My CD contract says WHAT? (The Sequel)

Man standing atop steps formed from dollar bill

A reader comment concerning iGObanking on another website got me thinking about a common CD contract provision -- one permitting a bank to close an account at any time, for any reason, by simply refunding the depositor’s money.

This reader pointed out that such a closure provision might turn what appears to be a fixed-term CD into a callable one.

I’ll use Nationwide Bank as an example, as I did on an earlier post about banks making unilateral changes in account terms, including outstanding certificates of deposit.

Its deposit contract says, "We may ... close this account at any time upon reasonable notice to you and tender of the account balance."

This includes a certificate account.

I’ve found similar language in the deposit contracts of MetLife Bank, American Express Bank and Discover Bank.

Others, however, don’t have this sweeping provision. Ally, for example, is only allowed to close a CD at maturity.

Why should you care?

With interest rates at historic lows, why would any bank ever exercise this right absent customer fraud or abuse?

First, are we really sure Ben Bernanke is through punishing savers? I’m not.

Couldn’t today’s 1.50%, 24-month CD rates be 0.35% a year from now? That’s already the two-year Treasury rate.

Or what if a bank wants to shrink its deposit base because, say, loan demand is off? Maybe it will start with those 5.25% APY five-year certificates it issued in 2008, with two years remaining to maturity.

Or a bank could exercise its account closure rights to eliminate investors in a geographic area in which it no longer wants to be present for regulatory or cost reasons.

OK, I’m being paranoid. I’m wired that way.

Perhaps the Truth in Savings Act comes to the rescue.

As interpreted by the Federal Reserve staff, the act requires that "in addition to the maturity date, an institution must state the date or the circumstances under which it may redeem a time account at the institution's option."

Somehow, I think a bank would be hard-pressed to start "closing" CDs to lower its cost of funds, downsize itself or eliminate savers in a particular area unless it clearly said it could do so in its TIS disclosures.

Maybe I ought to lay off the fine print -- and stop worrying.

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