My certificate of deposit contract says WHAT?

Benjamin Franklin's face on $100 bill

I once thought certificate of deposit investors and banks had a creditor-debtor relationship.

I believed a CD represented a borrowing by the bank from the depositor, which the bank agreed to repay at maturity, with interest, pursuant to a solemn contract.

Then I took up CD investing and actually read those contracts.

Take Nationwide Bank, a federally chartered thrift. Its deposit contract states, "We may change any term of this agreement."

Only reasonable or legally mandated notice is required. (The Truth in Savings Act requires 30 days’ advance notice of adverse changes.)

Some solemn contract -- where one party can unilaterally change the terms!

When I practiced law, I never ran into a loan or bond agreement that permitted the borrower or issuer to willy-nilly modify lender or bondholder rights.

Maybe Nationwide’s broad language (which all banks basically have) is justifiable when applied to a checking, money market or savings account, with a variable rate and a right of penalty-free withdrawal.

But it seems inappropriate for a CD, where the depositor makes a long-term commitment.

Suppose your bank wants to change its early-withdrawal penalties from six months' interest to 12? Or require its prior agreement to early withdrawals?

Banks have being doing this lately. Can they make these changes to existing CDs? (Fortunately, so far, my banks have limited changes in early-withdrawal terms to new CDs.)

How about imposing an exit fee (or "disloyalty penalty") if your CD matures and you don’t roll it over? Banks already do this with IRA CDs by charging transfer fees.

Or what if the bank decides that interest payments should be made annually, not monthly, or should be capitalized until maturity?

(I suppose a bank could do all this -- and more -- by failing and having its accounts assumed by another bank, although that would be pretty drastic and the FDIC says we can get our money back if terms change adversely.)

I could go on with this parade of horribles but won’t. Let’s just say a CD isn’t a promissory note.

Undoubtedly, there are legal and regulatory limitations that could be brought to bear if a bank really tried to do a number on CD holders.

But where will the line be drawn? And, given their persistent coddling of banks, can we count on regulators to protect us?

Or will we be on our own?

I think I know the answer to that one.

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