[Cindy]

Currently we have an interest penalty for early withdrawal on our CD accounts. Example: 6 month CD, the penalty would be 1 month of interest. Retail wants to add an additional standard fee of $10 onto the interest forfeiture.

I know fees are being scrutinized and I’m not sure if this would be compliant. Our Agreement states the following:

Early Withdrawal Provisions: We may impose a penalty if you withdrawal any or all of the deposited funds before the maturity date. For 30 day terms, the minimum penalty is the forfeiture of an amount equal to 30 days interest on the amount withdrawn at simple interest rate in effect for that term.

Fees & Charges: Please refer to the separate Fee Schedule provided to you with this disclosure for information about fees and charges associated with account. A Fee Schedule will be provided to you at the time you open an account and periodically when fees or charges change.

If this is possible I assume we would need to revise Agreements going forward and give a 45-day notification as well as revise our fee schedule.

Thank you for any light you can shed on this.

Topic

[Kimberly Boatwright, CAMS, CRCM]

Hi Cindy –

I guess my questions is why do they want to do this? Pretty risky in today’s environment. However, you are correct in your whole assessment.

1. Yes, you will have to update the language in your disclosures, agreements, and provide the proper notification.

2. Yes, Fees are being scrutinized heavily using UDAAP standards. Firstly, you would need to have a very good reason for the $10 additional fee. You will need to clearly be able to explain ” the Why”. Without using explanations that show it to be fee income for the financial institution. To do that you will mostly likely need a break out of how much it costs the FI to have them close the CD early. It will be a hard sale if this process for opening and closing is basically automated. Even “employee” time spent opening or closing the account is probably not much by way of time or process.

The institution will need to prove the new standard is not “unfair” or “abusive”. Unfair because people are living paycheck to paycheck right now and we are in an “recession”. So why charge the interest penalty and the extra $10. Abusive because it will be a policy that could hurt a person or persons who really need their money. They could be in financial hardship that they didn’t have when it was opened. As long as disclosures properly explain the fee the institution should be able to avoid a “deceptive” standard.

3. Two other consideration,
a. Fair Banking. Fee Waivers – If there is the ability for the employee to waive any of the fees (interest and/or the $10) you are going to need a very good policy, procedure, and tracking mechanism. It will need
to be monitored and trended to spot potential issues/disparities, which ultimately for deposit accounts will tie back to UDAAP.
b. Reputation Risk – Complaints – You’re going to want to watch these closely as well. As you know, no amount of disclosing ever prevents complaints by depositors. So you will want to look for these as they could
be early warning signs. If they hit social media they could catch the eye of the CFPB and/or your Federal and State regulators, as well as special interest groups.

Hope this helps provide another opinion on the risky practice charge fees. Please let us know if you have other thoughts or question.

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[Cindy]

Thank you, your response is very helpful.

[Author]

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