Reg Z Proposal: Increasing APRs on existing balances

Posted by Anthony Demangone

Steve penned a great post that breaks the 841-page Regulation Z open-end proposal into 25 major subjects.

Today, we'll begin our analysis with the section that addresses increasing APRs on existing balances. This link will take you to an 81-page snippet from the final rule that addresses this topic. 

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The Feds proposal tracks the Credit CARD Act very closely.  The proposal would prevent creditors from applying an increased APR and certain fees and charges to existing balances, except in four areas:

1. When a temporary rate lasting at least 6 months expires.  For example, teaser or introductory rates.

2. When the rate increase is due to the variable-rate nature of an account.

3. When the creditor has not received a minimum payment within 60 days.  Good luck on this one.  If the member has not made a minimum payment in 60 days, I wonder how much good it does to increase the rate on existing balances.

4. When the consumer completes or fails to comply with the terms of a workout agreement. This one is a bit tricky.  If you need additional details, a nice discussion begins on page 800 of the proposal. 

Also, the rule clarifies that when you've reduced the APR on existing balances to comply with the SCRA, you can increase the rate on existing balances once the SCRA no longer applies.

These proposed rules would be housed at 12 C.F.R. Section 226.55. Here are a few things that caught my eye.

If you are thinking of converting non-variable rate cards to a variable rate card, you may want to consider doing it sooner rather than later.  Take a look at this proposed comment. 

Because the conversion of a non-variable rate to a variable rate could lead to future increases in the rate that applies to an existing balance, proposed comment 55(b)(2)-4 clarifies that a non-variable rate may be converted to a variable rate only when specifically permitted by one of the exceptions in § 226.55(b). For example, under § 226.55(b)(1), a card issuer may convert a non-variable rate to a variable rate at the expiration of a specified period if this change was disclosed prior to commencement of the period. P. 194 of the proposal.

The general prohibition on increasing rates or fees applicable to existing balances is just that. Check out this proposed comment.

However, as discussed above, the prohibition on increases in rates, fees, and finance charges in revised TILA Section 171 applies only to “outstanding balances” as defined in Section 171(d). Accordingly, proposed § 226.55(b)(3) provides that a card issuer may generally increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) with respect to new transactions after complying with the notice requirements in § 226.9(b), (c), or (g).  Page 195.

Oh, and there's one fact that you won't see discussed within this section.  Keep in mind that the the prohibition concerning increasing the APR on existing card balances does not apply yet.  If you give notice now (and until it becomes effective) and the member does not reject the change, you can apply the increased rate to new transactions and the member's existing balance.  But also keep in mind another provision that will require you to revisit any APR increase for credit cards at least 6 months after the increase to see if the justification for the increased still exists.

Comments

[Cheryl Hart]

Can you tell me the actual difference between this and the CCA? Come on... are they really different?

[Michele Boven]

I'm confused. Is the Federal Reserve Board now making proposed changes to the Credit Credit Act? If so, if I am interpreting correctly, it appears their proposals are already in the Credit Card Act, such as section 171 (increasing APR's, etc). Please clarify....

[Anthony Demangone]

The Credit CARD Act made into law to do a number of things. The major goal was to amend the Truth in Lending Act to provide a number of consumer rights in the lending arena. But the Truth in Lending Act allows the Fed to issue regulations in a way that, while maybe not 100 percent in line with the Act, still achieves the Act's goal. Case in point, the Act appears to require payment warnings for ALL open end credit. The Fed's proposal would limit that requirement to credit card accounts. So, you have to review this proposal (and the future final rule) closely, as it may deviate a bit from the Credit CARD Act/Truth in Lending Act.

[Angela Baker]

Official staff comment (2)(a)(4) says that "the sending of a regular payment reminder (rather than a late payment notice) establishes a cycle for which the creditor must send periodic statements." What effect does sending payment reminders have on the timing of sending the periodic statement?

[Anthony Demangone]

It looks like they are saying that if you send a monthly payment reminder, you establish a monthly cycle. There's no other guidance on that issue, so I'm not 100 percent sure. But that is my initial read.