Can you have an early withdrawal penalty set at a term greater than the term of the CD? For example, 9 month CD with an early withdrawal penalty equal to 12 months of interest?

There are no regulatory limits on early withdrawal penalties. In fact, early withdrawal does not even have to be allowed.

Hi, The question has come to me as to whether there has been a rule change recently, perhaps during Covid, that allows the waiving of early withdrawal penalties on CODs. I've received emails about a couple of area banks that are under the impression that any CODs with maturities less than 12 months have the ability to waive all early redemption fees and provide prorated interest should the customer need the funds prior to maturity.
Of course there was the update to Reg D that amended the transaction limits to 'savings deposits' but I'm not finding anything to support cancelling short-term CODs, or have I missed it?

Thanks!

The only required penalties on a CD are found in Regulation D 204.2 below:

(c)(1) Time deposit means:

(i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit.

Anything else if up to the bank. But remember, if you are waiving penalties, it should be all or none, as otherwise you get yourself in a UDAAP situation for unfair treatment.

Thank you!

Even those required early withdrawal penalties during the first 6 days the CD is on the books can be waived under a limited set of circumstances in footnote 1 to Regulation D §204.2(c)(1)(i). But yes, be consistent.