Grappling with the Fine Print of CD Disclosures

I'm happy to announce we have another guest post from Charles Rechlin, a long-time reader and friend of the site. His last two guest posts covered his experience with IRA CDs. In this guest post, Charles focuses on CD disclosures and the sections that he feels are the most important for his own CD investing. Not only does Charles have many years of experience in CD investing, he also worked as an attorney representing clients in the financial services industry. I'm very thankful he has offered to share his experience with us on a topic that is so important to everyone who invests in CDs.

Notes on Personal CD Investing: Grappling with the Fine Print of CD Disclosures

by Charles Rechlin

Back in the day, as a lawyer representing clients in the financial services industry, my practice thrived on fine print—reading it, writing it and, occasionally, manipulating it.

I thought I was through with fine print once I retired. However, when I took up CD investing, I found myself right back into it—only this time for myself.

Below I discuss certain items I focus on in Truth in Savings Act (TISA) and other disclosures when I open a CD directly with a bank or credit union.

This isn’t intended to provide an exclusive list of what terms and conditions are important, only a summary of what I look for, based on my own financial objectives and personal experiences. I’m sure many readers consider other items more important. I encourage them to share their thoughts in the comments section, because, for me, CD investing involves a constant learning process.

“Fine Print” Defined

Let me begin with the documents I TRY to review before I open a CD account. They are:

• the TISA disclosure, including the form of CD
• the deposit account agreement (in the case of a bank) or membership agreement (in the case of a credit union), including fee schedules
• the deposit account FAQs, if any
• the table of posted rates, including footnotes

Not all of these things are easy to get your hands on.

By law, TISA disclosures, summarizing certain key terms of the account, must be furnished in advance of account opening when a customer establishes a CD in person at a branch or via an online application platform. Many websites have home page links to TISA disclosures, usually under “Terms and Conditions” or “Disclosures.” However, some don’t provide their TISA disclosure links until you actually begin the online application process, so, for a while, you’re flying blind.

Reviewing TISA disclosures in advance can be problematic if you open your CD over the phone, which, at some institutions, is often the only available alternative to a branch visit for establishing a special or promotional CD. Here, the law doesn’t require the institution to make disclosures available beforehand. If the customer requests those disclosures, the institution has to provide them, but the law gives it 10 business days to deposit them in the US mail.

As for getting a deposit account or membership agreement before opening a CD, good luck if you’re not personally present at a branch. Many institutions don’t link these documents online, even though they are highly relevant. I often have to perform my own Web search to find them, with no guarantee of success.

Website FAQs may simply not exist. Even when they do, they sometimes fail to address important questions.

And, for someone with less than stellar eyesight like me, reading rate table footnotes can be difficult, even deploying the “zoom” function on a computer.

Of course, if you don’t find what you’re looking for, you can always call or email the institution and ask questions. However, in my experience, it’s about as likely that you’ll get wrong (or nonresponsive) answers as the correct ones when you do this.

Terms and Conditions I Focus On

One way or another, I muddle through as best I can. Here are some of the things I look for.

Rate Lock

I will not establish a CD without knowing that my rate has been locked-in at the time I apply. If my funds are not already on deposit at the bank or credit union—e.g., funding will be provided through ACH transfer or by mailing a check—I need to know that the rate will be guaranteed even if the institution’s posted rates are cut before the funds are credited.

Although some institutions, such as Ally and GS Bank (USA), disclose rate guarantees on their websites, many don’t tell you when your rate locks-in. That means that, unless I’m familiar with these policies from opening CDs at the institution in the past, I have to call or email to verify them.

Interest Payments and Disbursements

Because I pay my bills from income earned on CDs, I look at when and how interest is paid. (Compounding methods aren’t important to me.)

The TISA disclosures tell you how frequently interest is paid. They should also tell you whether or not interest, once posted, can be withdrawn without penalty. Some institutions don’t actually say paid interest can be withdrawn from a CD account, but imply that it can by stating—as required by the TISA—that “withdrawal of interest will reduce earnings.”

You have to be careful because not all institutions permit penalty-free withdrawal of posted CD interest.

I also look at disbursement options—e.g., payment into a checking account at the institution or by ACH transfer to my primary checking account. Although I don’t like being paid by check, I can live with it if the CD’s rate is good enough.

POD Accounts

I look at disclosures regarding payable-on-death (POD) accounts whenever I open a new CD, even if I’m not establishing a POD beneficiary at that time. I want to know what I can do in the future, either with the CD I’m opening or another CD, should it become advantageous to increase my aggregate deposits at the institution to over $250,000 and I need more room under federal insurance limits. I’ve been burned a couple of times when I failed to review this initially, as I’ll detail in a later piece on POD accounts.

Early Withdrawal Restrictions and Penalties

This subject has occupied much attention and stimulated vigorous discussion on this site over the years.

Here, for what it’s worth, is my take:

Although I’m interested in what a bank or credit union has to say about EWPs and early withdrawal restrictions, including whether partial withdrawals are permitted, it’s almost never a decisive factor for me in opening a CD.

