No Withdrawal CD

Question:

The board of directors at our institution currently would like to offer a ten year CD with no option for withdrawal. My understanding is that as long as it is disclosed, you can make the early withdrawal penalty "all interest accrued", but that you can’t restrict a customer from accessing his money. Can you please tell me if my understanding is correct and where I can find a regulation that governs this issue?

Answer:

You are correct. As long as you disclose it, you can enforce it. I have seen a few cases where the early withdrawal penalty is not only "all accrued interest", but interest for the life of the contract. In other words, a ten year CD would have a penalty of ten years' interest, no matter when the early withdrawal occurs. If the customer decides to withdraw money at the end of year one, he would lose the accrued interest and nine more years of interest from the principal.

Reg D governs early withdrawal penalties [Section 204.2(c)(1)], but it only requires penalties on withdrawals during the first six days following initial deposit or partial withdrawals. Having a penalty that exceeds these requirements is acceptable and purely a contractual issue, subject to any state law restrictions.

First published on BankersOnline.com 1/11/10