We are changing how we calculate the penalties we charge on CDs, which will result in higher early withdrawal penalties. Should we notify existing CD customers in their prematurity notices?

Yes, we recommend notifying your existing CD customers of the change in their prematurity notices, and not with change-in-terms notices. Whether you need to highlight or point out the change in the calculation method for early withdrawal penalties depends on the type of CD, as we detail in the bullet points below.

Regulation DD requires you to provide advance notice of changes in terms that will adversely affect your customers. 12 CFR 1030.5(a)(1). However, the change-in-term notice requirement does not apply to an account if the change will not apply until after the account has matured. As stated in the Regulation DD staff commentary, the change-in-term notice requirement “applies if the change becomes effective prior to the maturity of the existing time account.” Official Interpretations, 12 CFR 1030.5, Paragraph (b), Comment 5(i). If the change does not become effective until the account is renewed, the prematurity notice requirements would apply, not the change-in-terms notice requirements. Also, note that change-in-terms notices are never required for short-term accounts with maturities of one month or less. 12 CFR 1030.5(a)(2)(iii).

Whether you need to highlight the new terms for calculating early withdrawal penalties in your prematurity notices depends on the type and length of the CDs:

For CDs with maturities longer than one year that renew automatically, prematurity notices must consist of (1) full account opening disclosures and (2) the maturity date of the existing account. 12 CFR 1030.5(b). However, there is no requirement to highlight new terms in the account opening disclosures. As stated in the staff commentary, “institutions need not highlight terms that changed since the last account disclosures were provided” for accounts with maturities longer than one year. Official Interpretations, 12 CFR 1030.5, Paragraph 5(b)(1), Comment 1.

For CDs with maturities longer than one year that do not renew automatically, you must provide a prematurity notice disclosing the maturity date and whether interest will be paid after maturity. However, you need not provide any account disclosures with the prematurity notice. If a customer decided to establish a new account after a CD matures, you would provide new account disclosures at that time. Official Interpretations, 12 CFR 1030.5, Paragraph 5(c), Comment 1.

For CDs with maturities of one year or less that renew automatically, whether you highlight new terms depends on what type of disclosure you provide, since the rule provides two options: either (1) full account opening disclosures or (2) a shorter notice with three specified disclosures — (a) maturity dates for the existing account and the new account, (b) the interest rate and APY (if known), and (c) any differences in terms between the accounts. 12 CFR 1030.5(b).

For CDs with maturities of one year or less that do not renew automatically, we are not aware of any prematurity notice requirement. See 12 CFR 1030.5.

For CDs with maturities of one month or less, you do not need to provide prematurity notices or highlight new terms. See 12 CFR 1030.5(a)(2)(iii), (b).