Limitations on Changes in First Year of Accounts

Posted by Steve Van Beek

Here are a couple of items to keep in mind as the February 22, 2010 deadline approaches:

• The ability to repay requirements apply to accounts opened on or after February 22, 2010, regardless of when the credit union received the application.  The rule also applies to credit limit increase requests (even on existing accounts) on or after February 22.  See pages 19-20 of the transition rules. 
• The prohibition on charging fees equaling more than 25% of the member's credit limit within the first year, 226.52, applies to credit card accounts opened on or after February 22, 2010.  It does not apply to accounts opened prior to 02/22/2010 even if they are still in their first year.  Be sure to track these new accounts, especially ones with low credit limits, as the rule requires you to refund any fees charged above the 25% level by the end of the next billing cycle.
• The restrictions on using the term "fixed" to describe your credit card accounts starts on February 22, 2010.  If you describe an account as fixed, be sure to clearly disclose the period it is fixed and the rate that will apply afterward.  If no time period is given, you will not be able to increase the APR on those accounts in the future.  So, be sure to scrub your disclosures, advertisements, statements, rate sheets and other information for any inadvertent uses of the word "fixed." 
• The prohibition on increasing APRs and fees in the first year (see page 2-3) of a credit card account via the advance notice exception in 226.55(b)(3) applies to cards opened on or after February 22, 2010.  See page 29. 
  •  Keep in mind this prohibition does not apply to increases due to other exceptions because the exceptions in 226.55 are not mutually exclusive.  For example, the APR could increase due to the ending of a properly disclosed promotional period or due to the increase in the index on a variable-rate account which is outside of the credit union's control.
  • But, this limitation would prohibit the credit union from increasing the margin on a variable-rate account within the first year the account is opened because to increase the margin you would utilizing the advance notice exception under 226.55(b)(3). 
  • This would also prohibit the credit union from increase a standard rate from 10% to 12%, for example on credit card accounts within the first year. 
  • Credit unions will need to track and monitor which credit card accounts have been opened in the past year.  The proposed increases in APR or fees can not apply to these accounts.  In other words, any changes proposed under the advance notice exception can only apply to accounts that have been opened at least a year.  This could cause operational headaches as your proposed changes will no longer be able to apply to all credit cards uniformly as some will be protected by the limitation on increase APRs or fees in the first year.       

Remember, this blog posting has links to the regulatory text, staff commentary, and preamble to help pinpoint information (and don't be afraid to use "CTRL-F" to search for what you are looking for in each PDF document).  

Good luck and have a great weekend.