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Understanding "Change in Terms" Notice for Time Accounts
Answer by Ken Golliher and Richard Insley, BOL Gurus
Question: It is our understanding that 12 CFR 230 5(a)does not apply to Change-in terms notices for time accounts. Also the definition of a fixed rate account in the definitions section of Truth-in-Savings does not apply to a fixed rate time account. If this is true, please explain the reference in the Commentary under 230.5 (b)5i which states that "If the change is initiated by the institution, the disclosures requirements of this paragraph apply. (Paragraph 230.5(a) applies if the change becomes effective prior to the maturity of the existing time account.) Why is the 230.5a (30 days notice for adverse changes for existing accounts) reference there, I did not think you could change any term in a CD until maturity. Please clarify and could you give me a good example of how this works.

Answer by Ken Golliher:

I agree with you, banks cannot unilaterally change terms in a time deposit prior to its maturity. Up until now, I have cited Regulation DD as one of the reasons why not. However, now you have shaken my faith.

To provide a context for the discussion: The current rate environment will eventually push many banks to realize that their early withdrawal penalties are a disaster waiting to happen – they will want to amend penalties on existing time deposits without waiting until maturity. Generally, Regulation DD’s 230.5 addresses subsequent disclosures. Section(a) allows banks to give consumers thirty days advance written notice of any change that affects them adversely. The language there does not specifically limit itself to accounts other than time deposits. However, Section(b) specifically deals with maturity notices on time deposits. Changes in terms on time deposits with original maturities from one month up to one year are specifically addressed. (Those having original maturities of greater than one year receive a new initial disclosure, hence they receive notice of all the new instrument's terms.) As the language regarding time deposits was more specific, many (myself included) have taken that construction as indicating that the terms for a time deposit can only be changed upon its maturity.

The parenthetical sentence you cite from the commentary gives banks support for the argument that Regulation DD does not prohibit the change prior to maturity. In context:
5. Renewal of a time account. In the case of a change in terms that becomes effective if a rollover time account is subsequently renewed:
i. If the change is initiated by the institution, the disclosure requirements of this paragraph apply. (Paragraph 230.5(a) applies if the change becomes effective prior to the maturity of the existing time account.)

Even to the eye of the nonbeliever, the language is pretty clear… Regulation DD does contemplate the possibility that the bank could unilaterally change terms during the life of the instrument. The early withdrawal penalty may be the least of it. If the time deposit was disclosed as a fixed rate instrument, then the rate can be changed on 30 days notice as well. If a bank can change a rate or an early withdrawal penalty on a time deposit, then there is very little argument that Regulation DD maintains its status as a “shopping regulation,” one which allows the consumer to make informed choices between alternatives.

At the time of its birth, Regulation DD was described as having only one substantive provision, the requirement that the balance on which interest was paid be based on one of two acceptable methods. The rest of the regulation was touted as only requiring disclosures. Saying that the regulation only talks about disclosing a change, but cannot be read as prohibiting it, is consistent with that observation

However, even if federal consumer protection laws do not prohibit the practice, state law might provide a moral compass. Most states have an unfair and deceptive practices act. (For now, we will not raise the specter of the FTC getting into banking issues.) Imagine a consumer’s reaction to receiving a written notice saying that the early withdrawal penalty on a $100,000 time deposit paying 2% interest and maturing in October of 2005 has been increased from 3 months interest to 6 months interest. If the change is permissible, the only way the consumer could avoid it would be to close the time deposit now and take the 3 month penalty. (Forget imagining the consumer’s reaction, what would your reaction be if it was your money or your parents’?)

If this is permissible, banks could offer low early withdrawal penalties on time deposits confident that they could be changed on 30 days notice. While, I am no longer confident that federal law presents a bar to the practice, I am steadfast in the observation that the practice meets my personal “I know it when I see it” definition of an unfair and deceptive act.

Answer by Richard Insley:

Ken- The practices you describe are commonplace in the credit card business--maximize customer intake with sweet terms, and then maximize profitability by selectively increasing fees and rates with 30 days notice. These lenders know they will lose a predetermined percentage of new accounts opened, but many customers will not pay attention to the fact that they are being had!

Portfolio profitability practices of this kind should be expected from the large credit card banks that fund themselves (at least partially) with CDs.

If customers are accepting CDs with contract provisions that allow unilateral changes with 30 days notice, by this time next year we will see an epidemic of penalty hikes and any other unfavorable changes imaginable; AND, next year is an even-numbered year! (Thank goodness for some job security.)

First published on 9/15/03

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