Early Withdrawals and Accrued Interest

Answered by:

Question:

If a certificate of deposit is redeemed early (not during the allowed grace days), do we have the option of paying the accrued interest? I was told that we can waive the early withdrawal penalty if we choose, but that we still have to pay the accrued interest.

Answer:

Early withdrawal penalties and possible interest forfeitures are controlled by your TISA disclosures they are not the same for all banks.

If a customer closing an account loses accrued interest, your disclosure must say so. 12 CFR 230.4(b)(2)(ii) If your disclosure does not mention forfeiture of accrued interest, you must pay it.

On early withdrawal penalties, your disclosure must also include... "A statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment." 12 CFR 230.4(b)(6)(ii). Regulation D does not impose any substantial limitation on your ability to waive penalties.

A note of caution, early withdrawal penalties reflect sound business judgment. In effect, they are liquidated damages from the customer's decision not to leave the funds with your bank as promised. Early withdrawals have an effect on your institution's assetliability management don't be too anxious to waive the penalties.

First published on BankersOnline.com 6/17/02