Compliance Blog

Written by Stephanie Lyon, Regulatory Compliance Counsel, NAFCU

This past weekend I received a letter from my credit union letting me know they were increasing my credit limit. This is highly convenient as I was just getting ready to begin booking trips for next year (don't tell my husband!). This made me realize the NAFCU Compliance team has seen many questions regarding the types of notices required when increasing or decreasing a member's credit card limit. There are a couple of regulations that govern notice requirements for loans such as Regulations B and Z as well as the Fair Credit Reporting Act (FCRA) as implemented by Regulation V. Let's break down which regulations trigger a notice requirement if the credit union decides to change a member's credit limit.

Increasing Credit Limits

Regulation Z sets notification requirements for certain post-consummation changes such as increasing the required minimum periodic payment of a credit card. See, 12 C.F.R. § 1026.9(c)(2). The rule also lists changes that do not trigger the advance notice requirement in section 1026.9(c)(2)(v). The commentary to that section makes it clear increasing the member's credit limit does not trigger Regulation Z’s advance notice requirement. However, nothing in the rule prevents the credit union from providing a friendly notice to let the member know about their new limit like my credit union sent me this past weekend.

As for Regulation B or the FCRA, there does not seem to be a notice requirement for this beneficial change. This makes a credit increase a simple yet effective method of providing a nice member service. Before you go increasing everyone's credit limit, keep in mind the credit union must still ensure the member has the ability to repay prior to increasing a member's credit card limit. See, 12 C.F.R. § 1026.51(a).

Decreasing Credit Limits

When decreasing a member's credit limit, notice requirements get slightly more complex as these may get triggered depending on the reason the credit union is making the change. For example, credit unions may choose to decrease the limit because of adverse information on the member's credit report, to limit the credit union's portfolio risk or because of individual delinquencies (among other reasons). So when making a decrease, it is important to identify the reason(s) for this to understand which requirements come into play.

Generally, Regulation Z requires an advance change in terms notice when the credit union makes a "significant change" to the account terms. A significant change, as defined in the regulation, does not include decreasing the credit limit for a member. This might surprise many folks who think reducing a line of credit sounds like a pretty significant change in terms, but the rule's commentary explicitly excludes this. Like most of Regulation Z, there is an exception to the exception… If the reduction in credit limit causes the member's credit balance to go over the member's newly reduced limit, the credit union must provide advance notice of the decrease before it can impose an over-the-limit fee or a penalty rate. See, 12 C.F.R. § 1026.9(c)(2)(vi). If an advance notice is triggered, the notice has to be provided at least 45 days prior to the imposition of the fee or penalty rate. As for the content of the notice, the rule requires this notice to be provided orally or in writing and state that the credit limit on the account has been or will be decreased.

Regulation Z is not the only regulation that matters when decreasing the limit of a card. The definition of adverse action under Regulation B is fairly broad and it seems to include reducing a particular member’s limit. So, for the most part, if a credit union reduces a member's limit, this action would trigger an adverse action notice. See, 12 C.F.R. § 1002.2(c)(1)(ii). Again, as with other regulations, there is an exception that removes the adverse action notice requirement if the credit union reduces the credit limit because of a delinquency. See, 12 C.F.R. § 1002.2(c).

There are instances when a reduction in a member's credit limit triggers both Regulation B and FCRA adverse action notice requirements. The FCRA's definition of an adverse action includes an action taken made in connection with a review of a consumer report to determine whether the member continues to meet the terms of the account. See, 15 U.S.C. § 1681a(k)(1)(B)(iv) & 1681b(a)(3)(F)(ii). An account review is a fairly standard process that entails reviewing a consumer report to ensure the member continues to meet the eligibility criteria for the credit product. This review helps mitigate risks associated with delinquencies and default. If the credit union takes an action that is "adverse" to the member's interests, such as a credit limit reduction, based in whole or in part on any information contained in a consumer report, the credit union must send an adverse action under the FCRA as well as Regulation B. See, 15 U.S.C. § 1681m(a) & 12 C.F.R. § 1002.2(c)(1)(ii).

Finally, if the credit union has the sudden need to decrease all members' credit card limits to mitigate its portfolio risk, neither the FCRA nor Regulation B's notice requirements would come into play. The reason for this is that a reduction of credit limit across the board, and one made without regard to a member's consumer report, would not be considered an adverse action under either regulation. See, 12 C.F.R. § 1002.2(c)(2)(iii).

Even though Regulation B and the FCRA contain different but similar adverse action notice requirements, there are a couple of model forms credit unions can use to satisfy both requirements. The forms are located in Appendix C to Regulation B. Make sure to read the information right before the model forms as it describes which requirements are being satisfied by each sample form.

There are a few other scenarios regarding credit line changes, but this should cover the major notice requirements associated with a change in the member's credit card limit and provide a good starting point when researching other credit limit change issues.