Compliance Blog

It's December. Football weather has settled in and the playoff race is heating up. If you're anything like me, you spent the entire day yesterday glued to the RedZone or, for those lucky few, you actually got to watch your team on the local broadcast. As every sports fan knows, sometimes no matter how hard the players play, sometimes it's up to the referees to decide the outcome (eyeroll and audible groan as you remember that terrible completely wrong call the refs made that cost your team the game). Most of time, the referees are on the same page and impose the right call, like these guys:

But, sometimes, no one can agree on what right call should be, like these guys:

So, what to do then? Well, go back to the rulebook. Every once in a while, credit unions find themselves in a similar position: your member hasn't paid her bill on time or has exceeded her credit limit and now you need to be the ref and enforce the rules and impose a penalty rate. But before you do so, you may find it helpful to review the rulebook first to ensure that you're making the right call. As penalty rates are most common with open-end credit products, the rules discussed below apply to open-end not home-secured credit.

The first rulebook to review is the credit agreement. This agreement lays out the obligations between you and your member but it also lays out your rights when the member fails to live up to her obligations. Before you can impose a penalty rate for such failures, you have to have the authority to do so. The agreement will usually tell you whether or not you have such authority. The agreement will also explain the circumstances under which a penalty rate may be imposed. In the event your agreement is silent on this issue, your state law may explain whether the credit union has the authority to impose a penalty rate. While the credit agreement is an important place to start, don't forget that there is another rulebook to review too: Regulation Z.

Penalty rates are generally permissible under Regulation Z. So, as long as you have the contractual authority to do so and one of the circumstances laid out in the credit agreement has occurred, you may impose the penalty rate. Regulation Z does, however, have a couple rules that must be followed. Section 1026.9(g)requires advance notice before you can impose the penalty rate. The notice must be provided after the event that triggered the penalty rate and at least 45 days before the effective date of the increased rate. The notice must include the following:

• Statement that the penalty rate has been triggered;
• Date the penalty rate will apply;
• Circumstances under which the penalty rate will no longer apply or a statement that the penalty rate may apply indefinitely;
• Statement of which balances the penalty rate will apply to and which balances the regular rate will continue to apply to, if any;
• If the account is a credit card, a statement of the principal reasons for the rate increase; and
• If the rate increase is the result of a failure to make a minimum periodic payment within 60 days of the due date, a statement that the increased rate will no longer apply to transactions occurring before or within 14 days of the notice if the member makes the next six consecutive minimum payments on time.

If the open-end credit plan is a credit card and the penalty rate was imposed because the member failed to make a minimum payment within 60 days of the due date, section 1026.59(e) requires credit unions to review the account periodically to determine whether the penalty rate is still applicable. The first review is required within six months of the sixth payment due date following the effective date of the penalty rate. After that, the review is required once every six months. In conducting the account review, the rule requires credit unions to review the factors that led to the application of the penalty rate. If the credit union determines that the penalty rate should no longer apply based on the review, the rule requires the credit union to reduce the rate back to the rate that previously applied within 45 days of completing the review. No review is required if the member makes the next six consecutive payments on time and, as a result, the credit union returns the rate to the rate that applied prior to imposing the penalty rate.