Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings compliance fans and Happy Leap Day! We have received questions lately about whether credit unions are required to use the term “annual percentage rate” in advertisements for closed-end consumer credit or, in the alternative, whether credit unions can use the abbreviation “APR.” This may be the result of some confusion regarding the different regulatory requirements under NCUA’s Truth in Savings Rule and the CFPB’s Regulation Z. This blog post will (hopefully) clarify this issue for you.
Truth in Savings requires credit union advertisements to state the rate of return on share, share draft, and share certificate accounts as an “annual percentage yield,” using that term. In parenthesis, the rule clarifies that
“The abbreviation “APY” may be used provided the term ‘annual percentage yield’ is stated at least once in the advertisement.”
12 C.F.R. § 707.8(b). This means that somewhere in the advertisement, the credit union must spell out the phrase “annual percentage yield” at least once in order to comply with NCUA’s rule.
Regulation Z has a similar requirement for advertisements for closed-end consumer credit. The rule states that
“If an advertisement states a rate of finance charge, it shall state the rate as an “annual percentage rate,” using that term. If the annual percentage rate may be increased after consummation, the advertisement shall state that fact…”
12 C.F.R. § 1026.24(c). Based on a strict reading of the text of the rule, and with some knowledge of the disclosure regime under Truth in Savings, it might seem like Section 1026.24 would require credit unions (and other financial institutions) to use the phrase “annual percentage rate” at least once in closed-end advertisements.
The Official Interpretations to Regulation Z, however, appear to allow credit unions to use the abbreviation “APR” rather than fully spelling out “annual percentage rate” in advertisements:
“Advertised rates must be stated in terms of an annual percentage rate, as defined in § 1026.22. Even though state or local law permits the use of add-on, discount, time-price differential, or other methods of stating rates, advertisements must state them as annual percentage rates. Unlike the transactional disclosure of an annual percentage rate under § 1026.18(e), the advertised annual percentage rate need not include a descriptive explanation of the term and may be expressed using the abbreviation APR…”
Official Interpretations, § 1026.24(c)-1. On the surface, it would seem that the text of the rule and the text of the commentary are in tension. The rule requires credit unions to state the rate as an annual percentage rate, “using that term.” On the other hand, the commentary allows credit unions to use the abbreviation “APR.”
A closer reading of the commentary, however, appears to suggest that the Federal Reserve’s (the agency that drafted the original rule) primary concern when drafting the rule was that credit unions disclose the cost of credit as an “annual percentage rate” as defined in Section 1026.22 and calculated according to Appendix J. It seems that it was also important to distinguish the “annual percentage rate” under Regulation Z from the simple interest calculation methodologies described in the commentary that may be allowed under state or local law.
It also appears that given the requirement in Section 1026.18(e) that credit unions disclose and provide a brief description of the “annual percentage rate” in the account opening disclosures, the Federal Reserve was less concerned about whether the credit unions used “annual percentage rate” or “APR” in advertisements. Read this way, the rule and commentary appear to allow credit unions to use the abbreviation “APR” in advertisements without first spelling out “annual percentage rate” provided that the rate disclosed otherwise meets the Regulation Z definition of “annual percentage rate” and uses Regulation Z calculation methodology.
On the other hand, the preamble to NCUA’s Truth in Savings Rule shows that the NCUA Board was very concerned with distinguishing the “annual percentage rate” disclosed under Regulation Z with the “annual percentage yield” disclosed under Truth in Savings. See, 58 Fed. Reg. 50394, 50401-402 (Sept. 27, 1993). This concern may have led to the Board adopting a conservative approach that requires credit unions to define “APY” in advertisements at least once to prevent member confusion.
I hope this brief history lesson has clarified this issue for you. Have a Happy Leap Day!
NCUA’s MBL Changes Explained: What you need to know
Live Webcast: Thursday, March 3 | 2:00 p.m. – 3:30 p.m. EST
In this free webcast you’ll get a thorough overview of NCUA’s Member Business Lending (MBL) rule that eliminate the rule's from its architect, Larry Fazio, director of NCUA’s Office of Examination and Insurance. You’ll cover the process allowing credit unions to decide for themselves if a borrower should be exempt from a personal guarantee. You’ll also review details of how the final rule requires credit unions currently engaged in commercial lending, as well as those considering stepping into this space, to develop board-approved policies that thoughtful delineate their individual commercial underwriting standards and infrastructure.