Compliance Blog

One of the August 22, 2010 changes to Regulation Z is the need to disclose the principal reason(s) on change-in-terms notices that contain an increase in annual percentage rate (APR) for a credit card account.  Here is the new subsection from 12 CFR 226.9(c)(2)(iv)(8):

"(8) If the change in terms being disclosed is an increase in an annual percentage rate for a credit card account under an open-end (not home-secured) consumer credit plan, a statement of no more than four principal reasons for the rate increase, listed in their order of importance."

The staff commentary has additional information that CUs will want to review to determine the language needed to explain the reason(s) for the increased APR:

"11. Reasons for increase.

 i. In general. Section 226.9(c)(2)(iv)(A)(8) requires card issuers to disclose the principal reason(s) for increasing an annual percentage rate applicable to a credit card account under an open-end (not home-secured) consumer credit plan. The regulation does not mandate a minimum number of reasons that must be disclosed. However, the specific reasons disclosed under § 226.9(c)(2)(iv)(A)(8) are required to relate to and accurately describe the principal factors actually considered by the card issuer in increasing the rate. A card issuer may describe the reasons for the increase in general terms. For example, the notice of a rate increase triggered by a decrease of 100 points in a consumer’s credit score may state that the increase is due to ‘‘a decline in your creditworthiness’’ or ‘‘a decline in your credit score.’’ Similarly, a notice of a rate increase triggered by a 10% increase in the card issuer’s cost of funds may be disclosed as ‘‘a change in market conditions.’’ In some circumstances, it may be appropriate for a card issuer to combine the disclosure of several reasons in one statement. However, § 226.9(c)(2)(iv)(A)(8) requires that the notice specifically disclose any violation of the terms of the account on which the rate is being increased, such as a late payment or a returned payment, if such violation of the account terms is one of the four principal reasons for the rate increase. 

ii. Example. Assume that a consumer made a late payment on the credit card account on which the rate increase is being imposed, made a late payment on a credit card account with another card issuer, and the consumer’s credit score decreased, in part due to such late payments. The card issuer may disclose the reasons for the rate increase as a decline in the consumer’s credit score and the consumer’s late payment on the account subject to the increase. Because the late payment on the credit card account with the other issuer also likely contributed to the decline in the consumer’s credit score, it is not required to be separately disclosed. However, the late payment on the credit card account on which the rate increase is being imposed must be specifically disclosed even if that late payment also contributed to the decline in the consumer’s credit score." 

As the staff commentary indicates, credit unions will need to disclose certain reasons generally (i.e., a change in market conditions) but disclose any violation of account terms specifically (i.e., made a late payment).