Posted by Anthony Demangone
In the past week or so, we've tried to highlight a few areas where regulations can be quite difficult to follow. Here's another example, coming out of the Fed's recent 300+ page CARD Act "clarification" rulemaking. The rule becomes effective October 1, 2011. If your credit union converted your credit card program from a variable to a fixed rate recently, please put down your coffee and move anything that you can throw that is currently within your arm's reach into a desk drawer. And then lock that drawer.
Issuers are generally required to reevaluate rate increases at least every six months. Regulation Z clarifies that a change from a variable rate to a fixed rate, or vice-versa is not a rate increase that triggers the obligation to reevaluate, if the rate in effect prior to the change is the same as, or higher than, the new rate. However, the Board added new comment 59(a)(1)-3.iii in its "clarification." The new comment creates an obligation to reevaluate if a creditor switches an account from a variable rate to a fixed rate and the variable rate decreases at some later time, leaving the cardholder paying a higher rate than he would have absent the creditors’ decision to change from a variable to a fixed rate. The comment below explains the situation.
“[A]ssume a new credit card account…is opened on January 1 of year 1 and that a variable annual percentage rate that is currently 15% and is determined by adding a margin of 10 percentage points to a publicly-available index not under the card issuer’s control applies to all transactions on the account. On January 1 of year 2, upon 45 days’ advance notice pursuant to § 226.9(c)(2), the rate on all existing balances and new transactions is changed to a nonvariable rate that is currently 15%. The change from the 15% variable rate to the 15% non-variable rate on January 1 of year 2 is not a rate increase for purposes of § 226.59(a). On April 1 of year 2, the value of the variable rate that would have applied to the account decreases to 12.5%. Accordingly, on April 1 of year 2, the non-variable rate of 15% exceeds the 12.5% variable rate that would have applied but for the change in type of rate. At this time, the change to the non-variable rate of 15% constitutes a rate increase for purposes of § 226.59, and the card issuer must begin periodically conducting reviews of the account pursuant to § 226.59.
Consequently, issuers that convert accounts from variable to nonvariable rates must track the old variable rate, which no longer applies to the account, as a decrease in that index may give rise to the obligation to reevaluate accounts that now have a fixed rate. The example shows a hypothetical where the review is triggered on April 1, of "year 2." But this requirement to compare your fixed rate against the old, dead, variable rate could trigger a review in "year 40." Add this to the mix: If your credit union has take part in a number of mergers and you've incorporated their card programs into your program, the complexity of the review process could be fierce. You'll need to know the history of their rate change decisions to get a good picture of your rate review responsibilities.