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CD investors: Beware the fine print

By Claes Bell · Bankrate.com
Monday, March 5, 2012
Posted: 2 pm ET

CD investors often think of a CD's terms as being set in stone once they've been purchased, but that's not always the case. In the case of a bank or credit union failure, CD rates and terms can be amended, since one of the parties of the contract you signed is now officially gone to that great bank holding company in the sky.

But now some credit unions are asserting the right to change early withdrawal penalties in the middle of a CD thanks to a few lines of fine print stashed away in their terms and conditions. From Allan Roth at CBS MoneyWatch:

CEFCU, a large Illinois credit union, announced to its members last month that it was increasing the early withdrawal penalty on certain outstanding CDs from 180 days' interest to 365 days'…

I spoke to Chuck Walker, CEFCU's CFO. He explained the credit union is authorized to change the penalty under the 40-page agreement that members sign when they open a deposit account. Jana Stevens, the company's community relations manager, added that "members sign a signature-card agreement to acknowledge they received and agreed to the deposit-account agreement when opening their account."

They also sent me this lengthy agreement and identified the clause that allowed CEFCU to amend the agreement.

Puzzled, I asked why this gave them the right to retroactively change a term in an existing CD, and Walker directed me to a different clause in the document that stated, "You agree that CEFCU may change the rate schedule and/or fee schedule at any time, and you will be notified of such changes as required by law."

While CEFCU may technically have the right to do this, and I'm sure regulators will at some point address that question, it strikes me as really bad business. The whole point of buying a plain-vanilla CD is predictability. Sure, you're not going to be setting the world on fire with your amazing return, but you know exactly what you'll be getting when the CD matures.

CD investors tend to prize that predictability, and I don't think a lot them would be likely to return to a financial institution that retroactively boosted their fees or cut their yield on a contract technicality.

This is also a reminder not to make sweeping judgments about a financial institution based on its size or type (credit union, thrift or bank). Many credit unions and small banks are customer-friendly institutions that offer excellent yields for their customers, but there are going to be exceptions. Assuming every credit union pulls for the little guy, rather than taking a careful look at their fees, terms and conditions, opens CD investors up to the risk of getting a raw deal they weren't expecting.

Still, I'm not sure, given the 40-page length of the agreement in question, that even a careful reading would have saved CD investors in this case, which is why I think regulators will get involved, especially if this becomes a widespread practice.

What do you think? Should financial institutions be able to change CD yields and terms after the fact? Have you ever had this happen?

Follow me on Twitter: @ClaesBell

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2 Comments
P. Daw
March 08, 2012 at 6:10 pm

What happened to my comment, please?

P. Daw
March 08, 2012 at 3:27 pm

CEFCU's position strikes me as outrageous, and in my view it is legally dubious at best. The quoted language about changing the rate or fee schedule is apparently in a document that customers sign when they join the credit union and open their first account (which may very often be a regular deposit or checking account and not a CD at all). If CEFCU's claim is that the language permits them to change retroactively a provision of the CD that's as basic as the early withdrawal penalty, then they are in effect arguing that they are also free to change the interest rate on outstanding CDs. That would be a preposterous claim, and I can't imagine they would dare to assert it. As for the 40-page document, it's what's known as a "contract of adhesion," meaning that the customer has no opportunity to negotiate its content. Courts tend to interpret such contracts favorably to the little guy, and they will resolve any ambiguities against the party that prepared it. From that standpoint, I suspect that CEFCU's position would evoke a lot of skepticism in a courtroom.