IBA Compliance Connection

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We issued a certificate of deposit (CD) to two joint owners with a right of survivorship. One of the owners has died, and the surviving owner would like to cash in the CD but has questioned the early withdrawal penalty. Is there any guidance on whether banks can charge early withdrawal penalties in such cases, or is this a matter of bank discretion? We have decided to waive the early withdrawal penalty in cases where there is a single owner with a payable on death provision.

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We are not aware of any guidance on charging early withdrawal penalties after a joint owner of a CD has died and the surviving owner wishes to cash it in. Whether you waive an early withdrawal penalty in this situation is a matter of bank discretion.

Early withdrawal penalties for CDs are required by Regulation D only for withdrawals during the first six days after the account opening. Additionally, Regulation D allows banks to waive the required early withdrawal penalty when a CD owner dies. After the first six days, any penalties and waivers are determined by your account agreements and bank policies.

Consequently, if your account agreement permits you to charge early withdrawal penalties, we do not believe that the death of one joint owner would prevent you from charging the early withdrawal penalty — unless your account agreement specifically addresses these circumstances. While you may waive penalties and fees provided in your agreements and policies on a case-by-case basis, it would be prudent to document the reasons for such waivers.

For resources related to our guidance, please see:

  • Regulation D, 12 CFR 204.2(c)(1) (“Time deposit means: (i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days’ simple interest on amounts withdrawn within the first six days after deposit.”)
  • Regulation D, 12 CFR 204.2, Footnote 1 (“A time deposit, or a portion thereof, may be paid during the period when an early withdrawal penalty would otherwise be required under this part without imposing an early withdrawal penalty specified by this part: . . . (d) Upon the death of any owner of the time deposit funds.”)