Compliance Blog

Written by Steve Van Beek

The Federal Reserve has published "clarifications" to Regulation Z to clean up some of the confusion from their previous regulations (those implementing the Credit CARD Act).  

Remember the removal of "floor rates" for credit card accounts?  Well, the Fed's "clarifications" now extend this language to all open-end credit (except HELOCs, for now).  The link above contains the page from the preamble which contains the Fed's rationale.  It includes this language: 

 "The Board continues to believe that, for consistency, it is appropriate to limit the variable rate exception to the change-in-terms notice requirements to only those rates that vary according to the operation of an index that is not under the control of the creditor and is available to the general public. The Board notes that for open-end (not home-secured) plans that are not credit card accounts under an open-end (not home-secured) consumer credit plan, the regulation does not prohibit variable rates that are subject to a minimum or ‘‘floor,’’ but for such rates the creditor must comply with the advance notice requirements of § 226.9(c)."  76 Fed. Reg. 22969.

The Fed did not prohibit floor rates.  But, they did a bit more than "clarify" their prior rulemakings.  Currently (and until October 1, 2011), credit unions can increase a variable rate on an open-end credit product (except credit cards) if the underlying increase comes from a change in a properly disclosed index.

"(v) Notice not required. For open-end plans (other than home equity plans subject to the requirements of §226.5b) a creditor is not required to provide notice under this section:

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(C) When the change is an increase in a variable annual percentage rate in accordance with a credit card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public;"  12 C.F.R. Â§ 226.9(c)(2)(v)(C).

Now - you might be wondering why that section only refers to "credit card agreements."  The Fed explains this in the preamble:

"In November 2010, the Board proposed to correct a typographical error in § 226.9(c)(2)(v)(C). In the proposal that led to the February 2010 Final Rule, proposed § 226.9(c)(2)(v)(C) referred to an increase ‘‘in accordance with a credit card or other account agreement.’’ In the February 2010 Final Rule, the phrase ‘‘or other account’’ was inadvertently deleted, without explanation in the supplementary information. The Board’s intent was for the exception in § 226.9(c)(2)(v)(C) to apply both to credit card accounts and to other open-end (not home-secured) consumer credit plans. Accordingly, the Board proposed to insert the phrase ‘‘or other account’’ into § 226.9(c)(2)(v)(C)."

The short story is that financial institution can, currently, increase the APR on an open-end credit product when the underlying index increases without giving a 45-day change-in-terms notice.  This ability exists even if there is a floor rate on the open-end credit product (but not if the product is a credit card).  After October 1, 2011, financial institutions will lose this ability.  

After October 1, 2011, if an open-end credit product has a floor rate the credit union would not be able to increase the APR on a variable-rate account if the underlying index increases without first giving a 45-day change-in-terms notice.  In other words, the exception listed above, in 226.9(c)(2)(v)(C) will only apply when the underlying index is "not under the control of the creditor."  

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That is a pretty big "clarification" considering the Federal Reserve extended one of its rules from only credit card accounts to all open-end credit products (except for HELOCs, for now).  Did the Fed make mention of this change in its press release?  Nope.  To their credit, they did explain their rationale in the preamble.

The Fed's "clarification" is finalized in a new comment in the staff commentary to Reg Z.  Let's take a look at that new comment to see how the Fed explains the rule change:

"12. Index not under creditor’s control. See comment 55(b)(2)–2 for guidance on when an index is deemed to be under a creditor’s control." Comment 12 - Official Staff Commentary to 226.9(c)(2)(v).

I sure hope the CFPB is making a list of things not to do when writing or amending regulations.  If a regulator is going to make a large change under the guise of a "clarification" - they should at least be clear in their "clarifications" and not use cross-references to explain a fundamental restriction.

I've written before about confusing regulatory language and wondered if the CFPB would be a different regulator.  

I firmly believe if regulators would write regulations (and the staff commentary) in a more straightforward manner, financial institutions would need to expend less resources reading and comprehending the new regulations.  In this situation, the Federal Reserve should have clearly indicated in the staff commentary the new restriction rather than using a cross-reference.  

NAFCU Members:  Our June issue of NAFCU's Compliance Monitor will include an article on the Fed's clarifications as well as a couple of Q&As explaining their impact.