By buying certificates of deposit (CDs), depositors can easily pick up an increase in yield over savings rates in exchange for agreeing not to have access to their money for a period of time. When rates are going down or staying constant, CDs can also protect from falling savings rates.
When savings rates are increasing quickly or where depositors need access to their money for another investment or an unforeseen expense, having money locked into a CD can be troubling. Virtually every CD has terms and conditions that allow the depositor to get money back by paying a fee, expressed as an amount of interest the CD pays, for early termination. BestCashCow has always found that a fair penalty for early termination of a CD of less than 1 year is 3 months of interest, for those CD between 18 months and 5 years is 6 months of interest. Early termination fees can affect principal if CDs are terminated just after opening, and are always waived in the event of death or adjudged incompetence of the holder.
A deeper look at most terms and conditions can expose two risks to relying on early termination fees. First, the bank or credit union sometimes retains an express right to refuse an early withdrawal (we note that AIG, Bank of America, US Bank, and USAA Bank are among those larger banks that have provisions in CD terms and conditions limiting early withdrawals to those where the bank consents). Second, even if the terms and conditions do not require the bank or credit union’s consent, terms ordinarily include provisions that allow the bank to make adjustments, which may allow them to require their consent in the future or to increase the early withdrawal penalty and apply those changes retroactively to existing CD holders.
BestCashCow has always taken the position that depositors should carefully read the terms and conditions of any product that they purchase. While some other financial websites recommend planning around early termination fees, we also recommend that depositors not engage in creative financial planning around paying fees, but rather only purchase CDs that they plan to hold to maturity. For this reason, and against the backdrop of possible rising rates (but the equally great likelihood that we are following the Japanese paradigm, we recently recommended that depositors will now find their best opportunities and safest bets in 1-year CDs.
Federal law provides some protections from changes in terms and conditions affecting early termination of CDs. Pursuant to Regulation DD, a bank or credit union is required to provide 30 days written notice of a material change in the terms of a CD. The addition of a provision requiring consent to early termination or a change in the terms of an early withdrawal penalty would be considered a material change. The recourse for a depositor however is limited. They may act within the 30 days and contact the financial institution to opt out. If the institution does not permit opting out, they may terminate the CD according to the existing penalties. When a credit union changed its early termination fees in 2011, the National Credit Union Administration (NCUA) took the position that its own rules were not violated and that federal consumer protection law provides no additional protection above that provided by Regulation DD. Presumably, the FDIC would take the same position for banks.
State consumer protection laws and common law related to contracts may also provide some protections from changes. Some attorneys suggest that the terms and conditions are a contract of adhesion and therefore the right to make changes to these terms, even if retained, cannot be done easily, especially when the purchaser has no ability to opt out. From my own studies, I think that the contract of adhesion argument is unlikely to hold up in a court of law. There is a large marketplace with many sellers of CDs and the buyer of a financial instrument is assumed to have a certain degree of sophistication regarding the risks (and therefore is treated differently from buyer of a ticket to a baseball game or an amusement park).
As a CD purchaser or CD holder, you do not want to litigate issues related to early termination fees. You just want to mitigate your risks of a bank or credit union refusing an early withdrawal or changing the withdrawal penalty amounts. You can do this through a careful understanding of the terms and conditions and purchasing shorter term CDs. Buying CDs only from well-known and highly visible institutions (such as Barclays, Synchrony, Sallie Mae Bank or GS Bank) can also serve as a form of protection. Any of these banks will likely be more apprehensive about changing the terms of a CD or refusing an early withdrawal all together, as they will face significant backlash throughout social media and on sites like BestCashCow. A smaller bank or credit union might be less concerned.
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