Ally Bank Now Requires Consent Before Allowing Early Withdrawal From a CD

Piggy Bank being Smashed with Hammer

Hat tip to Bogleheads investment forum participant B’Falls_JT, I learned that Ally Bank now requires its consent before it will allow early withdrawal from a CD. The early withdrawal penalty doesn’t even come into play if the bank doesn’t agree to the early withdrawal in the first place.

Many people advocated buying a 5-year CD from Ally Bank even if you need the money sooner or using the higher yielding 5-year CD as a cheap option in case interest rates go up, because you would come out better off even after paying the low early withdrawal penalty. This policy change adds significant risk to that strategy.

The policy change came in an amendment to Ally Bank’s Deposit Agreement effective September 27, 2012. The original agreement stated:

You may not make a partial withdrawal of funds you deposit in a CD prior to the maturity date. If you withdraw all of the funds you have deposited in a CD prior to the maturity date, we will close your CD, add the accrued interest to date to the balance and impose a penalty on your early withdrawal. The penalty imposed will equal sixty (60) days of interest.

Although it didn’t say it explicitly, it gave the impression that the depositor can initiate an early withdrawal at will and only pay the early withdrawal penalty of 60 days of interest.

The amended language says:

You may not make a partial withdrawal of principal from a CD or IRA CD prior to the maturity date. If we consent to the redemption of a CD or IRA CD prior to the maturity date, we will close the CD and impose a penalty. The penalty amount will be equal to the loss of 60 days interest calculated at the interest rate in effect for the CD or IRA CD at the time the redemption request is made. The penalty will be imposed on the balance of the CD or IRA CD. Any accrued (but not yet posted) interest will be applied as a credit against the penalty amount. If the accrued interest exceeds the penalty amount, the excess accrued interest over the penalty amount will be paid to you. If the accrued interest is less than the penalty amount, a reduction of the balance may result.

The highlighted part gives Ally Bank the right to refuse early withdrawals. Although the bank may not always exercise that right, it has it in its pocket.

If you need the money sooner and if interest rates haven’t gone up, Ally Bank will probably still let you withdraw early. If interest rates have gone up sharply and Ally Bank is facing mass exodus, it will more likely invoke the consent clause.

I would hope this change only affects new CDs sold after September 27, 2012, not existing CDs sold before that date, but I’m not sure. One customer reported that Ally customer service reps are instructed to say that this is a clarification of existing policy, meaning it applies to both new and existing CDs.

With the unconditional option to break the CD gone, you should plan on holding a CD to maturity and not count on breaking it early, as what a CD means originally. When you hold a CD to maturity, what the early withdrawal penalty is doesn’t matter.

Ally Bank is no longer the rate leader among online banks. Two other online banks, Discover Bank and CIT Bank offer better rates in some terms.

PenFed CU Ally Bank Discover Bank CIT Bank
Savings Account 0.19% 0.95% 0.80% 1.05%
1-year CD 0.90% 1.04% 1.00% 1.10%
2-year CD 0.99% 1.14% 1.15% 1.25%
3-year CD 1.25% 1.29% 1.35% 1.42%
5-year CD 1.71% 1.65% 1.75% 1.80%

Although the rate differences don’t seem much, if you are going to lock into a CD, you might as well lock into a higher rate. Unlike a savings account, once you lock into a CD, the rate on the CD can’t be lowered. So you don’t have to worry about whether a bank offering good rates today will continue to offer good rates next year. On you are in, you are in it for the whole term.

[Rates were obtained from respective banks' websites on Oct. 24, 2012. They are of course subject to change by the banks before you lock in.]

[Photo credit: Flickr user Images_of_Money]

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Comments

  1. says

    That’s a bummer. I figured it was only a matter of time before they changed this policy. I’ve locked up a bunch of money in 5 year CD’s though so I’ll be interested to see what happens if/when I try to redeem them early. I know I would be pretty pissed if they didn’t let me break the CD’s since those were the terms when I signed up. Like with other programs, I should be ‘grandfathered’ in. I bonds are looking better and better now :)

  2. edward says

    The other real advantage to Ally was the small penalty for early withdrawal. Discover is 6 months for CDs up to 5 years, versus 2 for Ally. I did acquire quite a chunk of Ally CDs, back when they were offering 3.09% 5yr. I was actually thinking of bringing more cash into Ally, and maybe some IRA as well, but probably won’t now. I Bonds are nice, but you can only buy $15K max a year, even if you use the 1040 refund trick.

  3. says

    edward – Yup, *was*. With the consent uncertainty, it doesn’t matter what the penalty is if you are not allowed to withdraw. Over at DepositAccounts.com, one customer reported that Ally customer service reps are instructed to say that this is a clarification of existing policy, meaning it WILL apply to existing CDs.

  4. Diane says

    This really stinks. I would never have put my money in an Ally CD if I had know they would not honor the terms I bought under. Ally will not ever get another penny of my money if they stick to the statement that is is a clarification of existing policy. What is the point of having an agreement if they can change it?

  5. says

    Thank you Allan. I’m afraid they didn’t answer your true question. “Can the customer …” Of course the customer CAN, if the bank consents. If it’s a small amount, and the bank is not facing a lot of withdrawals, I’m confident they won’t withhold consent. You will be able to close your $100 CD next week. The real test comes when everybody wants out of their sub-2% CDs to go to 8% CDs. The bank has reserved the right to refuse.

    Maybe ask them again “Can the bank *ever* refuse early withdrawal? If so, under what circumstances will the bank refuse? Only if there is a court order?” Ask them to list specifically what will make the bank withhold consent and state unequivocally the bank will not withhold consent outside those enumerated circumstances.

  6. says

    Harry – You sure like to say how I keep getting fooled.

