Compliance Blog

Written by Jennifer Aguilar, Regulatory Compliance Counsel, NAFCU

It is a common claim that human nature favors consistency. We, as humans, do not like change. For those like me, who are compulsive planners, this is truer than for those who like to “go with the flow.” As sudden change is unavoidable, managing it becomes a necessary life skill. However, where information can be provided in advance, the sooner you get that information, the easier it is to plan accordingly. That way, you don’t end up surprised like this kid:

It appears the federal regulators also subscribe to “the sooner, the better” theory of life and a key consumer protection contained in several of the federal financial regulations is that consumers must get advance notice of certain changes. One of the many, many, many changes implemented by the CARD Act was expanding the types of changes that trigger advance notice for credit card accounts. I’ve blogged before on what some of these changes are, but, there are also a number of exceptions to the rule.

One notable exception that credit unions frequently rely on is for variable rate credit cards. Section 1026.9(c)(2)(v) explains that no notice is required if the change is an increase in the rate according to a properly disclosed variable rate plan. However, there is an important limitation to this exception. Today’s blog is all about that limitation. In other words, if your variable rate credit card plan contains any of the features discussed below, advance notice is required each time the rate increases.

As with nearly all of the credit card rules, the limitation to the exception is stated in section 1026.9(c)(2)(v)(C) but explained in the commentary to an entirely different section of the rule. So, let’s start with the limitation. The rule explains that no notice is required for a rate increase if that increase is “according to [the] operation of an index that is not under the control of the creditor.”

This provides us with the limitation: the index that sets the variable rate must not be under the credit union’s control. But, what does that mean? The answer to this question is in the commentary to section 1026.55(b)(2). You’ll remember that section 1026.55 generally prohibits credit unions from increasing the rate on a credit card account unless an exception applies. The variable rate exception in section 1026.55(b)(2) closely tracks the language in section 1026.9(c)(2)(v)(C). The commentary provides three features that indicate an index is in the credit union’s control:

1. The index is based on the credit union’s prime rate or cost of funds. If the credit union has developed its own index, then it is under the credit union’s control. However, the credit union may use a published prime rate, even if its own rates are among the multiple rates used to develop the published rate.
2. The credit union imposes a minimum rate. If the variable rate cannot decrease below a specified rate, then the index is under the credit union’s control. For example, the credit card agreement states the variable rate is determined by adding 3% to the index and imposes a minimum rate of 8%. If the index is 5% and the variable rate is 8%, any decrease in the index will not trigger a change to the variable rate because of the minimum rate provision. Since the rate will not change if the index drops below 5%, the index is within the credit union’s control. However, if a maximum rate is imposed, the index will not be considered within the credit union’s control.
3. The date the index is valued is determined at the credit union’s discretion. If the credit union can choose the index value on any date within a stated time period, then the index is within the credit union’s control. However, credit unions may choose an average value over a certain time period or the value on a specified day. For example, suppose the variable rate is determined by adding 5% to the index. During the first quarter of the year, the index varies from 7.8% to 8.5%, with an average value of 8.1% and a value of 8.2% on the last day of the quarter. If the credit card agreement permits the credit union to choose any index value within the first quarter, the index is in the credit union’s control. If, instead, the agreement states the index value is based on the average value over the quarter or the value on the last day of the quarter, then the index is not in the credit union’s control.

If your credit card plan includes any one of these three features, the index is in the credit union’s control. As I noted above, this means that advance notice is required for all rate increases. This also means the rate increase would not qualify for the variable rate exception under section 1026.55(b)(2). In other words, each rate change would also create a protected balance because the credit union would need to rely on the advance notice exception in section 1026.55(b)(3) to increase the rate. Carefully reviewing the terms in your agreements may be necessary to determine whether your variable rate cards include any of these features.