I first heard this from Jonathan at My Money Blog about two years ago. Many banks automatically renew matured CDs to the same term. You only have a very short window — a few days — to stop that.
If you miss the window, you are subject to the early withdrawal penalty on the new CD. The early withdrawal penalty not only takes what you earn in the new term, but it can also eat into your principal.
Apparently this is still happening. Nathalie Martin at Credit Slips reports that a colleague of hers had a CD with Bank of America matured on April 23. She received a letter from B of A telling her that she had 7 calendar days after the maturity date to reverse the renewal. To do that, she also had to visit the branch.
She went there on April 30. It was the last day of the 7-day window but she was told it was too late (note 1). The early withdrawal penalty would cost her over $1,000 (note 2).
After she complained to the federal bank regulator Office of the Comptroller of the Currency (OCC), the bank waived the early withdrawal penalty. Although she got paid what she’s owed, it’s amazing she had to fight that hard for it.
Bank of America isn’t the only bank doing this. It’s a widespread practice.
Trapping customers like this is just wrong. It should fall into the Unfair and Deceptive Acts and Practices (UDAP) category. A CD should by default just mature. Either send a check to the customer by mail or deposit it to the customer’s checking account. Auto-renewal has to be an opt-in and the customer should be able to change it any time before the CD matures.
Brokered CDs don’t get auto-renewed. When they mature, the money just goes into cash in the brokerage account. Some credit unions and online banks also don’t automatically renew matured CDs.
Note 1: April 30, 2011 happens to be a Saturday. Banks’ computers operate on the following Monday’s date on Saturdays.
Note 2: It must be a very large CD. Bank of America currently pays 0.60% APY on a 18-month CD. The rate back in April can’t be that much higher. Assuming the early withdrawal penalty is six months of interest, it takes over $300,000 in principal to draw a $1,000 early withdrawal penalty.
Aside from the unfair auto-renewal policy, Bank of America’s rate is too low for a $300k CD. My bank Alliant Credit Union pays 1.55% APY on a 18-month CD. That’s almost 1% higher than Bank of America’s rate. Although she got the $1,000 early withdrawal penalty waived, she lost much more than that to Bank of America on its uncompetitive rate.
Assuming Bank of America’s rate was 1% lower than Alliant Credit Union’s when she took out the CD 18 months ago, she lost $300,000 * 1% * 1.5 = $4,500 from using B of A. She fought hard on one hand but willingly surrendered on the other. Some people just have more money to burn than others.
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After paying taxes on the interest, may be its even worse. There was an interesting article in NYT on a whole asset class (CDs and liquid savings that could pay reasonable interest) starting to vanish due to Fed’s low interest rate policy. I can’t seem to remember the title. But I would like to see you take on it beyond usual repercussions of seniors robbed of their income etc.
Harry Sit says
KD – I will put it into a post next week.
Helena Smith says
I guess each to his own. I love automatic renewal for my emergency fund which is in a CD ladder (6 six-month CDs). Automatic renewal is the perfect plan for a ladder like this, and my bank gives a premium on the interest rate (I think 0.25%)
Harry Sit says
@Helena Smith – Giving the customer an option to auto-renew is completely fine. Make it an opt-in: auto-renew only if the customer asked for it. My objection to the auto-renew policy at Bank of America are that (a) they renew it automatically even if the customer never asked for it; and (b) the window to stop the auto-renewal is too short.
Bank of America actually changed their early withdrawal penalties this year. That might have taken effect on her new CD that was automatically renewed. It’s now a flat $25 plus 3% of the amount withdrawn for CDs with terms of 12 months and longer. That 3% would explain the big penalty. Also, it shows how much profitable this change will be for BofA when their interest rates are so low.
Harry Sit says
@Ken – Thank you for that information. An early withdrawal penalty of $25 plus 3% is awful. It takes away all the interest she earned in the previous term and then some. I would call this kind of auto-renewal predatory. IMO an early withdrawal penalty should never be more than the interest earned in the current term.
Shirley Yang says
I would like to renew my church’s CD online since I am the authorized signature person. Can I do that?