The Terms That Should be Included in a Certificate of Deposit

There are no regulatory requirements as to what must be included in a CD. There are, however, some terms which institutions traditionally include in their certificates. A quick warning, however, is appropriate before we look at these terms.

The Truth-in-Savings Act (TISA) and Regulation DD (12 CFR 230.1 et seq., 12 CFR 707.1 et seq. for credit unions) impose a host of disclosure requirements on accounts your institution opens for consumers. What we are about to study are not TISA disclosures. In this chapter, we look at terms that you intend as contract terms. In other words, the terms that follow are there to make the agreement between you and your customer enforceable as a contract. We have two other chapters in this manual that cover account-opening TISA disclosures and ongoing TISA responsibilities.

First, the CD will always include the amount of the deposit and the date on which it was made.

Second, the maturity date and the term of the CD should be stated. Whether or not the CD will automatically renew at maturity and, if so, the terms that will apply on renewal and how the depositor can prevent an automatic renewal are important provisions. “Grace periods” at maturity are also often described. There are two types of grace periods. First, on a nonautomatically renewable CD, an institution may continue to pay interest for up to ten days after the maturity date if the contract provides for that and the depositor withdraws or renews within that ten-day period. Second, on an automatically renewable time deposit, an institution may allow a depositor to withdraw without penalty any time within ten calendar days of the maturity date.

Third, you should include terms affecting the accrual of interest. These are the annual interest rate; the compounding frequency; the payment frequency; how the interest is going to be paid (added to the account balance, automatically deposited to another of the depositor’s accounts, mailed to the depositor, etc.); if the rate is variable, how future rates will be determined and whether there are any rate floors or caps (rates below which and above which the annual rate will not go in the future); the assumed number of days per year for purposes of computing interest; and the annual yield.

Fourth, a CD should show the owners’ names and addresses, and the form of ownership–i.e., individual, joint with survivorship, etc.

Fifth, you should clearly state any restrictions on which of the account owners can cash the CD. For instance, if the signatures of all the account owners (rather than any one of them) are needed to cash the CD, the CD should say that. Also, if you require that the CD be presented in order to cash the deposit, the CD should say that.

Seventh, some institutions will include a statement of the penalty for early withdrawal on the CD. This is a disclosure you are required to make (unless you are simply not going to allow early withdrawals), but you are not required to have the disclosure on the certificate form. It can be made separately. We talk about what should be in the early-withdrawal penalty notice in another chapter in this manual.

Eighth, you should state whether a depositor is permitted to make additional deposits to the account. This would normally be the case only in a variable-rate time deposit.

We do not recommend including backup withholding certifications on the form that will be the CD itself. For one thing, the depositor will be taking the CD with him or her and, consequently, you would not have the certifications in your possession. For another, if the depositor’s signature appears on the CD in the backup withholding certifications, it makes it easy for a forger to copy the signature in the indorsement area of the certificate if the depositor should lose the certificate. Some institutions put the backup withholding certifications on a copy of the CD which is kept at the institution, and we see no problem with this practice.

That wraps up what you need to know about the content of a typical CD form.