Compliance Blog

Written by Steve Van Beek

There has been a bit of confusion as to when members need to receive the right to reject changes under Reg Z.  I think the best approach is to review the regulatory text itself - from 12 C.F.R. 226.9(c)(2)(iv)(B):

"(B) Right to reject for credit card accounts under an open-end (not home-secured) consumer credit plan. In addition to the disclosures in paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a significant change in account terms on a credit card account under an open-end (not home-secured) consumer credit plan, the creditor must generally provide the following information on the notice provided pursuant to paragraph (c)(2)(i) of this section. This information is not required to be provided in the case of an increase in the required minimum periodic payment, an increase in a fee as a result of a reevaluation of a determination made under §226.52(b)(1)(i) or an adjustment to the safe harbors in §226.52(b)(1)(ii) to reflect changes in the Consumer Price Index, a change in an annual percentage rate applicable to a consumer's account, a change in the balance computation method applicable to consumer's account necessary to comply with §226.54, or when the change results from the creditor not receiving the consumer's required minimum periodic payment within 60 days after the due date for that payment:

( 1 ) A statement that the consumer has the right to reject the change or changes prior to the effective date of the changes, unless the consumer fails to make a required minimum periodic payment within 60 days after the due date for that payment;

( 2 ) Instructions for rejecting the change or changes, and a toll-free telephone number that the consumer may use to notify the creditor of the rejection; and

( 3 ) If applicable, a statement that if the consumer rejects the change or changes, the consumer's ability to use the account for further advances will be terminated or suspended."  (emphasis added).

I've bolded the text above to highlight two separate issues: 

1. The right to reject only applies to credit card accounts.
2. The right to reject changes does not apply in situations where the APR on a credit card account is being increased.  

A lot of folks are surprised by the second point.  The reason the right to reject does not apply in the increased APR situations is because the increased APR can only apply to transactions conducted in the future.  Any existing balance on the credit card account is "protected" under 12 C.F.R. 226.55 of Reg Z.

There was actually a fairly lengthy discussion of this issue in the Reg Z final rule that became effective February 22, 2010:

"Application of Right To Reject to Increases in Annual Percentage Rate      

Because revised TILA Section 171 renders the right to reject redundant in the context of rate increases, the Board has amended Sec. 226.9(h) to apply that right only to other significant changes to an account term. Currently, Sec.  226.9(h) provides that, if a consumer rejects an increase in an annual percentage rate prior to the effective date stated in the Sec.  226.9(c) or (g) notice, the creditor cannot apply the increased rate to transactions that occurred within fourteen days after provision of the notice. See Sec.  226.9(h)(2)(i), (h)(3)(ii). However, under revised TILA Section 171 (as implemented in proposed Sec.  226.55), a creditor is generally prohibited from applying an increased rate to transactions that occurred within fourteen days after provision of a Sec.  226.9(c) or (g) notice regardless of whether the consumer rejects that increase. Similarly, although the exceptions in Sec.  226.9(h)(3)(i) and revised TILA Section 171(b)(4) permit a creditor to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent, revised TILA Section 171(b)(4)(B) (as implemented in proposed Sec. 226.55(b)(4)(ii)) provides that the creditor must terminate the increase if the consumer makes the next six payments on or before the payment due date. Thus, with respect to rate increases, the right to reject does not provide consumers with any meaningful protections beyond those provided by revised TILA Section 171 and Sec.  226.55. Accordingly, the Board believes that, on or after February 22, 2010, the right to reject will be unnecessary for rate increases. Indeed, once revised TILA Section 171 becomes effective, notifying consumers that they have a right to reject a rate increase could be misleading insofar as it could imply that a consumer who does so will receive some additional degree of protection (such as protection against increases in the rate that applies to future transactions)."