CD Early Withdrawal Penalties

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Question:

Our President wants to implement a different type of early withdrawal penalty structure. For example, for CDs of 1 year or less, the penalty assessed would be 3% of the amount withdrawn. For CDs of maturity of greater than 1 year, the penalty assessed would be 6% of the amount withdrawn. If we are able to get our data processor to support this and our documents and disclosures to correctly disclose this, do the regulations allow us to use such an early withdrawal penalty structure?

Answer:

As long as your penalty is always at least equal to 7 days' interest on the amount withdrawn if the withdrawal is less than 7 days from the deposit date or last withdrawal date, how you calculate the penalty is a matter of contract, which might be subject to some state law restrictions.

I haven't worked the math, but it appears your suggested penalties would pass the test.

First published on BankersOnline.com 06/9/03