Reg DD states:

Time account means an account with a maturity of at least seven days in which the consumer generally does not have a right to make withdrawals for six days after the account is opened, unless the deposit is subject to an early withdrawal penalty of at least seven days' interest on amounts withdrawn.

Does this mean we are ok if we charge a penalty that is more than 7 days interest? For example, charging the normal penalty amount stated for the term of the CD (3, 6 or 12 months interest).

You can impose a more substantial penalty. Your penalty must be "at least" 7 days' simple interest, it can be more but cannot be less.

Thank you burkemi! That's what I was thinking but just needed to hear somebody else say it.