Banks That Give Certainty About CD Early Withdrawals

POSTED ON WEDNESDAY, MARCH 28, 2012 BY Ken Tumin

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.

Comments

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38 Comments.

ChrisCD | Mar 28, 2012 | Comment #1

Thanks for the mention. :O)

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)

Anonymous | Mar 28, 2012 | Comment #2

I have an Online Savings IRA with Ally Bank and having a hassle trying to transfer it back to Vanguard. All the paper work has finally been completed (took weeks to do the paper work). However, Ally has notified me that I will have to notarize my signature before they will release the funds to Vanguard. I still have not received the paper to be notarized by Ally. I am concerned because Ally failed the bank stress test a few weeks ago. Ally has not made it easy for me to transfer funds (I am not even talking about a CD). Ally had no problem accepting a transfer just a few months ago. No notary sealed signature was required then. I am not feeling good about Ally down the road.

Anonymous | Mar 28, 2012 | Comment #3

You wrote:

“ 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.

me1004 | Mar 28, 2012 | Comment #4

As ChrisCD and Anonymous #3 point out: Such statements in these disclosures regarding early withdrawals being allowed are really just a false sense of security when there also is the overriding clause that provides for anything in the disclosure to be changed even in mid-CD. And as we have noted repeatedly over the past months and even years, such language is in most and probably all bank and CU disclosures, however vague it might be. That is, there is NO guarantee, regardless of the language as highlighted in this article. You might feel better about this straight-forward language allowed for the withdrawals, but that might not be the language when you want to make such a withdrawal.

ChrisCD's advice is on the mark, so I need not repeat it.

Terri, Esq. | Mar 28, 2012 | Comment #5

I'm a lawyer with some experiene in all of this. From a legal standpoint, #3 is totally correct. Sorry, Ken. Even very specific language or terms can be amended by most banks, CU's, etc. if they add such a clause as #3 specifies. Whether from a public relations or business standpoint the bank or CU wants to do so, that's another question.

#1's last sentence is really key: a strategy based on the potential to break a CD in the future can be troublesome.

lof | Mar 28, 2012 | Comment #6

The key is to use a "ladder system", with your cd's (5 year term).

Anonymous | Mar 28, 2012 | Comment #7

This beaten horse just won't die. If chris, #3, me1004, and Terri are correct, then a CD is a disaster waiting to happen. Contrary to #6's ladder idea, CDs should be avoided at all costs. 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. Reasonable people should clearly see that the actions of a couple of credit unions concerning retroactively changing their EWP (Ken has talked about it multiple times) is a joke. Hopefully someone will take one of these credit unions to court. I hope Terri just needs to brush up on his contract law. Otherwise, CDs are less than useless for a depositor.

Anonymous | Mar 28, 2012 | Comment #8

I agree with Anonymous #7. If all the terms are contained within the CD, it is a contract. I'm not a lawyer, but I can read and find so-called "loopholes". If I was opening a CD I would demand everything be stated clearly without all the exceptions being discussed above. If the Bank/CU refused I would go elsewhere. Everyone should remember it's the depositors money not the banks.

Apache | Mar 28, 2012 | Comment #10

#8 You seem to be forgetting that once we "loan" our money to the banks in the form of CDs, it really no longer becomes our money. We must abide by "their" rules for withdrawal etc. If they want to put the ****s to us, it is the chance we take for purchasing their CDs, imo.

Terri, Esq. | Mar 28, 2012 | Comment #9

Anonymous #7 is misintrepeting my comments. Items like Rate, Term, etc. are usually NOT changeable by the bank/CU. They are fixed. However, a careful read of things like EWP's, fees, etc. ARE often subject to change if the agreement contains such language.

Anonymous | Mar 28, 2012 | Comment #11

Bottom line - a bank that retroactively changed rate or term on a CD would either be smacked down by the regulators or in small claims court.

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.

Anonymous | Mar 28, 2012 | Comment #12

to Terri from #7 I'm sorry if I misinterpted your comments. You apparently have not been reading the posts about the two credit unions that retroactively changed their EWP. These two used hidden generic language that doesn't mention EWP to cover their tracks. As #3 stated, they claim they have the right to change anything unless they expressly say that they can't and then they reserve the right to change that claim anytime that they want to. Your idea that some things are "usually NOT changeable. They are fixed." is just your idea. It certainly isn't theirs. As Apache (#10) stated, they are playing by their rules and they can change them anytime they want. I'm sure that's not "usual" but unless someone calls them on it in court, the game goes on.

