Fed Meeting: Downshift to 25-bp Rate Hike - Strategies for Savers
CD Deals Summary
Fed Meeting Preview and Deposit Rate Forecast - January 24, 2023Banks That Give Certainty About CD Early Withdrawals
I don't know how long it will take, but interest rates will eventually rise. If rates do rise like they did in the early 80's, you won't want to be locked into a long-term CD paying today's extremely low rates. If the CD has a reasonable early withdrawal penalty, it should be easy for the depositor to do an early closure of the CD, take the penalty and reinvest the money into accounts with the new higher yields. As we have discussed many times, there are two potential gotchas to this approach:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD
The risk that a bank refuses to allow an early withdrawal is more worrisome since it totally locks the depositor into the CD until maturity. There have been cases of banks refusing an early withdrawal. In my 2008 blog post, I reported on the experience of Chris at Jumbo CD Investments. He remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.
Banks have little reason to refuse early withdrawals in today's environment of falling interest rates. If rates start rising, banks will have more incentives to refuse especially if rates rise substantially.
Last year I reviewed banks that include in their disclosures a clause that gives them the right to refuse an early withdrawal request. Some common clauses that I've seen will include language like "only with the consent of the bank" or "if we permit an early withdrawal of principal".
Most banks and credit unions have disclosures that neither state they may refuse an early withdrawal nor state they will allow an early withdrawal. The best institutions are those which explicitly state that they will allow an early withdrawal. This is typically in the section of the disclosure that describes transaction limitations for the CDs. If you're concerned about being locked into a long-term CD, you may feel more comfortable with these institutions. Unfortunately, I haven't found many. Below is a list of a few of these institutions with excerpts of the disclosures.
- Barclays just started an internet bank with online CDs. As I mentioned in my review, Barclays states the following in its disclosure: "You may, subject to an early withdrawal penalty, make withdrawals of principal from your CD Account before maturity."
- Nationwide Bank has its terms and conditions online, and in the CD transaction limitations sections it states: "You may make withdrawals of principal from your account before maturity. Principal withdrawn before maturity is included in the amount subject to early withdrawal penalty."
- Northwest Federal Credit Union has its certificate disclosure at the bottom of its CD application. In the transaction limitations section, it states: "After the account is opened, you may make withdrawals subject to the early withdrawal penalties stated below."
- Justice Federal Credit Union has the following in the transaction limitations section of its membership booklet: "For all accounts, after your account is opened, you may make withdrawals subject to early withdrawal penalties stated below."
There may be other institutions with this disclosure language that I have missed. If you know of others, please leave a comment. Also, please include a link to the disclosure if you can find it.
This is just one more issue to consider when you're shopping for CDs. For other important CD issues, please refer to my post 10 Gotchas to Avoid for Bank CD Investors.
The biggest tip I can provide is keep abreast of rates and close your CDs early when the timing is right. I think the first "wave" of closures will probably go without a hitch. But as the banks receive more and more requests, more attention could be given, and potential refusals.
The other thing is even for those banks that disclosures specifically allow for it, they could at some point change software or adobpt a new set of disclosures that contain the vague language. So although, I think many early closures (if the rates rise) won't have trouble, I wouldn't put all of my eggs in one basket either.
Plan for the worst. If you can't afford to hold the CDs until maturity, don't do it. :O)
“ banks and credit unions have disclosures that neither state they may refuse an early withdrawal nor state they will allow an early withdrawal...”
All of those disclosures contain language that also says:
We may amend, modify, include, delete and so on...at any time, without further or prior notice to you.
In other words, the disclosures are worthless from the consumer stand point and only serve to protect the Bank or CU.
Read line by line and then analyze the disclosures, they all carry the same message:
We decide whether you can be allowed to withdraw or not and or how much will cost you in
the future if we ever will allow you to do EWP and we can change our mind at any time.
ChrisCD's advice is on the mark, so I need not repeat it.
#1's last sentence is really key: a strategy based on the potential to break a CD in the future can be troublesome.
Apparently the EWP changes are OK with the regulators. I would love to someone take one of these credit unions to court on the issue, but the decision probably would not be precendent setting anyway.
Question: Where is a good lawyer when you need one?
Answer: Working for the bank writing their so-called "disclosures".
PS: Do you invest in CDs? If yes, how do you ensure your getting what you signed up for?
I once had a bank President compliment me for catching something in their CD that could have been a problem for me and other customers because whoever set up their CDs on their computers automatically had a box checked that I refused to accept. He gave me another CD with it set up the way I wanted it. The secret is to find smaller banks in small towns who still want and need a customer's deposits. It may mean we have to drive 50 miles or so out of our locality to get to them but to me it is worth it.
I don't believe one can get the same assurance from local "big" banks so I steer away from them as much as possible.
"Your idea that some things are "usually NOT changeable. They are fixed." is just your idea."
That is not my idea. Most banks/CU's that tried to change a rate, term, access to interest, etc. would be overruled by a state banking dept. or most courts. Those items are by custom and law/statute typically contractual or defined by law(s). The EWP's are not. Big difference. Ask your state banking dept., they are just a phone call away.
Sure, the banksters are in business for profiting off your dollars. But you go into this game for a profit off your dollars also.
You invest with the intent of giving the money a guarantee profit within a SET amount of TIME.
