Compliance Blog

Written by Steve Van Beek

Considering how many times Regulation Z has been amended (or proposed to be amended), it is not surprising that there are more questions than answers when it comes to Regulation Z.  One of the most confusing issues is finding out which rules apply to which products.  

For example, the Fed's recent clarifications to the Credit CARD Act indicates that the restriction on floor rates applies to more than just credit card accounts.  Here is from the "clarifications":

"The Board proposed to clarify that a variable rate plan that is subject to a fixed minimum or ``floor'' does not meet the conditions of the exception to the advance notice requirements set forth in Sec.  226.9(c)(2)(v)(C). The Board stated that is appropriate to adopt a consistent interpretation of ``an index that is not under the control of the creditor'' for all open-end (not home-secured) credit. Accordingly, the Board proposed to amend comment 9(c)(2)(v)-11 (renumbered as comment 9(c)(2)(v)-12) to refer to guidance on when an index is deemed to be under ``a creditor's'' control, rather than ``the card issuer's'' control. The substantive provisions of Sec.  226.55 would have continued to apply only to credit card accounts under an open-end (not home-secured) consumer credit plan; however, the proposed change clarified that 45 days' advance notice is required prior to a rate increase on a variable-rate plan subject to a fixed minimum or floor, for all open-end (not home-secured) plans..................

The Board is adopting the changes to Sec.  226.9(c)(2)(v)(C) and comment 9(c)(2)(v)-12 as proposed."

What about home-equity lines of credit (HELOCs)?  These are not covered - yet.  The Federal Reserve looked at this in a August 16, 2010 proposed rule (which has not been finalized yet).  Here is a portion of the preamble to that proposal:

"Interest Rate Not Under the Creditor's Control   

    TILA Section 137(a), implemented by Sec.  226.5b(f)(1), prohibits variable-rate HELOCs from being subject to any interest rate changes other than those based on ``an index or rate of interest which is publicly available and is not under the control of the creditor.'' 15 U.S.C. 1647(a). Accordingly, Sec.  226.5b(f)(1) prohibits creditors from changing a HELOC's APR unless the change is ``based on an index that is not under the creditor's control'' and is ``available to the general public.'' The Official Staff Commentary to Sec.  226.5b(f)(1) explains that a creditor may not make changes based on its own prime rate or cost of funds, and may not reserve a contractual right to change rates at its discretion. See comment 5b(f)(1)-1. The commentary states that a creditor may use a published prime rate, such as that in the Wall Street Journal, even if the creditor's own prime rate is one of several rates used to establish the published rate. Id.   

    In the August 2009 HELOC Proposal, the Board did not propose to revise these provisions. However, earlier this year, the Board adopted final rules regarding open-end (not-home-secured) credit, which include additional guidance regarding what constitutes an index outside of the creditor's control in the context of credit cards under an open-end (not-home-secured) consumer credit plan (February 2010 Credit Card Rule). See 75 FR 7658, 7737, 7819, 7909, Feb. 22, 2010. Under the February 2010 Credit Card Rule, new Sec.  226.55(b)(2) provides that a creditor may not increase an APR for a variable-rate credit card unless the change is based on ``an index that is not under the card issuer's control and is available to the general public'' and ``the increase in the [APR] is due to an increase in the index.'' See id. at 7819.   

    The commentary to this new provision incorporates the explanations of ``an index that is not under the [creditor's] control'' that appear in the HELOC rules, described above. See comment 55(b)(2)-2.i; 75 FR 7658, 7909, Feb. 22, 2010. In addition, the commentary includes two situations not currently associated with the meaning of this phrase in the HELOC rules.   

    First, under Sec.  226.55(b)(2), a card issuer exercises control over the index if the card issuer has set a minimum rate ``floor'' below which a variable rate cannot fall, even if a decrease would be consistent with a change in the applicable index. See comment 55(b)(2)-2.ii; 75 FR 7658, 7737, 7909, Feb. 22, 2010. .........  

    The Board expressed concerns that setting a rate ``floor'' and adjusting rates based on any index value that existed during a period of time can prevent consumers from receiving the benefit of decreases in the index. Upon review, the Board concluded that these practices constitute a creditor's control over an index to change rates in a manner prohibited by TILA. See id. at 7909 (citing TILA Section 171(b)(2); 15 U.S.C. 1666(b)(2)).   

    The Board solicits comment on whether to amend the commentary to Sec.  226.5b(f)(1) to adopt these clarifications regarding what constitutes control over an index for purposes of the restrictions on changing the rate for a variable-rate HELOC. The Board requests that commenters provide specific reasons why the Board should or should not do so." 

Thus, the restriction on floor rates on variable-rate accounts does not yet apply to HELOCs.  However, it may just be a matter of time before this restriction extends to HELOCs.  Remember - the CFPB now has authority over Regulation Z.

NAFCU strongly opposed the Fed's proposal to extend the restriction on floor rates to HELOCs.  Our comment letter from late 2010 is here - see especially page 4.