Question: Where is a good lawyer when you need one?

Answer: Working for the bank writing their so-called "disclosures".

Anonymous | Mar 28, 2012 | Comment #13

Apache: Isn't that what I stated. Make sure you agree with the "terms" of the CD contract or take your business somewhere else. If they breech the contract, there's always the option of going to court.

PS: Do you invest in CDs? If yes, how do you ensure your getting what you signed up for?

Apache | Mar 28, 2012 | Comment #14

#13: Yes I invest in CDs but I put a "lot" of time and research into the banks I purchase from. I also make sure before the purchase is finalized I read "all" the Disclosures and ask them what their history is about standing by what is written at the time of purchase and will they stand by the Terms I understand to be on the CD.

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.

Terri, Esq. | Mar 28, 2012 | Comment #15

Anonymous #7 and #12: You must not have read what I wrote. EWP's USUALLY ARE changeable by banks/CU's. The other terms typically are not. You write:

"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.

Hanrod | Mar 28, 2012 | Comment #16

The problem is that enforcement in court is simply not a practical option; further, legal review of vague and self-serving provisions placed by banks in CD agreements is also something most simply do not have the time for, particularly in view of the minimal return for that time. FRAUD, even if legal due to recent history of deregulation, is the problem, and with the MF Global case we need even prepare for the fact that our "custodial" customer broker accounts, 401ks, etc. may be violated by the "custodians". The government need to further regulate financial instititutions, and to call this (i.e. intentional provision of false or misleading information, or witholding of pertinent information, for purposes of gain) by it's proper name -- FRAUD. Websites and organizations like this one should get on board in advocating this. It may take one more "market" debacle before the majority are COMPLETELY AND FINALLY disillusioned enough to go back to their mattresses with their cash, but if government does not get on this, and/or the financial institutions responsible (who are competing too viciously to be likely to correct themselves), they, and we, deserve a complete U.S. (and thus global) FINANCIAL MELTDOWN!

Anonymous | Mar 28, 2012 | Comment #17

With all the back and forth on this subject why dont we stick to the fact of why you get a CD.

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

Anonymous | Mar 28, 2012 | Comment #18

#17 You seem to have missed a major point in this thread. The purchaser of a CD does not write the diclosures. The purpose of a EWP is to set the rules for what happens when you seek to withdraw your money. Why do you call it gaming the EWP when one tries to withdraw their money under the rules set up by the bank? If the bank changes the EWP penalty retroactively, they aree the ones who are gaming the system. Just because you haven't been bitten by this type of gaming doesn't mean the credit unions that changed their EWP retroactively aren't involved in a deceptive practice. The credit unions have the right to write their disclosures any way they want but they don't have the right to change the rules unilaterally after the game has begun. I fail to see how anyone can condone such gaming. If you tried to unilaterally change the terms of a CD you'd be laughed at. Why doesn't the same thing apply to the credit unions? Commitment should be a two way street.

Anonymous | Mar 29, 2012 | Comment #19

I guess I'm off topic on the disclosure terms for EWP but I dont get a CD with the intent of closing it before hand.

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.

Dale | Mar 29, 2012 | Comment #20

Wasn't it that with the right to change the EWP the cd owner got notice and could then withdraw based on the penalty in effect when the cd was purchased? Couldn't we expect the same kind of result where the institution expressly gives us the right to withdraw with a specified penalty, and then alters that right? We are relying on the express right to withdraw whenpurchasing the cd. I'd expect the institutions will try to change that right time-wise as Chris #1 points out.

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

Greg | Mar 29, 2012 | Comment #21

I think the best bet is to read carefully Ken's articles, which are almost always judicious and accurate. Some of the above posts vastly overstate what the regulators, Consumer Financial Protection Bureau or courts will say when presented with a test case. We don't know, and those who say they do know are misguided.

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.

Anonymous | Mar 29, 2012 | Comment #22

To Greg (anonymous) - #21,

#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.

Fred | Mar 29, 2012 | Comment #23

Many of the CDs which I have opened, besides the disclosure, give the depositor an "Agreement" or "CD Agreement" which is personalized and sets forth the term, rate/APY, access issues, opening balance, grace period, etc. I am an attorney, and I would consider this a binding legal contract.

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!

Greg | Mar 30, 2012 | Comment #24

To Anonymous No. 22:

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.

