CD Deals Summary
Fed Meeting: Another 25-bp Rate Hike - Strategies for Savers
Fed Meeting Preview and Deposit Rate Forecast - March 15, 2023
Silicon Valley Bank Is Shut Down - Second Largest Bank Failure in HistoryNCUA Rules in Favor of Credit Union That Raised Early Withdrawal Penalty on Existing CDs
In March I had confirmed that Fort Knox Federal Credit Union had increased the early withdrawal penalty on its long-term share certificates (CD) from 90 days to 180 days of interest. I also confirmed that this change applied retroactively to existing CDs. One of this blog's readers filed a complaint with the NCUA, and he has been kind enough to keep me informed of NCUA's review process. The NCUA's Office of Consumer Protection did the review, and I'm afraid it ruled that Fort Knox FCU's action was permissible. I've copied the majority of the letter below (only exclusions were personal information). Note, it references the Fort Knox FCU's membership agreement.
We have completed our review of your correspondence and information regarding Fort Knox Federal Credit Union. Specifically, you asked if it was permissible for the credit union to increase the early withdrawal penalty on existing share certificates.
Based on our review of the documentation relating to this matter, it appears the credit union made the change in accordance with the terms of the Membership Agreement (copy enclosed).
Section 7.c. on Page 6 of the Membership Agreement states:
Any term share certificate, certificate or share certificate accounts offered by the Credit Union are subject to the terms of this Agreement, the Schedule, and any account receipt or certificate, which are incorporated herein by reference.
Section 29 on Page 13 of the Membership Agreement states:
The terms and conditions of any account, including the method of determining dividends, may be changed by the Credit Union upon written notice, or as required by applicable law.
For share certificates with maturities greater than one month, the credit union would have needed to provide affected members with a written change-in-terms notice at least 30 calendar days before the effective date of the change in accordance with Section 707.5(a)(1) of the NCUA Rules and Regulations.
Since the credit union reserved the right to change terms in the Membership Agreement, the credit union would not have violated a federal consumer protection law or regulation regarding this matter provided it complied with the written notice requirements outlined in Section 707.5(a)(1) of the NCUA Rules and Regulations.
In my opinion, it seems unfair to overturn an important term (the early withdrawal penalty) that's explicitly specified based on generic clauses that are in different sections of a large document. The worry is that all banks and credit unions have similar disclosures with similar general blanket clauses that give them broad rights to make account changes. If inflation and interest rates shoot up sometime in the future, many CD holders will likely want to break their CDs to reinvest their money in new accounts that have much higher yields. That may put pressure on the banks and credit unions to increase the early withdrawal penalties to reduce the number of withdrawals.
As I mentioned in my previous post, the general opinion from experts is that early withdrawal penalties should not be increased on existing CDs. However, these were just general opinions that did not take into account the details of the disclosures.
Other credit unions and banks that have increased early withdrawal penalties did not make the changes retroactive. The larger penalty only applied to new CDs or CDs that rolled over after maturity. In my opinion, that upholds the spirit of the CD contract. In May I described Bank of America's early withdrawal penalty change which only affected new CDs. PenFed and OneWest Bank also made similar EWP changes that only affected new CDs. The question that can't be answered is if these institutions would be as honorable if interest rates were shooting up instead of going down. It's easier to be honorable when there's no financial pressure.
It's important to keep things in perspective on this issue. If interest rates stay low, institutions will have little reason to increase early withdrawal penalties especially on existing CDs. They will more likely make changes that are favorable to depositors such as waiving early withdrawal penalties.
Also, regulations require institutions to provide at least 30 days written notice before the changes are made. Before that change, a CD holder can make an early withdrawal with the existing penalty. If the institution is making this change due to interest rates shooting up, the CD holder should be able to reinvest the funds in higher yielding accounts.
The main risk for CD holders is if the institution can refuse an early withdrawal request. That completely locks a customer into a CD until maturity. Some institutions do include in their disclosures the right to refuse an early withdrawal request. Disclosures often state that an early withdrawal of principal is only allowed with their consent. However, unlike the blanket change clause, many banks and credit unions don't have this "right to refuse" clause.
One way to reduce the risk of being locked into a long-term CD is to maintain a CD ladder. With a CD ladder, long-term CDs are staggered to mature in regular intervals. In this way you don't have all of your money locked for many years.
The Consumer Financial Protection Bureau, the new Federal agency that is chartered with protecting consumers from the financial industry may feel differently about this.
Meanwhile, during this discussion over the months, market conditions have changed so that the more immediate danger that this could have become a more widespread action by the banks has greatly diminished. There had been real expectation that interest rates would be rising by the end of this year or turn of the year. Now, Bernanke says nope, not at least until the middle of 2013 -- if then, if ever. Rising interest rates is what would have/will put very serious pressure on the banks to change the early withdrawal penalty or otherwise try to thwart early withdrawals -- althogh, as Fort Knox, they still might choose to do so at any time any way. It doesn't really matter whether most will; what matters is whether the isolated one you are with does. Don't forget, banks that are hurting and need to gather more capital on hand to avoid insolvency will still be under tremendous pressure to change EWPs to stop any outflow regardless of interest rate pressures.
