Clause in contracts, loan agreements, and other obligations allowing a financial institution to assess penalties for early withdrawal from a savings account, late payments on an installment loan, or breach of contract. Since interest rate ceilings were lifted in March 1986, the Federal Reserve Board has eliminated the requirement under Regulation Q that banks impose mandatory penalties on early withdrawals from savings accounts; however, a bank still has the option of charging a penalty if a depositor fails to give advance Notice of Withdrawal, usually seven days in advance, before withdrawing funds from an interest earning deposit account. See also Early Withdrawal Penalty; Prepayment Penalty.

Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.