    I think i previously educated you on understanding the differences between dollar weighted and geometrically weighted returns are caused by behavioral traits and moving money to what’s hot. Now I want to try to educate you on how a legal department works. They are not going to answer the question you asked as their may be circumstances they haven’t thought of. Say a law suit over two parties claiming the CD upon the death of the owner or a thousand other possibilities. By noting in writing they can’t withhold consent for customers wanting the cash or to invest in higher rates, I believe they have done all they can to assure customers wanting to close for those two reasons.

    You should, however, feel free to ask them directly rather than direct me what to ask. Have you considered the possibility I may not be as stupid as you think? Maybe it’s even worth chatting before posting how I get fooled next.

  7. says

    Wow Alan, get defensive often? This is a different harry btw ha

    Anyways, I chatted with a CS rep and when I asked them directly: “Ok so I can still close a CD whenever I want for whatever reason as long as it’s the full amount?” Amy told me: “Yes, that is correct.”

    So I’m not sure why the added that amendment but it seems like you can still close a CD whenever you want for whatever reason as long as it’s the full amount, right? I also just found this transcript from a chat I had with them a while back:

    Jacob M.: The early closure penalty can be changed. If we do change the penalty, your C D will be
    grandfathered in (the penalty will remain the same) until maturity. If you renew your C D at maturity, it will be
    renewed under the new penalty policy.

  8. says

    Harry@PF

    I once asked an Ally CS Rep 3 technical questions on the CDs. I then followed up with Ally management and they were wrong on two out of three. Thus, if it’s a critical issue, I wouldn’t rely an a customer service rep from any call center from any company. That’s why i took this matter to a higher level rather than just relying on what the service rep also told me yesterday. I noted why I thought they added the amendment.

  9. says

    Allan – I’m sorry if I gave the impression that you did something wrong or you aren’t smart enough. I have the highest respect for you. I will take whatever education I can get. I meant to say they gave a literally true answer but they avoided your true question. I will edit the wording of my previous comment.

    With written language in black and white in a legal agreement on one hand, and a literally true answer on the other, when push comes to shove, the two will converge and the written language will govern. They are fooling all of us. I don’t have access to any level above regular service reps, who are often wrong as you noted. If they really want to clear this up, they should at least give us examples for what makes it outside “ordinarily.” I understand it’s impossible to pin them down to an exhaustive list. At least customers will understand better if they give examples.

  10. says

    Thanks Harry. I’m sure I could get Ally to tell me they would withhold the funds if the IRS had a lien but that doesn’t limit them or provide any assurance they would not deny the withdrawal for those wanting cash or finding higher rates elsewhere. Since don’t believe they would ever provide an exhaustive list of reasons where they would not consent (I wouldn’t if I were them), I went the other direction and asked them specifically if they would withhold consent for the two reasons in my piece. They responded in writing that they would not withhold consent and, while I’m not an attorney, I think it’s reasonable to rely on this written representation.

  11. says

    I agree with Harry. And with Allan. :-)

    They gave a literally true answer that doesn’t fully address the underlying issue.

    But at the same time, as Allan points out, I wouldn’t expect them too. They understandably don’t want to paint themselves into a corner by providing an overly broad or specific answer.

    As for having something in writing, they previously said (in writing) that they would provide customers with 30 days notice before changing the terms of their CDs — but they didn’t follow through on that promise.

    They can say this change is a “clarification” until they’re blue in the face but the fact of the matter is that their old policy didn’t give them the right to refuse consent for early withdrawals and the new version does.

    They may have meant to say this in the previous version but they didn’t actually say it. And now they do. Thus, the terms have changed — without written notification.

    Am I splitting hairs? Perhaps. But I think this could’ve been handled better.

  12. Philip Buck says

    Here is my discussion with an Ally Customer service rep:

    Welcome to Ally’s Live Chat. Thanks for joining us! A Customer Care Associate will be with you in a moment. You are number 3 in the queue. Thank you for waiting.
    You are now chatting with ‘Amy’
    Amy: Thank you for chatting with me today. How can I help you?
    Phil: Hi – I have really liked Ally’s choices etc but read where you now do not allow early withdrawal of a 5 year cd. I had talked at length to someone there about my need to cash them in early to carry me to SS retirement.
    Amy: Hello, Phil. May I ask where you read this? We do allow early withdrawal of all of our CDs. The early-closing penalty is equal to 60 days worth of interest for all of our CDs, with the exception of the 11-month No Penalty CD, which has no early-closing fee.
    Phil: The Financial Buff (quite reliable) http://thefinancebuff.com/
    Amy: Thank you. May I have 3-5 minutes to look into this for you?
    Phil: yes for sure
    Amy: We are not affiliated with this website, and I have just confirmed that what I stated above is still our policy. You will be able to close your 5-year CDs before the end of the terms.
    Amy: I’m sorry for any confusion which this may have caused.
    Amy: I have not heard from you for a few moments. Are you still with me?
    Phil: sorry yes
    Amy: Was there anything else I could assist you with today?
    Phil: So you have not changed your policy?
    Amy: That is correct.
    Phil: Great -thanks

  13. says

    Philip – To be fair they did not say they do not allow early withdrawal. I didn’t say they do not allow early withdrawal either. With the change in the deposit agreement, they only said they will allow early withdrawal if they approve it. In most cases they will likely approve the early withdrawal but it’s not 100% guaranteed. They are reserving the right to refuse even though they may have no plan to use that right at this moment.

  14. babar says

    I can understand a bank withholding a deposit when
    1. depositor is delinquent on a loan at the same bank
    2. directed to do so by a regulatory or law enforcement entity.
    3. there is suspicion of fraud.

    I do not believe banks have the authority to use their ‘discetion’ on whether to or not allow a depositor withdraw the money.

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