Nonetheless and meanwhile, those who undertook the strategy of taking out a longterm CD with the expectation of closing it when interest rates rise have won out for now, but only thanks to a deteriorating economy. It was and remains a gamble, and that gamble should be weighed before choosing to take that risk. If you can deal with leaving the funds in the CD for the entire length of the term, and at that interest rate despite market rates rising, then going the longterm rate remains a reasonable strategy. You would look at any early withdrawal as something that MIGHT be possible at the time, not as something that necessarily WILL be possible. But you should not count on being able to take an early withdrawal, and certainly not as a profitable move.
I will say, this is one agency's opinion. But until someone takes the issue to court and manages to get a contrary order, this is the rule of the land. Still, lawmakers can change the law so it is actually fair -- so feel free to lobby your legislators. But do be wary about "experts" opinions, especially in the face of the plain language in disclosures -- experts can be right on, and they can be far off. "Experts" are not necessarily so expert as the word suggests, so you must exercise your own common sense too.
FKCU should change their initials to FUCU.
Like another poster mentioned above, what if they change the interest rate when the rates are going down? From NCUA's statement that seems OK too.
Would it be OK to close the account if the contract is changed?
This philosophy didn't work out too well for the GM bondholders, did it?
In my opinion, the NCUA greatly erred in its decision. Banks/credit unions should not have a one-way contract ticket. If one cannot lock into a specific rate, for a specific time, with a specific penalty what is the point of a having a CD???
For all of us, please continue to pursue this matter and to keep us updated.
Again, the guberment protects banks everytime, never the customer!
Your CSR confirmation or branch manager assurances of grand fathered early withdrawals penalties are farce and are for your ego only.
Ally can do the same thing should a need arises to do that, don’t be fooled by “I was told by CSR it will not apply to me”.
@#16 Assurances from a branch manager or CSR are not binding as they are not authorized to set policy for the institution. The issue here is a legally binding contract between the institution and its accountholder.
Bernanke's "Twist" may just turn him into a bowl of butter and I hope spins him off our Federal Reserve! We need someone in there who gives a rat's **** about the "savers" . My letters have gone on deaf ears but if someone will advise better people I can write to, I am willing to type till my back screams with pain. We can't sit back and pretend it won't get worse. Read between the lines! THEY have given us a message and are letting us know what to expect. What a sad day for our country and US!
Fort Knox has blacklisted itself! Shun them!
"You may make withdrawals of principal from your account before maturity only if we agree at the time you request the withdrawal." https://www.firstmarkcu.org/Info/TIS_091806.pdf
"I contacted FKFCU regarding the EWP on my IRA term certificate which I opened on February 9, 2011, six days before the effective date of the February 15, 2011 change to the EWP from 90 days to 180 days. FKFCU assured me my EWP remains 90 days.
It makes sense. Under federal regulation 12 CFR 707.5, credit unions like FKFCU must give 30 days written notice to a term certificate holder of an EWP change. All of these banks, including the hallowed ALLY, give themselves the right to unilaterally change terms of their CD's, but 12 CFR 707.5 requires them to give 30 days written notice to the certificate holder."
I am quite confident that my EWP is still 90 days, but I will contact FKFCU on Monday just to confirm that I did not receive a 30 days written notice of an EWP change on my CD. If FKFCU were to send me such a notice, I would close it down in a heart beat.
U.S. Dollar CASH IS NOW TRASH! The best thing to do is to take advantage of the current short-seller attack on the gold, silver and platinum markets, and BUY BUY BUY. The precious metals are now on sale, and they are the only real money. US Federal Reserve Notes are a travesty, and have been irredeemable in gold since 1933, when Franklin Roosevelt unconstitutionally confiscated gold belonging to the American people.
Gold is down almost $300 from its high of $1,917, and so is platinum. Silver is down almost 25% from its highs. These takedowns are accomplished at the futures markets, where corrupt international banksters like JPM print futures contracts they don't have even 1% enough gold to fulfill, in order to cause a price collapse. A fake supply creates overwhelming price pressure that could never exist in real markets that require delivery of real gold. But, people all over the world have been respecting the New York "spot" price for so long, they go along with it, and start selling at lower prices.
What I just said requires many pages of explanation for you to understand, but it is true, and you can read more about it by googling "gold manipulation" or searching Seeking Alpha or other websites. The bottom line, however, is that precious metals have been made artificially cheap, temporarily, by JPM whose proprietary trading software is filled with newly printed dollars from the Fed. The powers that be do not like rising gold prices because it embarasses them and shows clearly that central bank policies are not only corrupt, but do not work.
