Compliance Blog

Posted by Steve Van Beek

"9(c)(2)(v) Notice not required.
1. Changes not requiring notice. The following are examples of changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise required by §226.9(c)(2)(vi)......"

The referenced section, 12 C.F.R. Â§226.9(c)(2)(vi) reads as follows:

"(vi) Reduction of the credit limit. For credit card accounts under an open-end (not home-secured) consumer credit plan, if a creditor decreases the credit limit on an account, advance notice of the decrease must be provided before an over-the-limit fee or a penalty rate can be imposed solely as a result of the consumer exceeding the newly decreased credit limit. Notice shall be provided in writing or orally at least 45 days prior to imposing the over-the-limit fee or penalty rate and shall state that the credit limit on the account has been or will be decreased."  (emphasis added).

"Section 226.9(c)(2)(vi) requires an issuer to provide a consumer with 45 days' advance notice that a credit limit is being decreased or will be decreased prior to the imposition of any over-the-limit fee or penalty rate imposed solely as the result of the balance exceeding the newly decreased credit limit. The Board is not including a decrease in a consumer's credit limit itself as a significant change in a term that requires 45 days' advance notice, for several reasons. First, the Board recognizes that creditors have a legitimate interest in mitigating the risk of a loss when a consumer's creditworthiness deteriorates, and believes there would be safety and soundness concerns with requiring creditors to wait 45 days to reduce a credit limit. Second, the consumer's credit limit is not a term generally required to be disclosed under Regulation Z or TILA. Finally, the Board believes that Sec.  226.9(c)(2)(vi), as adopted, adequately protects consumers against the two most costly surprises potentially associated with a reduction in the credit limit, namely, fees and rate increases, while giving a consumer adequate time to mitigate the effect of the credit line reduction."  

There is another wrinkle to this situation as well.  Section 226.9(g) requires 45-days advance notice and the right to cancel prior to imposing the penalty APR to a member's account.  However, one of the exceptions is if the credit union has provided notice of the credit limit decrease and indicates to the member that the penalty APR will apply if the member's balance exceeds the reduced credit limit after 45-days expire from the date of the notice.  Here are the details:

"(4) Exceptions —
.............
(ii) Decrease in credit limit. A creditor is not required to provide, prior to increasing the rate for obtaining an extension of credit that exceeds the credit limit, a notice pursuant to paragraph (g)(1) of this section, provided that:
(A) The creditor provides at least 45 days in advance of imposing the penalty rate a notice, in writing, that includes:
( 1 ) A statement that the credit limit on the account has been or will be decreased;
( 2 ) A statement indicating the date on which the penalty rate will apply, if the outstanding balance exceeds the credit limit as of that date;
( 3 ) A statement that the penalty rate will not be imposed on the date specified in paragraph (g)(4)(ii)(A)(2) of this section, if the outstanding balance does not exceed the credit limit as of that date;
( 4 ) The circumstances under which the penalty rate, if applied, will cease to apply to the account, or that the penalty rate, if applied, will remain in effect for a potentially indefinite time period; and
(B) The creditor does not increase the rate applicable to the consumer's account to the penalty rate if the outstanding balance does not exceed the credit limit on the date set forth in the notice and described in paragraph (g)(4)(ii)(A)(2) of this section."

Thus, the credit union is not required to give 45-days advance notice before reducing the credit limit on a member's credit card account.  However, the credit union does need to give notice 45 days prior to imposing an over-the-limit fee or penalty rate because the member is above the reduced credit limit.  And, if the credit union follows the exception in Â§226.9(g)(4)(ii) - this 45 day notice could replace the normal 45-day notice required under Â§226.9(g)(1) before imposing the penalty APR on the credit card account.  Importantly, the notice under Â§226.9(g)(1) requires the right to cancel.  However, the exception in Â§226.9(g)(4)(ii) does not require the right to cancel.

"9(g)(4)(ii) Decrease in credit limit.
1. The following illustrates the requirements of §226.9(g)(4)(ii). Assume that a creditor decreased the credit limit applicable to a consumer's account and sent a notice pursuant to §226.9(g)(4)(ii) on January 1, stating among other things that the penalty rate would apply if the consumer's balance exceeded the new credit limit as of February 16. If the consumer's balance exceeded the credit limit on February 16, the creditor could impose the penalty rate on that date. However, a creditor could not apply the penalty rate if the consumer's balance did not exceed the new credit limit on February 16, even if the consumer's balance had exceeded the new credit limit on several dates between January 1 and February 15. If the consumer's balance did not exceed the new credit limit on February 16 but the consumer conducted a transaction on February 17 that caused the balance to exceed the new credit limit, the general rule in §226.9(g)(1)(ii) would apply and the creditor would be required to give an additional 45 days' notice prior to imposition of the penalty rate (but under these circumstances the consumer would have no ability to cure the over-the-limit balance in order to avoid penalty pricing)."