Unfair and Abusive Automatic CD Rollovers

Earlier this month the FTC finalized its “Click-to-Cancel” Rule to make it easier for consumers to get out of recurring subscriptions and memberships. The rule was promulgated under the FTC’s power to prohibit unfair and deceptive acts and practices in commerce, but the FTC’s jurisdiction under that power does not extend to banks, and banks have an auto-renew product that is in some instances much more problematic than automatic subscription renewals. What I’m talking about are automatic CD rollovers, which are sometimes done in an unfair and abusive way to rollover unsuspecting depositors into way-below-market-rate CD terms.

Certificates of deposit are a major bank investment product. CDs are for a fixed period of time, and at maturity they can be paid out or rolled over into a new CD. Many banks have an automatic rollover, which is not itself unreasonable—the consumer would probably want the funds to keep earning money if he doesn’t withdraw it. Instead, the problem is with the terms of the auto renewal.  

Consider Bank of America.  BoA offers three types of CDs:  “Featured”, “Fixed Term,” and “Flexible”.  What’s the difference?  Well, the Featured CDs are available for 7-37 month terms, while the Fixed Term are available from 1 to 120 month terms, and the Flexible are available for a 12 month term and can only be opened on-line. The only other difference is in the rates.  The Featured CDs have more-or-less competitive rates (not the top of the market, but not ridiculous, currently up to 4.35% APY depending on size and term). The Fixed Term CDs have a laughable 0.03% APY, and the 12-month Flexible CDs have a 3.75% APY. 

In other words, there is no difference between the 7-37 month Featured and Fixed Term CDs other than the APY, and the APY is always lower on the Fixed Term CDs than on the Featured CDs.  No rational consumer would ever choose the Fixed Term CD over the Featured CD if they wanted a maturity of between 7 and 37 months.  

 

Now here’s the issue:  Bank of America automatically renews Featured CDs that mature into Fixed Term CDs of with the exact same maturity. So if you had a 7-month $100k Featured CD at 4.35% APY (or actually it would probably have been higher if you opened it 7 months ago), then you will be auto-renewed into a 7-month Fixed Term CD at 0.03% APY, even though you could get a 4.35% APY rate if you closed out the CD and then opened up a new Featured CD. And if you were to realize the problem after the auto-renewal, well, you could get out of the Fixed Term CD, but if you didn't act within a 7-day grace period (when you'd have no new notice), then you’d have to pay an early withdrawal penalty of 90 days interest (which isn’t so much given how low the rate is—roughly $90 on a $100k CD). 

 

A similar practice exists with the Flexible CD. Although it is originally a 3.75% APY 12-month CD, Bank of America auto-renews it into a 9-month CD at 0.01% APY. So not only does Bank of America choose an apparently random maturity, but it also moves the consumer into an interest rate that inverts the yield curve (i.e., a short-term product is offering a lower rate than a long-term one). It's hard to see any justification for this other than fleecing the consumer.

 

Bank of America’s auto-renewal practice is, imho, unfair and abusive.  The only reason a consumer would auto-renew from the Featured CD into the Fixed Term CD (or roll-over the 12-month Flexible CD into a 9-month one) is if he isn't paying attention or doesn’t understand the product. But even if a consumer is paying attention, it's hard to understand the auto-renewal consequences because Bank of America doesn’t have a single website that lists the terms of all of its CDs.  Instead, you have to press different URLs and use different drop-down menus to see just a single CD price term at a time. For a consumer to realize that the Fixed Term CD rates are so much worse than the Featured CD rates takes a fair amount of work, and the consequences of auto-renewal are so punitive that no reasonable consumer would anticipate this sort of treatment.

 

Having auto-renew is fine, but the consumer should be auto-renewed into a CD of the same term with the best available rate offered by the bank, not the worst.  What Bank of America is doing is a sharp and illegal practice—Bank of America is basically stealing interest from depositors who roll over their CDs.  (On the numbers I've used here, BoA is unjustly enriched by about $5,000 over 7 months on a $100k CD. Now recognize that that Bank of America has about $200 billion in time deposits according to its last call report. With these numbers, if BoA is able to pull off this rollover practice on only 10% of those deposits, it's still being unjustly enriched by about $1.7 billion a year.)

 

Bank of America’s practice is unfair because it causes substantial injury to consumers and is not reasonably avoidable by them because it requires the consumer to (1) recognize that the rates on the Fixed Term CDs are worse than on the Featured CDs, which requires substantial internet sleuthing and (2) affirmatively call Bank of America to avoid the auto-renewal into the penalty-rate Fixed Term CD. There is no countervailing benefit to consumers or competition. Perhaps BoA can point to the percentage of CD depositors who do not rollover their CDs as showing that the injury is reasonably avoidable. But they might not be rolling over their CDs for a range of reasons beyond lack of understanding of the effective forfeiture BoA imposes. And the fact that some consumers can avoid a practice does not mean that it is reasonably avoidable, only that it is merely avoidable.

 

Bank of America’s practice is also abusive because it is taking unreasonable advantage of both (1) the lack of understanding on the part of the consumer about the material conditions of the product and (2) the inability of the consumer to protect his interests when using the product. The fact that no rational consumer would ever opt into a Fixed Term CD with the same maturity as a Featured CD is conclusive on this point. And with abusiveness, the reasonable avoidability issue goes away; it is an element of unfair, not of abusive.

 

CD rollovers should not be a game of “gotcha.”  They are an important and generally transparent savings product. Banks should not get to benefit from consumer lock-in, consumer inattention, and from hiding the ball on auto-renewal pricing. I hope the CFPB will address this issue. 

Comments

[Marta Gollub]

Synchrony Bank has similarly deceptive CD-rollover practices, requiring a phone call to stop the rollover from occurring. Consumers should be able to effect simple changes in their CD holdings (like not rolling it over) via a click of a button online. And/or the default should be not automatic rollover. That option--to not automatically roll over--should be presented to the consumer at the outset.

[Joe I]

I work at a Credit Union where most terms have same rate for new and existing accounts that are in the 2.50-3.25% range currently (1 term has a promo in the 4s). We rather have stability and reasonable experience for those accountholders who rollover terms vs the very crappy experience shown above that most national banks do.

BofA is only one example, nearly all major banks do this process. These banks want to only give +4-5% rates for new funds, any existing funds are all yielding 0.10% or less, given most accountholders won't take any action to move funds to another bank's CD or high-yield savings (or MMF with a brokerage)