So, use this opportunity to buy gold, silver and platinum, and wait for the continued crash in equities markets to play out. Once it has, use the majority of the remaining cash to buy stocks. Transfer any cash you want on hand into demand deposit accounts denominated in foreign currencies from nations that are fiscally sound, like Swiss francs. Forget about the US dollar and American banks. Although the dollar is temporarily going to rise substantially, in the long run it is the fiat currency issued by a badly mismanaged government, and it will eventually collapse under the weight of Ben Bernanke's printing press as soon as the current 3 inflation hawks on the FOMC rotate off the committee in January 2012.
Savers are the best people in America. The salt of the earth. But, we are all in the process of being mugged by our own government. Over the next several weeks, we will have an opportunity to save ourselves. Let's take it!!
But I think it's important to point out, that the NCUA based their decision, at least nominally, on the specific language in that particular credit union's membership/account terms that allowed them to make certain changes... though clearly not explicitly stated as relating to early withdrawal penalties per se.
Sometime back when this issue first arose, I went back and reviewed the terms and conditions I have with Pentagon FCU for my CDs with them. And I could find no comparable language in my PFCU TandCs, like that quoted from the Fort Knox document, that would provide cover for that kind of a change...
So rather than making blanket pronouncements about "never open CDs" and such, I'd say the better advice is to read carefully just what your member agreement or account agreement says...and see if it includes language that would allow a decision like occurred in the case of Fort Knox FCU...
I opened my fkfcu cds the same day you did. I was told by their phone csrs on 5 phone calls earlier in February that 'they would never do this retroactively". I could not get their supervisors to put this in writing. Then, 1 month later I found out that they did this retroactively. I never received a 30 day written notice either, but they said their January glossy mailed newsletter served that purpose.
I sent a letter to NCUA in early April protesting this retroacive change and also asked them to address the lack of written notice. I have not heard a decision from NCUA but they are reviewing my case and the written response by FUFCU.
I don't expect anything different than what happened here.
Did you call and speak to the bank about your particular CD? I am familiar with the flyer of which you speak, and it is not the notice required in the Federal regulations. When I spoke to the CU about my CD, I was told that my CD still had a 90 day EWP. I think you will find if you call the CU that you still have a 90 day EWP. The flyer is insufficient notice.
3.
Your Agreement With the Credit Union.
All accounts and account services are governed by the terms and conditions in this Booklet and the Schedule; your Account Card(s), account receipts, and certificates; any other application or agreement we require; together with the Credit Union's Bylaws, policies and procedures, which are herein collectively referred to as "Agreement". This Membership and Account Agreement governs all your accounts and services, except as may otherwise be specifically provided in this Booklet or other agreement(s) with us. Your Agreement may be amended or revised by us at any time, and any change in the Agreement shall be effective at the earliest time allowed by law. This Agreement is binding upon all parties hereto and their heirs, successor, assigns and any other person claiming any right or interest under or through said parties. (bolding is mine!)
To be fair, this detail should be on Page One of the agreement & not buried 35 pages later. My opinion is that Fort Knox CU is legally able to change the penalty-but to apply this retroactively to existing acounts indicates a poorly applied policy...both for the CU and the customer.
This was an appalling and shortsighted ruling by the NCUA. The premature withdrawal penalty is very much a material term of the certificate for even reasonably sophisticated investors. If that provision can be changed at the unilateral whim of the institution, why not also reduce the interest rate to 0%?
If other credit unions and banks try to follow suit, there will most likely be pressure on the regulatory front and a rash of class-action litigation.
This is an issue for the new Consumer Financial Protection Bureau. The NCUA is only worried about having to bail out credit unions that go under.
People, I think we are going to find a LOT of banks and credit unions putting new CD programs into their computers with such wording to protect themselves. Read your CD Disclosures!! If they try to skunk you, let them know you will get the word out to millions of savers about their actions. We have the internet these days so a few clicks can do a lot of work for us!
If that President of my new bank doesn't keep his word, he may be getting a personal visit from me after I contact that new group I just found out about on here. I particularly asked if there was anything different about their CDs than the ones I normally buy and was told no by the person. I think a "Callable CD" is quite different!! Maybe one day we will see "mystery savers" in the banks to catch all their tricks!
This is also sometimes thought of a "Mutuality of Obligation." See, e.g., Johnson v. Oconee State Bank, 226 Ga. App. 617 (1997) (no meeting of minds on essential term of the renewal contract, making it unenforceable). This defense usually is raised where, on the face of the contract, one party is free to walk away with impunity while the other party remains bound to perform (hence, the lack of mutuality). See e.g., Ponce Development Co. v. Espino, 449 So.2d 317 (Fla. DCA 3 1984).
Class action plaintiff's lawyers take note, OK?
Meanwhile, I think I'll be emailing this particular website to my Fort Knox representative. Surely this much bad P.R. ought to give management pause.