Question: We have two certificates of deposit, eight- and fifteen-month, that have a disclosure that states:
“If your daily balance is $14,999.99 or less, the interest rate paid on the entire balance in your account will be 1.40% with an annual percentage yield of 1.41%. If your daily balance is $15,000.00 or more, the interest rate paid on the entire balance in your account will be 1.65% with an annual percentage yield of 1.66%. The interest rate and annual percentage yield for the account depend on the applicable rate tier. We will pay these rates until maturity. Minimum balance required to open the account is $500.00.”
I say this is a tiered rate account and that when the balance goes above $15,000.00 during the term the higher rate should be paid. This is not what our system is doing. The higher rate is only used with a new certificate or when a certificate is renewed. If the balance
goes above $15,000.00 during the term of the certificate, it stays at the lower rate.
I say we need to send a notice of change or re-disclose to our customers to inform them that the rate will not change during the term of the account. This would only need to be sent on accounts that have not matured, because we send a maturity notice telling the customer
that the rate has not been determined at this time and they can call for the rate. The CSR will give the customer the rate according to the balance in the account. The maturity notice does not have the tiered rate information on it.
I have been informed by the CSR and CEO that we do not need to re-disclose or send a change notice to the accounts that have not matured. What is your opinion?
Answer: A tiered rate account is defined as “an account that has two or more interest rates that are applicable to specified balance levels.” This is the product you described, but what you are disclosing would be two separate products based on the amount of the initial deposit.
Based on the disclosures, the consumers whose balances increase in the tiers should receive a corresponding change in the rates. A change in terms notice now would, in my opinion, expose you to additional risks as you are reducing the earnings some depositors
have anticipated based on your contract with them. The certificate of deposit represents a contractual arrangement between you and your customer under which you agree to pay a specific rate of interest for a specific term.
You cannot unilaterally abrogate that contract by simply sending a change of terms notice during the term of the CD This is different from a variable rate account where the customer knows up front that the rate may be subject to change.
The original version appeared in the Febuary/March 2004 edition of the Oklahoma Bankers Association Compliance Informer.
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