Regulation D Early Withdrawal Penalty
In this Compliance Clip (video), Adam explains the requirements for charging early withdrawal penalties under Regulation D. Ultimately, this video answers the question: Is it permissible to waive every early withdrawal penalty?
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to focus on Regulation D and early withdrawal penalties. Our question today is: Are we permitted to waive early withdrawal penalties for customers?
The answer, of course, comes from two places. It's going to come from, first, from any internal policies we might have, and secondly, from Regulation D.
The first part, I'm not going to get into in detail because that's up to your policy. If your policy governs withdrawal penalties, you need to follow your policy. Now as far as what the rules say, Regulation D is what's going to drive this. So let's take a look at Regulation D, and where we look is in section 204.2(c), which is the Federal Reserve's numbering system for Regulation D. This is the definition section where we define a “time deposit.”
We look at the definition of a time deposit, and what it says here is that a time deposit is a deposit that the depositor does not have a right and is not permitted to make withdrawals from within 6 days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least 7 days simple interest on amounts withdrawn within the first 6 days after deposit. In other words, for the first six days, you have to make that account subject to a withdrawal penalty of at least seven days simple interest for the first six days. That's what the rule says and that's how we define a time deposit. The rule goes on and it says that a 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are permitted must impose additional early withdrawal penalties of at least seven days simple interest on amounts withdrawn within six days after each partial withdrawal. So what we have in the beginning is when the account is first opened, we cannot waive early withdrawal penalties within that first six days without charging seven days simple interest. Otherwise, the account is not considered a time account.
Once the account has been opened, if we permit a partial withdrawal halfway through, which some people do, for example, if I wanted to buy a car, I came in, I took $10,000 out of my CD to go pay cash for a vehicle for one of my children. Then at that point, you don't have to charge me the withdrawal penalty because the accounts have been opened for a period of time beyond the first six days. Now, what happens though is if I've taken those funds out, maybe yesterday and, which is this example here, and then I come back the next day because I realized I don't just need 10, but my son wants leather seats, so now I need $12,000 right? That always happens when you go to buy a car. Since we took $10,000 out yesterday, what this says here is we have to wait at least six days before we can waive all penalties. Otherwise, in that first six days after we took out a withdrawal, we have to charge at least seven days simple interest on the amount withdrawn. In other words, we're not permitted to waive early withdrawal penalties within that first six days of either opening an account or a subsequent withdrawal.
Now, the rules go on. They explain this a little more clear because they say if such additional early withdrawal penalties are not imposed, the account ceases. It stops. It stops becoming a time deposit. So what that means is if you are reporting this on your call report as a time deposit but you violated Regulation D, now you've got a violation of your call report, which becomes very problematic. So that's really how this works.
The definition also goes on to say that the account may become a savings deposit if it meets the definition of a savings deposit, but otherwise it's going to become a transaction account. This is just how Regulation D works because there's different reserve requirements for different types of accounts. So if we're not following the rules for time accounts and early withdrawal penalties it may possibly and most likely morph into a transaction account, and that becomes problematic from a call report perspective and it violates Regulation D. In other words, we can waive early withdrawal penalties as long as it is not a penalty from a withdrawal that occurs in the first six days after account opening or after a withdrawal in the middle of that CD period. Hope that makes sense.
That’s all I have for you today.