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.