is free. Also, you could bring the case yourself, in small claims court in the Texas County in which the bank is located. Or, you could contact a Texas lawyer, and offer yourself as a class representative. This may be a decent class action, if there are enough victims, because it is really a fairly simple breach of contract case very suitable for handling in that manner.
"We may change any term of this agreement. Rules governing changes in interest rates have been provided. For other changes we will give you reasonable notice in writing or by any other method permitted by law. If any notice is necessary, you all agree that the notice will be sufficient if we mail it to the address listed on page one of this form. You must notify us of any change."
So this means, they can decide to change ANYTHING they want at ANY time -- and their idea of "reasonable notice" is NO notice, as long as they drop you a letter in the mail the day they decide to do whatever they want.
Can THIS be challenged? Because this is really no longer a guaranteed time deposit. After all, YOU cannot do anything to the account without getting penalized, but the BANK is saying they can do WHATEVER THEY WANT to your account. That's not an agreement. The bank hasn't pulled this out yet, but I'm just wondering, is this worth submitting an enquiry to the FDIC about? Not that they'd do anything...
Now I'm afraid to contact them on this but will search their site or my e-statements to see if they are there...which I doubt. Of course, I understand that regardless whether they have the offending clauses or not it's obvious they'll do what's best for themselves even if unfair to savers! :) Rosedala
PenFed CD application, which discusses early withdrawal penalties etc. I see no discussion of changing terms - not to say it's not in another document. https://www.penfed.org/pdf/accountsforms/688.pdf
Sorry, Dude. I'm a retired lawyer, too, and I doubt any lawyer worth his or her hat or cattle would take a case based on "lost" interest. Do the math. Even assuming you had the max involved ($250K), and the bank ripped you off by, say 3%, you have to calculate the opportunity cost (i.e., I get ripped off, so I take the funds and plunk them elsewhere), then subtract filing fees and your contingency fee (duh), and the fact that neither Texas nor any other state would grant class action status, you see where this is leading. As I posted in another thread on this blog, banks do math quite well. The math means they can rip you off and get away with it.
Don't get me started on class action status, by the way. Trust me (I'm a lawyer), it won't work.
Bozo
As one who has a "pacta" with KeyDirect with many years to run (at 5.75%), I can only hope my "pacta" will "servanda".
Happy Newish Year,
Bozo
If the bank is answering an FDIC order, this action is allowed. It is an account closure so the bank can remain healthy, not a change of terms forcing you to keep your money with them. Because it is an account closure as response to FDIC, it would not have to give 30 day notice. Because you got all your money back, you have no ground to stand on. FDIC will allow this all over the place in order to keep a bank healthy and not have to use taxpayer monies to take over the bank. You should expect to see more of this until this financial crisis is over.
To be clear it was 14 accounts that were closed, totaling about $1.4MM in principal and $32K of lost interest. And based on the letter, if the bank gets away with this round, they may attempt round two sometime before March 31.
It is not Ken's (depositaccounts.com) integrity that is in question here. It is Main Street Bank's (of Kingwood, TX).
cd :O)
Brokered deposits come under different FDIC rules.
So I surmise that the FDIC treats brokered deposit somewhat differently than non-brokered deposits. Sometimes the acquiring bank will only take the non-brokered deposits and the folks that have brokered deposit get a check for P&I through the day of the closing. Have a look at this post: http://www.depositaccounts.com/blog/2010/11/uninsured-deposits-at-failed-banks-how-the-fdic-has-changed.html
So it has nothing to do with different regulations. In the case of a bank closure it comes down to the perceived value.
The very fact that Main Street decided that the easiest way to comply with the FDIC directive was to dump the brokered CD's tells us all something about what banks and the FDIC thinks about brokered deposits.
So while I am concerned that this bank decided to break their contract, I would be much more concerned if they decided to do this with non-brokered deposits. Even so, it still sucks.
The site is now owned by Lending Tree, but apparently people forget.
Founders Loyalty account is paying above 5%. Why would any rational credit union close accounts paying 3% and start paying over 5%?
And the rates are okay, no longer great. But if they think they can change the rates on existing CDs, the stated rate is no longer relevant.
3% is above market but the total can't be enough to be worth ruining the credit union's reputation.
It seems more driven by stupidity than profit.
Every time I check this site for a sign of intelligent life it is a disappointment.
Maybe one was opened incorrectly, who knows. Comments here are wrong as often as they are correct.