Bank has a NOW account with APY of 3.00% on balances of $5,000 and above. Now, they want to change the terms so that the maximum balance that will earn interest is $500,000. Any balance above $500,000 will earn no interest.

Besides notifying the customers of change in terms, does a blended rate have to be disclosed to existing customers in this case?

Sounds like it - See Reg DD Appendix A.I.D - Method B.