A reader recently informed me that his credit union, CEFCU, sent out letters with a change-in-terms notice informing members that certificate early withdrawal penalties would increase effective March 15, 2012. He learned that this change would apply to existing certificates. Thus, the early withdrawal penalty on his CEFCU 5-year CD would increase from 180 days of dividends to 365 days of dividends on March 15th. I've confirmed this with the credit union which emailed me its change-of-notice document.
The reader has complained to the credit union and has spoken with management. After some discussion, a manager agreed to let him close the account within a week, with no early withdrawal penalty. The problem with that option is that he'll lose his high interest rate that would otherwise remain in effect for several more years.
If you're a CEFCU member with a CD, you'll have to speak up if you want the option to close the CD without a penalty before this change takes effect. For members who can't get this special exception, the only option will be to close their CDs before March 15th with the existing early withdrawal penalties. Here's an excerpt from the email reply I received from CEFCU management:
The Change In Terms Notice does apply to existing Certificates, but not until March 15th, 2012. So current Certificates could be closed at the current penalties until then. To address your point on changing the early withdrawal penalties, be advised that any financial institution can do the same with a 30 advance notice. Therefore it would be prudent select a term and rate that you are comfortable keeping for the duration.
In my opinion, CEFCU management is being too confident in thinking that "any financial institution can do the same with a 30 day advance notice". I asked my NCUA contact about this, and he sent an "Official Staff Interpretation" of a NCUA regulation which stated:
Credit unions are cautioned that unless credit unions have reserved the right to change terms in the account agreement or disclosures, a change-in-terms notice may not be sufficient to amend the terms under applicable law.
So if the institution doesn't have anything in their disclosures which gives them the right to change terms, they might be violating a regulation. However, it should be noted that a generic clause allowing the institution to make account changes is probably common in member agreements or disclosures.
Early Withdrawal Penalty Increases at Fort Knox FCU
Last year Fort Knox Federal Credit Union made a similar change to its certificates and applied the larger early withdrawal penalties to existing certificates. A reader who was a member at Fort Knox FCU filed a complaint with its regulator, the NCUA. Unfortunately, the NCUA ruled in favor of Fort Knox FCU claiming that the change was in accordance with the terms of the membership agreement which had a generic and broad allowance for the credit union to make any change to accounts.
Fairness to CD Account Holders?
In my opinion, it's unfair to overturn an important term (the early withdrawal penalty) that's explicitly specified in the membership agreement based on generic clauses. As one reader stated in the comments, this makes the CD "contract" a completely one-way street, with protections for the institution and in effect none for the account holder.
It's interesting to see credit unions being the institutions that have retroactively applied early withdrawal penalty increases to existing CDs. When Bank of America increased its early withdrawal penalty last year, it didn't apply the change to existing CDs. It only affected new CDs or CDs that were renewed. This is the fair way to increase a CD early withdrawal penalty.
Not all credit unions have applied early withdrawal penalty changes to existing certificates. One example is Pentagon Federal Credit Union. Last year it increased the early withdrawal penalty for its 5-year certificates, but it applied this change only to new certificates.
The general opinions from people in the industry is that early withdrawal penalty changes should not apply to existing CDs. Last year I submitted this question to Ask a Banker website. Here's an excerpt from their reply:
Increasing the penalty for closing a CD early is not a normal change. Call the bank and ask to speak to a bank officer about this. They shouldn't be able to do it any more than you could tell them you have reduced the penalty to 45 days. Again, an allowance to modify the CD contract unilaterally would be very unusual.
This general opinion is not much help for a specific case, but it does show that increasing the penalty on existing CDs is not considered fair.
Filing a Complaint Against a Credit Union
It may not have helped in the Fort Knox FCU case, but it doesn't hurt to file complaint in this case. That is what the reader plans to do, and I'll keep you updated on how it goes. One difference between these two cases is that CEFCU is not a federal credit union. The credit union's full name is Citizens Equity First Credit Union. The "F" in CEFCU is short for "First" and not "Federal". CEFCU is a state-chartered credit union that's based in Illinois. This NCUA page has more details about determining if your credit union is a state-chartered credit union.
If your credit union is a state-chartered credit union, complaints will generally have to be submitted to a state supervisory authority. The NCUA lists the contact information of all of the states in this webpage. The Illinois Department of Financial & Professional Regulation oversees Illinois state-chartered credit unions, and its complaint form is located at this webpage. At the top of the complaint form, the Illinois agency warns that it can only provide assistance if the issue involves a violation of a regulation.
Hopefully, this Illinois agency will be more pro-consumer than the NCUA was.
This case with CEFCU is another example showing the risk of depending on mild early withdrawal penalties on long-term CDs. There's a concern of what will happen when interest rates start rising. If rates shoot up, that could put pressure on banks and credit unions to increase the early withdrawal penalties. More institutions may choose to try to increase the penalties on existing CDs.
It should be noted that regulations do 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, it may be an easy decision for the CD holder to close the CD with the existing penalty so he or she can reinvest the money into a new CD with a higher rate.
It's a more difficult decision if the institution is increasing the penalty in today's environment when no one knows how long rates will stay low. If the CD holder closes the CD now with the existing penalty, he or she will only be able to reinvest the money into a lower-yielding account.
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.
In my opinion, these actions of CEFCU and Fort Knox FCU are unfair to the members who purchased the certificates with the reasonable expectation that the rates, maturity dates and the early withdrawal penalties were locked until maturity. This might be the time to get help from the new Consumer Financial Protection Bureau (CFPB). Here's an excerpt from CFPB's website which describes the bureau's mission:
Above all, this means ensuring that consumers get the information they need to make the financial decisions they believe are best for themselves and their families—that prices are clear up front, that risks are visible, and that nothing is buried in fine print.
If an institution wants to meet the spirit of this, they should avoid increasing the early withdrawal penalties on existing CDs or they should state in their disclosures in the sections on the early withdrawal penalties that the penalties may be increased before the CD matures. In my opinion, justifying a penalty change based on some generic clause buried in the disclosure doesn't meet the fairness criteria as promoted by the CFPB.