Compliance Blog

Posted by Anthony Demangone

Today, I want to highlight another aspect of the final rule that is a wee bit unexpected.

On February 22, 2010, credit card "existing balances" are protected.  If a creditor increases an APR for the card, the change will not affect the card's existing balance.  The increased rate can only be applied to new transactions.   You'll find this new consumer protection at 12 C.F.R. Part 226.55(b)(3).

But what if a card issuer sends a change in terms notice to increase a credit card's APR on January 29, 2010, weeks before section 55(b)(3) takes effect?  Will the increased APR apply to the existing balance? No. You're too late. 

Remember, the change in terms now takes 45 days to become effective.  Even if you sent the notice today, the change would not take effect until after February 22, 2010.   The existing balance protection springs to life on February 22, 2010 - regardless of when the notice is sent.  This is different from how the Fed generally deals with change in terms notices.  Normally, it is the date the notice is sent - not the effective date - that trumps. But not in this case. Ironically, because the Fed issued this rule so late, we never had a chance to issue a change in terms notice 45 days before the effective date of February 22, 2010, if we waited to see the final rule before sending it.  Coincidence?  Hmmm.  Here's the Fed's rationale.

Furthermore, if the relevant date for compliance with § 226.55(b)(3) was the date on which a § 226.9(c) or (g) notice was provided, card issuers would be permitted to apply increased rates, fees, or charges to existing balances until April 7, 2010 so long as the notice was sent before the Credit Card Act’s February 22, 2010 effective date. The Board does not believe that this was Congress’ intent. Regulation Z final rule, p. 518.

The Fed gives theses two examples to show how the protection works.

Example 1. On January 7, 2010, a card issuer provides a notice of an increase in the purchase rate pursuant to § 226.9(c). Consistent with § 226.9(c), the increased rate is effective on February 21, 2010. Therefore, § 226.55(b)(3) does not apply. Accordingly, on February 21, 2010, the card issuer may apply the increased rate to both new purchases and the existing purchase balance (provided the consumer has not rejected application of the increased rate to the existing balance pursuant to § 226.9(h)).

Example 2. On January 8, 2010, a card issuer provides a notice of an increase in the purchase rate pursuant to § 226.9(c). Consistent with § 226.9(c), the increased rate is effective on February 22, 2010. Therefore, § 226.55(b)(3) applies. Accordingly, on February 22, 2010, the card issuer cannot apply the increased rate to purchases that occurred on or before January 22, 2010 (which is the fourteenth day after provision of the notice) but may apply the increased rate to purchases that occurred after that date.