IBA Compliance Connection

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We offer Christmas Club accounts to our customers where they determine how much they wish to deposit each week over 50 weeks. When the account reaches maturity, we require that the customer deposited 50 times their weekly amount in order to receive their accrued interest. For example, if they wish to deposit $10 a week, they must deposit $500 over 50 weeks. If they fall short of this amount at the time of maturity, then we do not pay them the accrued interest on the account. Is that permissible? What about withholding accrued interest when they close the account before maturity? Is that an acceptable penalty?

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We are not aware of any law that would directly prohibit a bank from establishing holiday club savings accounts for which customers forfeit their accrued interest if they take early withdrawals or close the account before maturity, provided this forfeiture penalty is clearly disclosed in the account agreement. In fact, Regulation DD appears to allow this savings account feature by requiring financial institutions to disclose “a statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment.” The regulation’s Official Interpretations make clear that early withdrawal penalties include “accrued but uncredited interest.”

However, there is a possibility that requiring the forfeiture of accrued interest when customers simply do not deposit the agreed amount of funds into their accounts could be viewed by your regulators or a court as an unfair, deceptive or abusive act or practice (UDAAP), even if the forfeiture is a term placed in the account agreement. The characterization of an act or practice as a UDAAP violation is highly subjective and often unpredictable. It is conceivable that the practice of withholding interest already accrued from previous deposits based solely on the customer’s failure to make a later scheduled deposit could invite UDAAP scrutiny in some quarters.  

For resources related to our guidance, please see:

  • Regulation DD, 12 CRFR 1030.4(b)(6)(ii)

  • Regulation DD, Official Interpretations, 12 CRFR 1030, Paragraph 4(b)(6)(ii), Comment 2 (“Examples of early withdrawal penalties are: Monetary penalties, such as ‘$10.00’ or ‘seven days' interest plus accrued but uncredited interest.’”)

  • Consumer Financial Protection Act of 2010, 12 USC 5531(b) (“The [Consumer Financial Protection] Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.”)