We are looking at offering a add-on cd product for IRA's.
The initial deposit would receive a interest rate equal to the current rate for the term. When a deposit is made, that portion of the CD would receive whatever rate is being offered on the term at the time of the deposit.

Does anyone offer this type of product? We are not sure how to handle TISA disclosures for the additional deposits.

You simply modify your transaction limitation disclosure to indicate that you "will" allow additional deposits.

I have not seen this type of product. I agree with Randy but also add that you would need to indicate that the new deposits will be at the then current rate. This wouldn't effect the TISA disclosure as you would base the APY on the initial rate - you can't guess future deposits or their rates.

You would need to spell out the legal terms in the deposit agreement. For instance, if this was a 12 month CD and in month 2, I made an additional deposit, would I receive the current rate on the then 12 month CD or would it be on the 11 month rate (since that is all that is left until maturity)? Things like this will need to be thought about and spelled out. Good luck.

I guess I didn't read this post carefully enough. Wow! What a complicated product this is going to be to administer. Sounds like this would actually trigger a change of terms notice based on a specific event (additional deposit) and would require a disclosure be sent/delivered to the customer disclosing the new composite APY. See comment 230.5(a)(1) comment 3:

Terms that change upon the occurrence of an event. An institution offering terms that will automatically change upon the occurrence of a stated event need not send an advance notice of the change provided the institution fully describes the conditions of the change in the account opening disclosures (and sends any change-in-term notices regardless of whether the changed term affects that consumer's account at that time).

I just received an "invitation" to an internal meeting regarding add-on IRA CDs that we are considering offering. I would also be interested in hearing from anyone who is currently doing this.

The difference with what we are considering is that the add-on amount would receive the same interest rate as the original CD.

If you are keeping the interest rate the same, then refer to my first comment. The other thing that needs to be considered is interest rate risk. If you are offering long term CD's and rates drop significantly (is there still room for a significant drop?), you may want to limit the amount of money that can be added (even inside an IRA due to the possiblity of large rollovers). You may subject yourself to a large inflow of deposits at way above current market rates.

The CD would still mature on the same day as stated on the original CD (no change in term). Our system actually would calculate a new rate based on the formula: ((Balance before deposit X Rate before deposit) + (amount of deposit x current rate for term))/balance. This effectively give the customer the old rate on the old balance and the new rate on the deposit.

Would we then need to give the customer a new TISA on this calculated rate at the time of deposit?

Based on the commentary that I cited above, I have to vote yes. It's not a variable rate CD, the change in terms (APY) is premised on a specific event (an additional deposit).

You also have penalty issues to address. You have to charge a 7-day penalty if a withdrawal is made within 6 days of a deposit. Also, you need to disclose that the additional deposit will not affect the maturity date of the instrument. And don't forget to address all of the revisions in your long-term auto-renew CD notice (if it is auto-renewable) as well as your initial account TISA.

Let's assume a customer opens an add-on CD with $5,000 on 1/2/03. On 2/1/03 an additional $100 is added. For whatever reason, on 2/3/03 the customer wishes to withdraw $300. Would the 7-day penalty still apply? Technically, the original $5,000 is long past the 7-day penalty requirement and I suppose the argument could be made by the customer that the $300 was coming from that amount. Or, does the penalty apply to any amount simply because a deposit was made on 2/1/03?

The penalty has to be assessed anytime within 7 days of the most recent deposit. This is regardless of amounts.

The penalty shouldn't apply, but where I could see a problem is lets say it's all over 7 days...well...part of the CD is at 2% and part is at 1.5%...okay...which rate are you going to affect by the withdrawal? This could become a major issue.

Personally, I would think this type arrangement could be a bookeeping nightmare. We recently did away with our add on CD's for the reason stated above...interest rate risk. We have some at very high rates, but ours are fixed for the entire term. We have the right to discontine the "add-on" feature at any time.

In reply to:

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The penalty shouldn't apply,

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On what do you base this position? Reg D indicates:

Time deposit means:
(i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit.

A time deposit from which partial early withdrawals are permitted must impose additional early withdrawal penalties of at least seven days' simple interest on amounts withdrawn within six days after each partial withdrawal.


Although Reg D may not have anticipated additional deposits to a time deposit at the time it was written, I think you would be hard pressed to say that penalties don't apply within 7 days of the latest deposit.

Some where in my obsure past I can recall this coming up and it was argued that it could be a withdrawal of previously deposited money. The arguement stood. That's the best I can do without further investigation.

I agree with susy, Randy. Why couldn't you argue that the withdrawal was from the original deposit. In fact, it would have to be since the deposit was more than the additional deposit.

We offer a 12 no Add on CD. It is fixed rate. $5,000, minimum to open, $90,000 max. Deposits of $500 or more may be added any time during term, but do not extend the term. Two withdrawals of $1000 or more are allowed during the last 3 months of the term without penalty...If any principal is withdrawn before maturity a penalty is imposed. This is an auto renew CD.