Written by Jennifer Aguilar, Regulatory Compliance Counsel
Last month, I blogged on the timeframes for running promotions on your credit cards. A question then came up regarding whether credit unions have to provide notice when the promotional rate ends and how to handle situations where a member no longer qualifies for a discounted rate, such as an employee preferential rate or a special rate for autopay. This blog addresses the change in terms notice requirements for promotions and discounts that are agreed to after a credit card account is opened and are not provided for in the original card agreement.
In true regulator fashion, getting the answer to this seemingly simple question is not so easy. Once you have figured out where to start, you'll wander through obscure parts of the rule and commentary only to find yourself in a completely different section of the rule. As it can be quite easy to get lost in the maze of cross-references and confusing language, it's helpful to take it one step at a time. So, I'll guide you slowly through the maze and hopefully you won't get lost along the way.
As a starting point, the issue with credit cards is that section 1026.55 generally prohibits credit unions from increasing the rate on a credit card account unless a particular exception applies. When the promotional or discounted rate is first applied to the account, there is no need to worry about this general prohibition since the rate is actually decreasing. However, the commentary explains that this general prohibition also applies to a promotional or discounted rate. Therefore, once the rate has been discounted, credit unions cannot increase that discounted rate back to the original rate unless an exception applies.
For promotional rates, this is pretty straightforward as section 1026.55(b)(1) provides an exception for temporary rates in effect for at least six months. However, it gets a bit more complicated when a member no longer qualifies for a discounted rate. Section 1026.55(b)(3) allows credit unions to increase the rate if it provides advance notice, but there are a couple of twists to this exception. First, it creates a protected balance. This means that all transactions made during the time the rate discount was in place and those transactions made within 14 days of the advance notice must continue to receive that lower rate until the protected balance is paid off. Second, this exception cannot be used during the first year the account is opened. For example, if a member receives a discounted rate for using autopay and then cancels autopay within the first year, the rule prohibits a credit union from increasing the rate until after the first year ends.
Now that we have worked our way through the first part of the maze, let's keep going. Section 1026.55(b)(3) points you to section 1026.9(c) to determine the applicable timeframe and content requirements for the notice. Section 1026.9(c)(2) generally requires a credit union to provide 45-day advance notice when it changes the APR on an account. However, section 1026.9(c)(2)(v) provides a number of exceptions to the general 45-day advance notice requirement. The commentary to this section explains that if the rate is temporarily discounted, a change in terms notice is not required when the rate increases back to the original rate as long as the credit union previously disclosed certain terms. The commentary sends you to a different section of the rule to determine the disclosure requirements – section 1026.9(c)(2)(v)(B).
Section 1026.9(c)(2)(v)(B) requires credit unions to disclose the following: when the reduced APR will apply and the APR that will apply when the reduced APR ceases to apply. If these disclosures are made in advance (e.g. when the credit union offers the discounted rate), advance notice is not required when the member no longer qualifies for the discounted rate. If the disclosures are not made in advance, then the rule requires the credit union to provide notice 45 days before the original rate is imposed. That 45-day advance notice must comply with the content requirements in section 1026.9(c)(2)(iv)(A).
Whew, that was confusing. Congratulations on sticking with me through the end. I know it can be exhausting wandering through the rules and all that commentary. Hopefully, this blog will serve as your shortcut when dealing with these types of discounted rates. That way, you can be just like Groundskeeper Willie and reach the end of the maze in a fraction of the time:
As always, the NAFCU compliance team is here to help you find all your regulatory shortcuts.
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Yesterday, the CFPB released its updated lists of rural and underserved counties - 2018 List of Rural or Underserved Counties and 2018 List of Rural Counties. The CFPB has also updated its Rural or Underserved Areas Tool. Credit unions can use these lists and the tool to determine whether a particular property is located in a rural or underserved area. The lists and tool can be found here.
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