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Compliance Question of the Week
In today’s banking environment as soon as one big new regulation is implemented another pops up. Our compliance resources help your community bank stay one step ahead of the regulators.
Does a bank need to impose an early withdrawal penalty for a time deposit?
The early withdrawal penalty is what differentiates a time account from other types of accounts.
The earliest withdrawal penalty must be at least seven days’ simple interest on amounts withdrawn within the first six days after deposit (or within six days after the most recent partial withdrawal).
If funds are withdrawn more than six days after the date of deposit or more than six days after the most recent partial withdrawal, no interest penalty is required under Regulation D.
These penalties are the minimum federal penalties required by Regulation D and the Federal Reserve Act. A bank may impose a greater penalty. If the bank fails to impose the early withdrawal penalty when required, the account may not be classified as a time deposit. The early withdrawal penalty language must be part of the account agreement with the depositor.
See 204.2(c)(1) footnote for information on when a time deposit may be paid during the early withdrawal penalty without a penalty being imposed.
Reference: 12 CFR 204.2(c)(1)