Compliance Blog

Written by Steve Van Beek

The Federal Reserve's clarifications to the disclosure of employee preferential rates has caused some confusion.  I think the best approach is to review the Fed's language from the preamble to the Final Rule.

"The Board notes that proposed Sec.  226.5a(b)(1)(iv)(C) and 226.6(b)(2)(i)(D)(3) were not intended to impose any new disclosure requirements regarding employee preferential rates, but were rather intended to clarify the placement requirements for disclosures that are already required under Regulation Z. Sections 226.5a(b)(1) and 226.6(b)(2)(i) currently require disclosure of each periodic rate that may be used to compute the finance charge on an outstanding balance for purchases, a cash advance, or a balance transfer. Thus, the Board believes that under current Regulation Z requirements, employee preferential rates must be included in the tabular disclosures provided pursuant to Sec.  226.5a and 226.6(b), if they are, or will be, included in the initial account agreement."

In short, if the preferred rate will be applicable at account opening - the account opening disclosures need to reflect the reduced APR on the account.

Footnote 2 which is added at the end of the section quoted above indicates the preferred rate is not required to be disclosed in the account opening disclosures if the preferred rate is added to the account at a later date.

"^2 If an employee preferential rate is not included in the initial account agreement, but is instead added by an amendment to the agreement after account opening, such a rate is not required to be disclosed in the tabular disclosures pursuant to Sec. 226.5a and 226.6(b). But see Sec. 226.9(c)(2) and (g) for other disclosure requirements that may apply."

Thus, when looking to see whether your employee preferential rates need to disclosed in the account opening disclosures or not - take a look at the timing of when the employee receives the discounted rate.  If the discounted rate is applicable at or soon after account opening, the preferential rate should be disclosed upfront. 

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Stay tuned - we will have additional postings on the clarifications to Reg Z in the future - including more information on the confusion surrounding employee preferential rates.