Conditional Step-Rate CD

Management is kicking around an idea to offer a CD bonus if the customer opens a new checking account. The bump would be given 90 days after the account is opened, provided that the new checking account funds and remains open the full 90 days. If the new checking account is closed or is not funded during teh 90 days, no bump would be given. I'm not quite sure how to disclose the APY on something like this since the bump is conditional.

Which APY example would I follow? The step-rate example, or the variable rate example? Or can this even be done?

Since the bump is conditional, I don't think you use either the stepped-rate or variable rate rules for disclosure. You'd disclose the CD based on the known rate now, period. Then, I assume the bump would be given, which would not be a change in terms. So, I think all you do is change the interest rate on the CD if the consumer meets the requirement for the bump, starting with the 90th or 91st day of its term.

"I don't think you use either the stepped-rate or variable rate rules for disclosure."

If you mean for calculating the APY, I would agree, but this would still be a variable rate account and the conditions of the variable rate would still have to be covered in the disclosure.

However, this product basically isn't going to buy you much from an advertising standpoint.

Yes, Randy is correct. The APY reflects the current reality. The rate is subject to change, per the conditions in the contract.

Thanks. We aren't really looking at it to bring in new CD business, but rather to get some of our CD only customers to bring over some low cost core deposits.

So if I understand you correctly, we would calculate the APY like a fixed rate CD, but the other disclosures/contract documents need to disclose all the conditions required to get the rate bump. Is that right?

I caution your managament and encourage them to think about this... banks have done this for years, and all you usually end up with are a bunch of short term, low balance, seldom if ever used checking accounts that either sit or close out shortly after they think you are no longer watching them, and an abundance of CDs you are paying too much money for.

Point taken. We are in the early stages of this, and right now it's just an idea, not anything concrete. I know they are kicking around the notion of requiring a minimum balance in the checking account, and potentially maybe some activity minimums. Right now I'm just looking at 1) can we do this, and 2) if so, how does it affect our disclosures. If we decide to go through with it, my next stop is if our core system can handle it.

"my next stop is if our core system can handle it."

In an automated manner? - good luck with that one - I know of none out there that would be able to handle that type of tied promotion.

No, sorry, I meant our document system (if they have the ability to add the conditions for the bump).

That is the least of your concerns. How are you going to manage the process would be mine. Disclosures can be doctored, but mamually tacking accounts and changing rates will be the big thing. Also, how are you going to promote this. Is the customer going to have to ask about it. What if someone opens an account and a CD and doesn't ask - if they don't get the promotion you have a UDAAP. I could go on and on. Disclosures are the easy part.

Already brought up the management part...was told, it's too early, we'll figure that out later if we decide to do it.

Thanks for the input though. I will definitely keep those things in mind and bring them to management's attention when the time comes.

I'm guessing this type of Conditional Step-Rate CD would only be offered on new or renewing CDs, not existing CDs becuase then you've created a step-rate without prior disclosure?