Compliance

Reg Z Rate Changes

Final rule addresses preferential rates, floor rates, and consumers’ ability to pay.

July 18, 2011
KEYWORDS loans , rule , variable-rate
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The Federal Reserve Board issued a Regulation Z final rule in March 2011 clarifying prior rules related to the Credit Card Accountability, Responsibility, and Disclosure Act.

The final rule becomes effective Oct. 1, 2011. It makes some significant changes regarding preferential rates for employees, floor rates, and consumers’ ability to pay.

Preferential rates

When a credit union discloses a preferential annual percentage rate (APR) for employees in the account opening or credit card application tabular disclosure, it must briefly disclose (directly beneath the table) the circumstances under which the preferential rate will be revoked and the rate that will apply afterward.

For example, the disclosure could state, “If your employment with ABC Credit Union ends, your current rate will increase to X.XX%.”

However, after the employment relationship ends and before the rate can be increased, the credit union must provide a 45-day notice of change in terms. If the preferential rate isn’t included in the account opening agreement, but is added by an amendment to the agreement after account opening, the rate isn’t required to be disclosed in the tabular disclosures.

Floor rates                                                  

In the supplemental material for the final rule, the Fed stated that a variable-rate plan that’s subject to a fixed minimum or “floor” doesn’t meet the conditions of the exception to the advance notice requirements in Reg Z Section 226.9(c)(2)(v)(C).

Ordinarily, a creditor isn’t required to provide a notice of change in terms for open-end loans when the change is an increase in a variable-rate APR due to an increase in an index that:

  • Was previously disclosed;
  • Isn’t under the creditor’s control; and
  • Is available to the general public.

However, an index is under a creditor’s control if the variable rate is subject to a fixed minimum rate or “floor” that doesn’t permit the variable rate to decrease consistent with reductions in the index.

The supplemental material in the final rule also clarified that a 45-day advance notice of change in terms is required prior to a rate increase on a variable-rate account that’s subject to a fixed minimum or floor for all open-end loans (except home equity lines of credit [HELOC]).

This change has important implications for credit unions that maintain a floor rate on open-end loans other than HELOCs. After Oct. 1,  if an open-end, variable-rate loan is subject to a floor rate, the credit union must provide members with a 45-day advance notice of change in terms before the rate can be increased due to an increase in the index.

On the other hand, credit unions with variable-rate, open-end loans that aren’t subject to a floor rate won’t have to provide 45-day advance notice before increasing a rate due to an increase in the external index.

Additionally, credit unions that use an internal index rather than one that’s not under their control and is available to the general public must provide 45-day advance notice before increasing the APR due to an increase in their index.

Ability to pay

A card issuer must consider a consumer’s independent ability to make the required payments on a credit card account before opening a new card account or increasing the credit limit on an existing account.

In noncommunity property states, a card issuer may not rely solely on “household income” provided by an applicant on a credit card application. It must obtain additional information about the applicant’s independent income.

This would prevent a stay-at-home spouse that has no independent source of income from being approved for a credit card after the rule becomes effective. Apparently, the stay-at-home spouse would have to apply jointly with the working spouse who has sufficient income to repay the loan or become an authorized user on the spouse’s account.

In noncommunity property states, ask for “income” or “salary” rather than “household income” on your application.

In community property states, issuers may rely on household income.

MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel. Contact him at 608-231-4185.

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