Compliance Blog

Posted by Sarah Loats

I know everyone is focused on the 21 day requirement, but there is another portion to this August 20, 2009 rule - the 45 day advance notice of APR increases and significant changes in terms for credit cards (yes, just credit cards). Before we get into the crux of the rule, it might be useful to focus on what it means to be effective August 20, 2009.

General change-in-terms notices. The Federal Reserve indicates in the interim final rule that the important date is the date the change-in-terms notice is provided, not the effective date of the change. So, if the notice is provided prior to August 20, 2009, it need not comply with the 45 day advance notice of the rule, or any of the content requirements. The example the interim final rule provides is:

"For example, a creditor may provide a notice in accordance with existing Regulation Z on August 10, 2009 disclosing a change-in-terms effective August 26, 2009. Accordingly, any such notice would not be required to comply with the content requirements of this interim final rule, including the disclosure of the consumer’s right to reject the change."

What does this mean? If your credit union plans on making any changes to its credit cards in the near future, it may want to get those notices out by August 19, 2009.

Notices for rate increases due to default or delinquency. Currently, for such rate increases, 15-day advanced notice is not required. The notice need only be provided prior to the change. Effective August 20, notices will be required 45 days in advance for rate increases due to the member's default or delinqunecy or as a penalty for events specified in the account agreement. For determining if you will need to provide the 45-day advance notice, the Federal Reseve has determined that the relevant date is the date on which the increase becomes effective. The examples provided in the rule are:

"For example, if a consumer makes a late payment on August 10, 2009 that triggers penalty pricing, a creditor may increase the rate effective on or before August 19, 2009 in compliance with existing Regulation Z, and need not provide 45 days’ advance notice of the change.

The Board is aware that there may be some circumstances in which a consumer’s behavior prior to August 20, 2009 triggers a penalty rate, but a creditor may be unable to implement that rate increase prior to August 20, 2009. For example, a consumer may make a late payment on August 15, 2009 that triggers a penalty rate, but the creditor may not be able to implement that rate increase until August 25, 2009 for operational reasons. In these circumstances, the Board believes that requiring 45 days’ advance notice prior to the imposition of the penalty rate would not be appropriate, because it would in effect require compliance with new § 226.9(g) prior to the August 20 effective date. Therefore, for such penalty rate increases that are triggered, but cannot be implemented, prior to August 20, 2009, a creditor must either provide the consumer, prior to August 20, 2009, with a written notice disclosing the impending rate increase and its effective date, or must comply with new § 226.9(g). In the example described above, therefore, a creditor could mail to the consumer a notice on August 19, 2009 disclosing that the consumer has triggered a penalty rate increase that will be effective on August 25, 2009. If the creditor mailed such a notice, it would not be required to comply with new § 226.9(g). This transition guidance applies only to penalty rate increases triggered prior to August 20, 2009; if a consumer engages in behavior that triggers penalty pricing on August 20, 2009, the creditor must comply with new § 226.9(g) and, accordingly, must provide the consumer with a notice at least 45 days in advance of the effective date of the increase."

Thus, if the member's action that triggered the penalty pricing occured prior to August 20, but the credit union cannot implement the change until after August 20, it will need to provide the member a notice of the new rate prior to August 20, or it will need to comply with the new rule (including the 45 day advance notice). In other words, for those days in August prior to August 20, watch your operations in relation to penalty pricing closely.

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Addendum by Anthony Demangone

You may have read about what we are doing to address the 21-day issue recently.  Let me just set the record straight.

Since I joined NAFCU, I have never seen a compliance problem as confounding as this 21-day issue.  The scope of the compliance burden is massive.  The time to comply is miniscule.  The availability of clear guidance is limited.  This all adds up to one of the greatest compliance hurdles I've seen. 

Since the Credit CARD Act was issued, we've worked with Congress and the Federal Reserve to address this issue.  At our Annual Conference last week, scores of CEOs urged us to do anything and everything possible to lessen this burden.  Did we put out a call to action within Connecticut?  You bet.  We believe that your Representatives should hear from you on important issues that affect your daily operations.  Talking with you has helped us to understand this problem.  I believe that your conversations with Representatives can play the same role. 

In short, our members asked us to act, and we did.  We understand that many individuals and groups are working on this issue.  But we realize that you, the regulated credit union industry, play an all-important part within the lobbying universe.