Anonymous | Mar 30, 2012 | Comment #25

Fred (anonymous) - #23 and Greg (anonymous) - #24

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.

Jeff | Mar 30, 2012 | Comment #26

#25: You are incorrect. #7 is saying:

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.

Greg | Mar 30, 2012 | Comment #27

Well, Anonymous #25, you SAY there's a bright line between "disclosures" and "agreements," but that's not necessarily true, on at least two levels. First, a binding contractual agreement does not have to announce itself as such. Courts look to the entire context. Documents solemnly styled as 'agreements" have been tossed out as non-binding, because they were too vague, merely agreements-to-agree, violated the rule against perpetuities, were between parties who lacked legal capacity or otherwise did not meet the standards necessary to be enforceable. By the same token, binding agreements have been found in a wide range of unconventional settings, including oral arrangements, undertakings written on ****tail napkins or even, yes, documents that style themselves "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.

Anonymous | Mar 30, 2012 | Comment #28

Jeff (anonymous) - #26.

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.

Jeff | Mar 30, 2012 | Comment #30

#28- I don't know what you are talking about. I agree that Disclosures are not binding. Re-read my post. In my opinion, Agreements ARE binding and I disagree with the readers/posters who are questioning that. It's the Disclosures that should be questioned.

WiserThanThou | Mar 30, 2012 | Comment #29

Ken, you are wondering "when" interest rates will go up a lot. I can give you the answer. They will start to soar upward, just like in the late 1970s and early 1980s, AFTER we have already had sufficient inflation to bring the government's debt into balance with its income. The situation, today, is exponentially worse in terms of government deficits than it ever was in the 70s, of course. Rates will go up ONLY after the US dollar has had its purchasing power split into about 1/5th of where it is today. Buying CDs now is a guarantee of being wiped out, even worse than the people who bought them in the 1970s.

Anonymous | Mar 30, 2012 | Comment #31

to Jeff (anonymous) - #30,

You and #3 are 100% correct, the rest of the posters are mixing apples and oranges.

Mark | Mar 31, 2012 | Comment #32

Let me comment as someone who last fall closed four CDs several months early to get the money for a new house (a total of a little over $700,000). I had numerous other CDs I could have closed if any of the banks/credit unions had failed to abide by the EWP terms they had originally set. However, I had no need to alter my choices of which CDs to close. All of the banks/CUs (Flagstar, OneWest, U.S. Alliance, Century Bank Direct) abided by exactly the terms they had specified for EWPs. Indeed, when I explained why I wanted the money, one of them (I don't recall which) actually waived the EWP altogether. The main thing I would say is that you should invest in CDs in such a way that you have maximum flexibility if you need to close one or more CDs early. Even if one bank/CU tries to charge a higher EWP than originally specified (which was not my experience), you'll be able to turn to antoher.

Apache | Mar 31, 2012 | Comment #33

Mark #32: Good thinking. That is why I believe in using an assortment of different banks and cus for CDs. If one gets "hard nosed" on me, I can always try another. I very rarely (thank goodness) have had to close a CD early but when I did, I never had a problem because it seems the particular bank did not want to lose my business completely.

Anonymous | Apr 3, 2012 | Comment #34

I recently bought 5yr CD's at:

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.

EmptyPockets | Apr 3, 2012 | Comment #35

RE: Early CD Withdrawal

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?

Apache | Apr 3, 2012 | Comment #36

#35 I don't know what you mean by "terminate" but what is usually done is the bank which takes over another doesn't have to keep the CDs at the same interest rate but they have to return ALL of the principal of the CDs to you. What you would be losing is any additional interest you may have gotten if the CDs were still active and earning interest. From everything I know, they can't charge you any Early Withdrawal Penalties in these cases especially if "they" are the ones forcing you to close and withdraw the CDs. What is happening here is very unusual in my experience. I have never had a bank refuse to keep the CDs from the bank it took over.

EmptyPockets | Apr 3, 2012 | Comment #37

Apache,

Thanks for your response. It is unusual. I hope the takeover bank notifies me before moving the CD to a lower rate.

Apache | Apr 4, 2012 | Comment #38

Empty: If I were in your spot, I would not wait for them to contact me. I would contact them and request information on exactly how they plan on handling the CDs. Find out the name of the takeover bank and get a contact number for them. Then I would find out what interest rate they will be giving you on them? If you wait too long they may just roll them over into their CDs at whatever rate they decide to give you. When it comes to finances, I always make sure I know in plenty of time what is going to happen.

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