Last spring I wrote about a credit union that changed the terms of their existing CDs. The institution in question was Fort Knox Credit Union in Radcliff, KY. Today, I want to follow up on that story and provide an update.
The change in this case was an increase in the early withdrawal penalty on all CDs with terms of 24 months or longer. They wound up raising the penalty from 90 days of interest up to a full six months. Ouch. From the bank’s (or credit union’s) perspective, this change helps to mitigate the risks associated with customers breaking their CDs early when rates rise.
From the consumer’s perspective, this change effectively decreases the interest rate of your CD if you decide to break it early. Not good if you’ve been hedging your bets by buying long-term CDs with the intent of cashing them in if/when rates rise.
According to a recent article over at DepositAccounts, at least one Fort Knox CU customer lodged a complaint with the NCUA, but the NCUA ruled against the customer because Fort Knox had reserved the right to change terms with 30 days written notice.
To be clear, customers still had the option of breaking their CDs under the old terms, but they had to do so within that 30 day window. If they waited, the new policy would have gone into effect, and the penalty would have already doubled from 90 days to six months.
In contrast, most other banks (including BofA, PenFed, and OneWest) have only applied such changes to newly-issued CDs, and have left existing CDs alone. Whether or not this practice of changing the rules on existing CDs will spread remains to be seen. But I, for one, certainly hope that it doesn’t.
I think that this is an extremely rare occurrence. Most credit unions as well as banks have more deposits than they need. My credit union started offering penalty free withdrawals, on existing certificates, back in the spring.
However this credit union should not have been able to change the terms on existing accounts.
Trav: I doubt most people read the fine print — and I’d be willing to bet that you’d find language to this effect with most CDs if you did read the terms.
Who in their right mind would buy a CD that reserved the right to change its terms during the life of the CD?
So let me get this straight. Originally they had a penalty of 90 days of interest if you withdrew early.
Then they changed the penalty to six months interest. And this was all predicated by a clause in the original CD indicating they had the right to change the terms as long as they gave 30 days notice.
So in essence, if you were unhappy with the change in terms, you were forced to take the original 90 day penalty to avoid the possibility of a future longer six month penalty?
That does seem shady to me. I guess at the end of the day you ‘bought’ a CD that had a 30 day change notice clause. So you have to bear the consequences of that. But it does seem awful shady. That is just the sort of practice that laws or regulations should prevent.