I understand the reg to read that federal penalties must be assessed when funds are withdrawn within the first 6 days of deposit or previous partial withdrawal. That penalty equals the loss of 7 days interest.

What about this scenario... A CD matures (CD #1), and during the 10 day grace period the owner comes in to invest that money in a new CD (CD #2). Three days later, they change their mind on the term and/or amount they wanted on the new CD, so they close CD #2 to open a new CD (CD #3).

My thought is, CD #3 must have an early withdrawal penalty since it would be closed within the first 6 days. I have a personal banker who would like to help out this customer and her thinking is... 'this would only be done for valuable customers and it would be OK since the original 10 day grace period had not expired.'

My arguement is that the 10 day grace period expires when the first CD is invested into the second CD.

Would this practice be a Reg D violation?

Personal bankers are understandably aligned with customers. But that does not permit them the luxury of making up rules as they go along.

IMO, the customer killed the first CD and its grace period when the second CD was purchased. There's a new contract, a new deal, and a new penalty period of 6 days. I think this customer is in the same legal position he or she would have been in had CD #2 been the first transaction with the bank. You don't get a "do over" or Mulligan on CD contracts.

"This would only be done for valuable customers ..." is the Kiss of Death and one of the most often abused lines of bull in banking. You don't get to ignore the rules just for valuable customers, and the "valuable customer" exception is the beginning of the proverbial "slippery slope."

John,
Thank you very much. That was exactly my understanding, but it's great to have someone else back you up on your opinions from time to time!

PS - I already jumped on the CSR for the 'only for valuable customers' line. It's amazing how often I hear those types of comments...

Quote:

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"This would only be done for valuable customers ..."

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I recall finding a MMDA that had excessive transactions. A VERY large account, I might add. When I inquired about it I was told that only showed up because of a systems change and the sweep didn't work. When I criticized them for that, they explained that his other bank wouldn't do it for him, that is how we got the account. (I still have the formica table imprint on my forehead.)

I have a similar "valuable customer" problem. Thier attorney has advised them to close out their current CD's in order to change ownership. There will be a penalty assessed. They are initially moving the funds to checking accounts. After changing the ownership of the funds to a partnership, the money will go back into CDs along with a substantial additional deposit. If they reinvest the funds with us in new CD's, dep ops want to refund the original penalty amounts. Can we do this? Please help.

Sure you can (if the CD has been on the books for more than 6 days) - but why? Why reward customers causing you additional work. They signed a contract with penalties for breaking it. It would be like you saying, I know we agreed to 5%, but I'm only going to pay you 2% for the last 10 months. Most of these schemes dreamed up by lawyers do little good, if the lawyers aren't helping in an orderly transition of assets. No good lawyer would recommend a premature withdrawal of a CD without a very compelling reason.

I agree with RL (not that he needs my agreement). Would this even be considered if the customer was the old man that has had an account at the bank since forever, but never big balances? The bank, over time, makes (or spends less) for the less active accounts. Check it out, when the customer wants this and that ("But don't charge me!"), it costs more for the bank over time. (Of course there are some exceptions.) Go ahead and waive the CD fees, but don't be surprised when that valued customer comes back 10 months later wanting another (costly to the bank) change.

Ahh, a pet peeve of mine.

Still under Reg D early withdrawal penalties, I'm curious to know what other banks are penalizing Christmas Clubs (or similar types of accounts which fall under time deposits) for each withdrawal after the first six days. Do you go with a set dollar amount, or a certain percent? What works well?

If you wouldn't mind sharing, I'd appreciate all the help.

Thank you. I agree that this is like opening up a can of worms for this customer. They will not want to be charged for anything! I also agree that the little old man deserves a break just as much (if not more) than the big customer. Per deposit operations, now that they know refunding the penalty is not against regulations, they are going to refund under the stipulation that the original funds plus $300,000 are deposited into a comparable time deposit within one week.

On the subject of Christmas Clubs we charge $10 for each early withdrawal.