Honor your "commitment" instead of trying to Game the EWP and there are no conflicts of intererest.
Financial establishments have never not given me my money back on the agreed terms.
You people are starting to sound like the Strategic Default crowd
That's why savings acct and checking are for access money. Play the short term CD if you want quicker availability to your money. Most people buy CDs for the Security of Time.
I have been helped immensely by Ken and his excelllent info on this site. His advice to get longer term certificates was wise, back in the day. But I think he was the one who stirred the pot on this EWP game.
I apologize to him if I am mistaken.
I'd esp. like Terry #3 take on this since she has the legal expertese,ie relationship between the blanket right to change the deposit agt w/r/t/ the express right to withdraw the funds
Whether a bank or CU can change an EWD penalty is a complex and fact-specific question. Critical are the specific contract language, contract interpretation principles, FDIC/NCUA policies, and consumer protection agencies and rules. Ken's posts over the years have explored all of these points in detail.
The overly broad, ipse dixit statements of some of the above posters need to be taken with a big grain of salt. For example, it is not at all clear that the rate and term are fixed, inviolable parts of the deal, but the EWD is a mere detail that can be changed at the whim of the institution. The EWD is essentially a "put" option -- an element of the deal that the depositor may well have "paid for" by passing up higher rates in favor of a lenient EWD. A put option is every bit as much an enforeceable right as any other in a contract.
Also, a fundamental maximum of contract interpretation holds that specific language (i.e., a clear right to an EWD, as in the language Ken posts) controls general language (i.e, general rights to amend, often in a different document). Another such maxim is that ambiguities are construed against the dtaftsman (i.e., the institution), particularly when the other side of the contract is a consumer with little or no bargaining power.
None of this is to say that the results of any such litigation or regulatory action can be predicted. But please – enough with the half-****ed, overly confident predictions about what will or will not happen. As I said, Ken pretty much gets this completely right in his posts.
#3 Got it right, I have seen such language on all of the banks I had CD with.
Don’t be naive, the courts will throw out any such case, since the banks have explicit right to amend, modify and nullify anything written in the disclosure, because a disclosure is not an agreement between two parties, but is treated only as a guidance of the rules present at the time of issuing the CD and the customer is aware that those rules can change at any time.
The pre-printed Disclosure, however, DOES typically list other things, like the EWP, which the bank will usually reserve the right to amend. Let's all understand the difference. Any reputable bank's Legal Dept. will not seek to modify the "AGREEMENT," but many do reserve the right to modify the "DISCLOSURE." I would advise all readers of this blog to only do business with banks or c.u.'s that also give an "AGREEMENT." If the "AGREEMENT" contains language that allows them to modify it, I would run the other way!
I may be many things, but "naive" about contract matters is not one of them. I've been a lawyer for over 35 years and have litigated (and won) many contract cases, including several up to the federal circuit court level. I am not giving legal advice here, but neither should you. Your comment that "the courts will throw out any such case" is a vast and -- dare I say it? -- "naive" oversimplification of contract law jurisprudence. I repeat what I said earlier: Ken's gloss on these matters is as good a layman's interpretation of the nuances involved as I have seen.
The subject of this blog is: Disclosures
You can not litigate disclosures and the agreements are for the term, amount and grace period only and nobody is disputing or discussing those.
If they can retroactively change the EWP to anything they want without your permission, why couldn't they change the interest rate or term of the CD without your permission.
Obviously, some readers of this blog think that this is possible and are questioning the Agreements besides the Disclosures.
Second, banks and CUs all have slightly different procedures and documentation. Some EWD penalties are in a document named "Disclosures" and others are in documents styled as "Agreements" -- or even on the certificate itself.
So your neat dichotomy between "disclosures" (changeable at the whim of the institution) and "agreements" (binding) is too simplistic and does not work in all situations. Sorry.
Your idea is too far fetched fantasy.
Disclosures are not agreements and therefore are not binding on the banks to honor them.
Agreement with terms, amounts and grace periods can not be modified unless the bank folds or is bought by another bank in fire sale under FDIC rules and regulations.
#3 is 100% right.
You and #3 are 100% correct, the rest of the posters are mixing apples and oranges.
Melrose CU @ 2.65% APR
First American CU @ 2.50% APR
Digital CU @ 2.32% APR
Alliance Bank @ 1.99% APR
Ally Bank @ 1.73% APR
With the exception of Melrose CU, which has such a punitive & unusual EWP that it's prohibitive, they all have penalties for early withdrawal from a low of 60 (ALLY) to a high of 180 days (DIGITAL).
These terms are written, contractual and binding to both parties so are not subject to revision.
If the institution does not want to allow early withdrawal of principal it is free to forbid it, or offer terms that are unacceptable (ie., MELROSE), but up front with no equivocation.
Any institution that breaks a contract must be held accountable.
Otherwise, that contract has no meaning, and there is no way to do business in a reasonably acceptable manner.
What about when the bank wants to terminate a fixed term CD?
Example: A national bank is planning to complete the takeover of a chain of small community banks by January/February 2013. The national bank has already met and decided to terminate the CDs of the community bank's customers without early withdrawal penalty. I stand to lose the last year of my 5 year CD.
Can the national bank taking over do this?
Thanks for your response. It is unusual. I hope the takeover bank notifies me before moving the CD to a lower rate.