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When a Bank Changes the Terms of an Existing CD

When you purchase a fixed-rate CD from a bank or credit union, it's commonly understood that the rate will remain unchanged until maturity unless the institution fails. However, can other terms of a CD agreement be changed by the bank? This isn't as clear, and it can be costly for CD holders if banks can unilaterally change the terms. One example is an early withdrawal penalty. There have many concerns that Ally Bank could increase its very favorable early withdrawal penalty (60-day interest) on existing CDs. As I described in this post, Ally has assured me that this will not be done, and I was told all of Ally's customer service reps are being trained on this issue.

I can understand the concerns that many have regarding Ally since there have been cases in which banks and credit unions have tried to unilaterally change the terms on existing CDs. Recent and past cases have involved CDs that have allowed additional deposits. The CD terms allowed unlimited deposits until maturity, and long before maturity, the bank notifies the CD holders that they'll soon be unable to make additional deposits.

In a recent case a reader wrote a complaint to the FDIC which was the primary federal regulator of the bank. It appears his letter helped get the bank to rescind the disclosure change. The reader sent me the letter he received from the FDIC which included a letter that the bank sent to the FDIC on this issue. The reader asked me not to mention the bank's name so I replaced the name with [The Bank]. Those who have been following this blog will probably know which bank it's referring to.

Even without specific names, I wanted to show that bank customers have more power than they might think. If you are wronged by your bank and you are unable to resolve the issue with the bank, it pays to send a complaint to the bank's regulator.

Letter from the FDIC:

Below is the copy of the letter that the reader received from the FDIC. All names have been blanked out as requested by the reader.

This is in response to your correspondence received in this office on XXX XX 2010, regarding a Certificate of Deposit (CD) you hold with the Bank. After reviewing your correspondence, we contacted the Bank to regarding [sic] your concerns. A copy of the Bank's response is enclosed for your review.

The Bank advised it [sic] reviewed its policy and procedures, and will update disclosures as necessary and it rescinded the disclosures you received on XXX XX, 2010.

For your reference, the FDIC is responsible for enforcing the Bank's compliance with federal consumer protection laws and regulations including the federal Truth in Savings Act (Act), as implemented by the Federal Reserve Board's Regulation DD. Section 230.4 of Regulation DD requires an institution to disclose certain deposit account terms, and to make those disclosures available to consumers at the time of initial account opening and upon request.

The FDIC continually reviews the banking practices of all financial institutions under our regulatory authority, including the Bank. Thank you for raising your concerns with the FDIC.



[The Bank]'s Letter:

This is the letter [The Bank] sent back to the FDIC, and the FDIC sent a copy of it to the reader.

RE: Complaint of XXXX, Reference # XXXXX

Dear Ms XXXX [to the FDIC]

Please accept this correspondence as [The Bank]'s response to your letter dated XXX XX, 2010. The bank has reviewed the attached complaint and the policy and practice related thereto. Upon our review and subsequent research, [The Bank] has identified the need to rescind the disclosures provided on XXX XX, 2010 to [The Bank] CD holders limiting future deposits to their accounts. Customers affected by the aforementioned change will be notified no later that [sic] XXX XX, 2010 that they may continue making deposits to their current accounts.

If you have any questions regarding this matter please call me at (XXX) XXX-XXXX.



Regulation DD and Account Disclosures

Another reason I wanted to post this letter is that this case has implications regarding Ally Bank and its early withdrawal penalty. As the FDIC letter describes, Regulation DD Section 230.4 covers account disclosures. Unfortunately, this regulation is not crystal clear on the question of a bank's right to unilaterally change terms on existing CDs. Most of it covers liquid accounts (like checking or savings accounts). Here is what Section 230.5 states regarding these accounts:

A depository institution shall give advance notice to affected consumers of any change in a term required to be disclosed under § 230.4(b) of this part if the change may reduce the annual percentage yield or adversely affect the consumer. The notice shall include the effective date of the change. The notice shall be mailed or delivered at least 30 calendar days before the effective date of the change.

However, farther down in that section, it does mention CDs (time accounts):

For time accounts with a maturity longer than one month that renew automatically at maturity, institutions shall provide the disclosures described below before maturity. The disclosures shall be mailed or delivered at least 30 calendar days before maturity of the existing account.

In my opinion, this seems to imply that changes to a CD disclosure can only be made at maturity.

Based on the above letter and information in my research on Ally Bank, CD holders should expect that the terms in the CD disclosure will remain until maturity. Regarding small print buried somewhere in the disclosure, here's what another reader mentioned in his conversations with the FDIC:

[The bank] can't change the terms of the initial disclosure unless they specify in the disclosure that it is subject to change. They also need to state that near the term they plan to change. So, they can't say the CD allows unlimited deposits on page 2 and then say this is subject to change on page 5.

It's nice to see the FDIC is on our side on this issue.

Filing a Complaint with Your Bank's Regulator

The FDIC recently published a tip on how to request assistance from the bank's federal regulators:

You have tried to resolve a problem with your financial institution, but haven't had much success. Did you know that you can request assistance from the bank's federal regulator? Learn more here if your bank is supervised by the FDIC; or here if it is supervised by one of the other agencies.

The FDIC's tip left out credit unions. Refer to this NCUA page if you have a complaint about your credit union.

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  |     |   Comment #1
Re: "In my opinion, this seems to imply that changes to a CD disclosure can only be made at maturity."

I don't think that would "imply" anything about what can or can't happen during the term of the CD. The statement does not require support from anything during the term of the CD so can't be implying anything about it. However, it does not need to. The FDIC regulation is merely addressing the matters in which it is interested and in which it specifically is regulating. It is not writing any and all law that applies, nor does it need to repeat any and all applicable law -- whether constitutional, statutory or case law -- in its regulations. And basic contract law will block the contract from being changed unilaterally in mid-contract. It is basic contract law that is the key here, not the FDIC regulations.

For instance, if a contract says you will get such and such a interest rate -- period -- then the bank can't unilaterally change that, at least not to your disadvantage (they might be able to unilaterally give you more). But, if the contract says you will get such and such an interest rate, but this may be changed twice during the term, then the bank could unilaterally reduce your interest rate as that is what the contract says. But I've never seen such a CD contract!

And I don't mind mentioning that Darby Direct is the bank in question that chose to try to block any additional deposits despite the terms of the CD allowing such deposits for the duration of the term. Readers should know.
  |     |   Comment #3
When I renewed my CD with Ally I did through with their chat option.  I asked specifically if they can change the 60 penalty and if so, where does it state that in the contract.  I was told in writing that they cannot change the terms, including increasing the amount of penalty.  I kept a hard copy of the chat should I need it later.  I would suggest that if possible everyone get the bank to put something in writing and to keep a copy of it.  This will help out tremendously should a bank want to change the terms after the CD is opened.
  |     |   Comment #4
I have a 10 yr cd w/ capitalOne.  I am two years into  the cd and because it was through costco,  i am being notified that after 12/31/12, I will no longer be with cap1 and my rate will be whatever.  Really!  Not much on the web about this yet.
  |     |   Comment #5
I don't know how it's going to be done but we really need to find a way to make banks and credit unions accountable for the main information they have for the CDs they sell us.  For example, we should be able to count on the rate and the EWP not changing unless the bank fails.  It is not right that they can add in a word or two to give themselves the ability to **** us up and we have to accept it.  Most will not give any supplements in writing to assure purchasers they will stand by the terms.  I get a verbal commitment and make sure my DP is with me to hear it but that may not hold up if a problem occurs.  Something has to be done about all the protections being on the side of the institutions.

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