[timob1973]

I’m reviewing our CD disclosures. Our CDs automatically renew and have a 10 day grace period to withdraw without penalty during the grace period. Since our CDs automatically renew, Regulation DD (1030.4 and commentary) does not require us to disclose if we pay accrued interest during the grace period.

While the commentary is very specific, I am wondering if there would be any UDAAP concerns by not disclosing especially if the Bank does not pay interest during the grace period.

Would any UDAAP risk be mitigated if we always paid the accrued interest regardless of providing a disclosure?

Any help would be greatly appreciated. Thanks in advance!!!

[rcooper]

Thank you for your question. We have forwarded it to Don Blaine. You should have a response soon.

[donblaine]

Great question.

The relevant Commentary in Reg DD states that “banks offering a grace period on CDs that automatically renew need not state whether interest will be paid if the funds are withdrawn during the grace period. Most banks handle this situation by disclosing in their initial disclosures: “If you close your CD during the grace period, accrued and unpaid interest will not be paid”

Unfortunately, the Commentary didn’t provide any clarity regarding payment of interest during the 10-day (for your bank) grace period if the funds were NOT withdrawn and did roll-over. There seems to be different practices among banks as to whether they pay interest or not during the grace period on accounts that are rolled over.

Payment of interest during the grace period would likely relate back to language, if any, you might have in your Agreement with your CD customer. The catch-all requirement in Reg DD is that account disclosures be: “reflective of the terms of the legal obligation of the account agreement between the consumer and the depository institution.” If your Agreement say says you will pay interest during any grace period you have to disclose this, and pay interest, but if the Agreement doesn’t address the issue then no disclosure and no payment of interest during the grace period is required. My guess is that your Agreement and disclosures indicate that interest will cease to accrue at the end of the original maturity date.

However, your main question dealt with UDAAP concerns regarding risk of not disclosing that interest will not be paid during the grace period. You also queried whether any potential risk could be mitigated by the payment of interest during the grace period. Both are good questions.

Rule #1 from Reg DD is that the disclosures be clear and conspicuous and reflect the legal obligation between the parties. My guess is that you currently meet that standard.

I do not think the issue of non payment paying interest during a grace period, when neither the bank’s Agreement nor its disclosures called for the payment of such interest, would meet the Unfairness standard of UDAP which is an act which causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers or to competition. Neither do I think it meets the Deceptive test regarding a representation, omission or practice that mislead, or be likely to mislead, a reasonable consumer or is material in nature.

While I believe there are is minimal UDAP (I didn’t address the Abusive standard in the full UDAAP since that standard technically is applied to banks with greater than $10B in assets) risk in this situation, risk is usually lowered when a bank’s actions, such as paying interest when it isn’t required to such as during a grace period, are in the customers favor.

If your bank does decide to pay interest during the grace period, I would align my bank’s Agreement and account disclosures with this practice.

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