I view a CD as essentially a loan by me to the bank or credit union. (Stated another way, I consider myself an investor, not a customer.) Like the purchaser of a corporate bond, I don’t expect to be paid back before maturity unless the institution becomes insolvent or breaches its agreements with me.

Despite this approach, there are two items I’m sensitive to.

First, I want to know whether the institution, in addition to imposing a penalty, requires its prior consent to an early withdrawal, thereby reserving the right to arbitrarily block it. Unfortunately, this veto right has become more commonplace. Even where they have no explicit language covering the point, I’m sure many institutions, in a crunch, wouldn’t hesitate to claim that a consent requirement is implied by standard language to the effect that “by opening your account you agree that your funds will remain on deposit until maturity.”

Second, I look out for what, in my lawyering days, we called a “make whole” premium. This is intended to render a financially-beneficial early withdrawal virtually impossible by imposing a penalty equal to the higher of (1) a particular amount of interest or percentage of principal and (2) the difference between the interest you would earn until maturity at the rate on your current CD, and the interest you would earn, at current posted rates, on a replacement CD having an identical remaining maturity. The last I checked, OneWest Bank and Union Bank had make-whole penalties.

Account Closure Upon Death or Incompetence

After considerable effort, I’ve cobbled together both a will (for what happens when I die) and a conservatorship plan (for what happens should I live but become unable to care for myself).

In either event, I’d like my personal representative to be able to liquidate promptly all my CDs, without penalty.

Most institutions have exceptions to early withdrawal restrictions and penalties for death or legally-established incompetence—or they try to have them—sort of.

Unfortunately, these provisions are not always models of clarity. Take, for instance, the language of Nationwide Bank, which is typical of what you find in many bank and credit union disclosures: “In certain circumstances such as the death or incompetence of an owner of this account, the law permits, or in some cases requires, the waiver of the early withdrawal penalty.”

I’m not sure what this means, but at least it sounds promising. Frankly, these provisions are all over the lot. For example, at PenFed, death gives you a right of penalty-free withdrawal, but disability only qualifies if your CD is an IRA CD.

In the end, I’ll just trust that my executor or conservator will be smart enough, and persuasive enough, to handle the situation.

“Zingers”

Sometimes I stumble across CD provisions I’m not expecting to find. They can sneak up on me, or come at me out of nowhere.

A couple of years ago, I discovered, to my horror, that the TISA disclosure of NASA FCU allowed the credit union to arbitrarily lower the dividend rate on any CD upon 30 days’ notice. After word of this got out—including among readers of this site—savers started to complain to NASA, which, wisely, decided to remove the language from its disclosure.

Another example—pounced on by many readers of this site as well—is the provision in the membership agreement of USAlliance FCU granting it the right to unilaterally call any CD upon 60 days’ notice, even though it identifies none of its CDs as “callable.”

Because I intended to limit my USAlliance CDs to terms of three years or less, this didn’t strike me as a major risk. Also, USAlliance assured anyone who asked that it had never used this right. So, I gave the credit union a pass.

But what about a blanket provision allowing a bank or credit union discretionary power to close any deposit account?

Consider Synchrony Bank: “We may close . . . any account, (including, without limitation, a CD) at any time without notice or your consent for any reason in our sole discretion unless prohibited by applicable law.”

Although the paragraph goes on to give specific examples of reasons the bank might want to close your account (a desire to reduce the bank’s interest expense not being one of them), the language reserving this right is only limited by “applicable law.”

Should I stop opening Synchrony CDs until I get clarification? (Probably not.)

Amendments

At the end of the day, maybe I shouldn’t worry about anything I read in CD disclosures. After all, if language about amendments can be taken literally, there are no terms or conditions of a deposit account, including a fixed-term, fixed-rate CD, that can’t be changed, modified or otherwise eviscerated, retroactively, in the institution’s unbridled discretion.

Synchrony’s language is pretty standard: “We may add, delete or change any terms of this Agreement in our sole discretion, and you will be bound by any additions, deletions or changes as soon as we make them.”

Because the TISA only requires an institution to give advance notice (30 days) of adverse changes in account terms and conditions—but doesn’t limit the substance of those changes or their retroactive application—this kind of language is subject to real abuse, if a bank or credit union chooses to abuse it.

Synchrony chose not to abuse it when, a couple of years ago, it amended its IRA CD terms to remove a provision permitting holders of the CDs unrestricted early withdrawal rights after age 59-1/2. Recognizing that many savers had opened IRA CDs in reliance on these rights, the bank grandfathered outstanding IRA CDs from the change.

Other institutions haven’t been so kind. I need only mention the names Fort Knox Credit Union and Valor Credit Union.

I’m sure, in the coming years, the rights granted banks and credit unions to re-trade CD terms retroactively under this type of language will be subject to further regulatory and perhaps judicial scrutiny. By the time it’s finally resolved, however, my executor will probably be busy closing the CDs in my estate, scratching his head while he does so.

Pleasant reading, everyone.