Written by Steve Van Beek
This afternoon I have the pleasure of speaking at NAFCU's Regulatory Compliance School on Lending to Servicemembers. One of the topics I will be talking about is the changes to Reg Z that require 45-days advance notice before removing the 6% interest rate cap on credit card account.
The Federal Reserve included the SCRA exception as one of the six exceptions where financial institutions could increase the APR, fees, or charges under 226.55. However, the Federal Reserve did not provide a similar exception in 226.9(c) to the 45-day notice requirement. Here is the Fed's rationale from the preamble (see pages 36-37) to 226.9(c):
"A number of commenters urged the Board to adopt additional exceptions to the requirement to provide 45 days’ advance notice of significant changes in account terms. Several industry commenters stated that the Board should provide an exception to the advance notice requirements for rate increases made when the provisions of the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. 501 et seq., which in some circumstances requires reductions in consumers’ interest rates when they are engaged in military service, cease to apply. These commenters noted that proposed § 226.55 provided an exception to the substantive repricing requirements in these circumstances. However, the Board is not adopting an analogous exception to the notice requirements in § 226.9. The Board believes that consumers formerly engaged in military service should receive advance notice when a higher rate will begin to apply to their accounts. A consumer may not be aware of exactly when the SCRA’s protections cease to apply and may choose, in reliance on the notice, to change his or her account usage or utilize another source of financing in order to mitigate the impact of the rate increase."
Additionally, the preamble to 226.55 (see page 37) includes this language:
"Furthermore, because the Board believes that a consumer leaving military service should receive 45 days advance notice of this increase in rate, the Board did not propose a corresponding exception to § 226.9. Commenters were generally supportive of proposed § 226.55(b)(6). Accordingly, it is adopted as proposed. However, although industry commenters argued that a similar exception should be adopted in § 226.9(c), the Board continues to believe – as discussed above with respect to § 226.9(c) – that consumers who leave military service should receive 45 days advance notice of an increase in rate."
Thus, even if the credit union includes information and disclosures when the servicemember initially receives the SCRA protections - the 6% rate will need to apply to the protected balance at least 45 days after the credit union provides notice to the member, under 226.9(c), of the expiration of their SCRA protections.
Note: The SCRA protections only apply to transactions made prior to the member entering military service and do not apply to transactions made on the credit card account after the member enters military service.
Also, keep in mind that the requirements in 226.53 regarding payment allocation may mean these protected balances at 6% may stay on accounts for longer times as the CU will need to apply payments in excess of the minimum payment to the balance with the highest APR.
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