Dry Eyes, Fatigue, and the Limiting of Term Increases
NAFCU’s compliance team has received several inquiries into Regulation Z’s limitations on increasing annual percentage rates, fees, and charges. We wanted to take the time to provide a brief overview of how section 1026.55 may influence a credit union’s plans and how credit unions may traverse section 1026.55.
Limitation on APR Increases for Transferred Balances
According to section 1026.55(a), a credit union is not permitted to increase an annual percentage rate (APR), a fee, or charge that a credit union is required to disclose in an account-opening disclosure unless an exception applies. However, a credit union may increase the APR, a fee, or a charge if one of the exceptions under section 1026.55(b) applies. There are six exceptions that may allow a credit union to increase an APR, a fee, or a charge. To protect the reader from dry eyes and fatigue, we will only cover the three most widely used (based on NAFCU’s own experience) and asked about.
Temporary Rate, Fee, or Charge Exception
According to section 1026.55(b)(1), a credit union may initiate an increase after the expiration of a defined period of six months or longer. A credit union may do this so long as the credit union first discloses to the member the period’s length and the term that would apply after expiration of the period. The credit union is also under several other obligations to benefit from this exception. To benefit from the exception, a credit union must not
…apply an annual percentage rate, fee, or charge to transactions that occurred prior to the period that exceeds the annual percentage rate, fee, or charge that applied to those transactions prior to the period;
If the disclosures required by paragraph (b)(1)(i) of this section are provided pursuant to § the card issuer must not apply an annual percentage rate, fee, or charge to transactions that occurred within 14 days after provision of the notice that exceeds the annual percentage rate, fee, or charge that applied to that category of transactions prior to provision of the notice; and
The card issuer must not apply an annual percentage rate, fee, or charge to transactions that occurred during the period that exceeds the increased annual percentage rate, fee, or charge disclosed pursuant to paragraph (b)(1)(i) of this section
This type of exception is sometimes used for a promotion. One thing to note is a credit union’s promotion does not have to last for six months or longer to benefit from the exception. The twist is the promotion may be less than six months, but the rate has to apply for six months.
The commentary provides additional examples that may help to highlight what the regulation means by “period of six months or longer.” Comment 55(b)(1)-2.i and comment 55(b)(1)-2.ii both allow a credit union to apply a higher APR only after six months. In other commentary examples, a credit union may still benefit from the exception when the promotion’s timeframe is shorter than six months so long as the rate itself during the promotion applies for six months or longer under comment 55(b)(1)-2.iii. In comment 55(b)(1)-2.iii, a card issuer offers a consumer a rate of zero percent for six months on purchases that only occur for two months. A credit union benefits from the exception so long as the promotional APR applies for a specified period of six months or longer.
Variable Rate Exception
Next is the variable rate exception. This exception applies to an increase of a term relating to a variable rate. A credit union may increase the APR when the APR “varies according to an index that is not under the [credit union’s] control and is available to the general public; and [t]he increase in the [APR] is due to an increase in the index.” However, this exception does not prohibit a credit union from “changing the method used to determine a rate that varies with an index…even if that change will not result in an immediate increase.”
Advance Notice Exception
The last and more widely used exception is the advance notice exception. This exception allows a credit union to increase a term after providing advanced written notice to the affected members. A credit union will benefit from this exception if the increased term is disclosed pursuant to section 1026.9(b) and the the credit union does not apply the term to transactions that occurred prior to the credit union providing the notice. On the other hand, if a credit union discloses an increased term pursuant to section 1026.9(c) or (g), then the credit union cannot apply the new term to transactions that occurred “prior to or within 14 days after the provision of the notice.” The last segment of the advance notice exception prohibits a credit union from increasing a term that is disclosed in account opening disclosures during the first year the account is opened, when the account is closed, or when the credit union does not permit the member to use the card for new transactions.
Another regulatory hurdle that sometimes occurs when a credit union follows the advance notice exception is the concept of protected balances. The concept of a protected balance applies to “a category of transactions to which an increased annual percentage rate required to be disclosed…cannot be applied after the annual percentage rate…has been increased pursuant to paragraph (b)(3) of this section.” In other words, an increased annual percentage rate may not be applied to a category of transactions that occurred before the increase if the annual percentage rate is increased following the advanced notice exception under section 1026.55(b)(3). A credit union may still have to protect previous transactions in some other capacity for section 1026.55(b)(1).
This NAFCU Compliance Monitor article explains the what, the why, and the how of protected balances, providing a deeper dive on a credit union’s obligations under section 1026.55. NAFCU”s compliance team also wrote a blog on how a credit union may handle the transfer of member balances relating to a credit union merger.
If there are any remaining questions, please do not hesitate to contact NAFCU’s Compliance team at firstname.lastname@example.org.
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About the Author
Justin joined NAFCU as a regulatory compliance counsel in August 2021. As part of the Regulatory Compliance Team, he provides daily compliance assistance to member credit unions on a variety of topics.