We believe that you may set a flat fee as an early withdrawal penalty on a CD, provided that the fee is properly disclosed under Regulation DD. Regulation DD’s Official Interpretations state that “Monetary penalties, such as ‘$10.00’ or ‘seven days’ interest plus accrued but uncredited interest’” are examples of early withdrawal penalties that must be disclosed before an account is opened.  

You should also know that Regulation D sets a minimum withdrawal penalty for accounts that can be considered “time deposits” for reserve requirement purposes. However, the importance of distinguishing time deposits from other types of accounts for the purposes of Regulation D is questionable now, given that an interim final rule reduced reserve requirements to zero for all accounts as of March 26, 2020.

We are not aware of any maximum withdrawal penalties for CDs under federal or Illinois law. In our view, the general rule in the Illinois Banking Act relevant to lending and account service charges would be similarly applicable here. That is, “[t]he establishment of account service charges and the amounts of the charges not otherwise limited or prescribed by law is a business decision to be made by a bank according to prudent business judgment and safe and sound operating standards.”

For resources related to our guidance, please see:

• Regulation DD, 12 CFR 1030.4(a)(1)(i) (“A depository institution shall provide account disclosures to a consumer before an account is opened or a service is provided, whichever is earlier.”)

• Regulation DD, 12 CFR 1030.4(b)(6)(ii) (“Account disclosures shall include the following, as applicable: . . . For time accounts: . . . A statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment.”)

• Regulation DD, Official Interpretations, Paragraph 4(b)(6)(ii), Comment 2 (“Examples of early withdrawal penalties are:

i. Monetary penalties, such as ‘$10.00’ or ‘seven days’ interest plus accrued but uncredited interest.’

ii. Adverse changes to terms such as a lowering of the interest rate, annual percentage yield, or compounding frequency for funds remaining on deposit.

iii. Reclamation of bonuses.”)

• 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. A time deposit from which partial early withdrawals are permitted must impose additional early withdrawal penalties of at least seven days’ simple interest on amounts withdrawn within six days after each partial withdrawal. If such additional early withdrawal penalties are not imposed, the account ceases to be a time deposit. The account may become a savings deposit if it meets the requirements for a saving deposit; otherwise it becomes a transaction account. . . .”)

• Regulation D: Reserve Requirements of Depository Institutions, 85 Fed. Reg. 16525, 16525 (March 24, 2020) (“In light of the shift to an ample reserves regime, the Board has determined to reduce the reserve requirement ratios to zero percent effective March 26, 2020.”)

• Illinois Banking Act, 205 ILCS 5/5e(a) (“Notwithstanding the provisions of any other law in connection with extensions of credit, a State bank may elect to contract for and receive interest, fees, and other charges for extensions of credit subject only to the provisions of subsection (1) of Section 4 of the Interest Act, except for extensions of credit secured by residential real estate, which shall be subject to the laws applicable thereto.”)

• Illinois Banking Act, 205 ILCS 5/5e(b) (“The establishment of account service charges and the amounts of the charges not otherwise limited or prescribed by law is a business decision to be made by a bank according to prudent business judgment and safe and sound operating standards. In establishing account service charges, the bank may consider, but is not limited to considering, the costs incurred by the bank, plus a profit margin, for providing the service, the deterrence of misuse of the bank’s services, the establishment of the competitive position of the bank in accordance with the bank’s marketing strategy, and the maintenance of the safety and soundness of the bank.”)