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Fort Knox FCU Early Withdrawal Penalty -- Refusal To Allow Closure

me1004   |     |   516 posts since 2010

For a while now, there has been the suggestion that getting into longer term CDs with relatively small early withdrawal penalties might be a good way to get better returns. The latest posting on that includes a comparison of a few of the better options for such. One is Fort Knox FCU.

I have been trying since that posting to get the definitive word from Fort Knox about its policy about early withdrawals, as their terms state that they can refuse to let you close your CD early. I just today have gotten their final response from their compliance office, as I asked to go above the CSR:

"While we have never invoked the “withdrawal of principal provision”, we have it included in our agreement should the need ever arise.  If invoked, we would retain the principal amount in the certificate until maturity.  Also, you should know that we have the legal right to change the withdrawal penalty at any time with 30 days notice. "

So, they don't expect to ever deny early closure, but they could. But what is alarming to me about this response is that they added that they can change the early withdrawal penalty at any time!!! That could seriously undermine the concept of getting a longterm CD with a small early withdrawal penalty with the idea that you can just close it in midterm and still end up with more than if you had gotten a shorter term CD. This could put you at a loss! Imagine if a bank were to change the early withdrawal penalty from 60 days of interest to 1 year's worth or even more!

I also mention, there have been postings in the forums in the past by people complaining about such change of terms in mid-CD. I figured that was some isolated bank doing wrong. But does this issue with Fort Knox mean it is a wide-spread thing that financial institutions think they can do, unilaterally change the CD contract in midterm? Routine contract law would say they cannot, but sometimes there are laws that provide for exceptions, and maybe there is some law providing such for CDs from financial institutions? 

I find this so alarming as to short circuit proceeding with the concept of getting into a longterm CD with the idea I can close it in midterm and still end up with more than I would have with a shorter term CD. 

Ken, being as this now is not some isolated financial institution doing this, I really think we need a write up definitively addressing this issue -- this is not the first time it has arisen. I think we need FDIC lawyer input and/or other lawyer expert on such topic to weigh in. Perhaps the FDIC gives an exemption to typical contract law on this matter, maybe to help banks avoid potential loses, or for whatever reason? 

If this is legal, then all the people now getting into 5-year CDs with the idea they might close them in a year or two when rates rise might find themselves in big trouble. Five years is a long time, banks' situations can change dramatically over that time and so they might very well want to change the early withdrawal penalty. 

Ken Tumin
Ken Tumin   |     |   5,670 posts since 2009
Thanks me1004 for checking on this issue at Fort Knox FCU.

About the risk that the bank or credit union may change the early withdrawal penalty on existing CDs, there was this same concern at Ally Bank. I was able to get some confirmation from an Ally official to say that they wouldn't change the penalty on existing CDs (see post).

It looks like each financial institution may have different interpretations of the "30-day notice" clause. I'll see if I can get somes answers from a FDIC or NCUA official/attorney.

I'll also check with Allan Roth at the CBS MoneyWatch blog. He has also written about the mild early withdrawal penalties of long-term CDs
me1004   |     |   516 posts since 2010
Good Ken. I look forward to the answers. I hope to hear also what legal authority there is for changing a contract in midterm. That makes the whole idea of planing to get a higher yield by taking a longterm CD with the idea you will close it, take the penalty and still end up with more a real crap shot.

I do believe I recall reading your prior post about Ally not applying that to existing CDs. And I hope that was not just misinformation from them, that later they will apply it and say sorry, that's how it is. 
anon123   |     |   5 posts since 2010
Even though I did not speak to the top compliance officer at Fort Knox, I did talk to a manager at Fort Knox before opening my CDs there. I asked her to first send me an email confirming what I had asked her about, and did receive one from her, in case I need to refer to it later. The content of her email contains following words:

"Please be advised that the only time we (The Fort Knox FCU) would not give consent of the member to withdraw their CD is if they owe the Credit Union money. There is a penalty of 90 days of dividends if earned or not if funds are with drawn prior to the maturity date."

Other people may find it useful to receive similar emails or something in writing to prevent change of terms in the conditions.

Best Regards!