Compliance Blog

Nov 28, 2018
Categories: Consumer Lending

The Merger Effect: Protected Balances

Written by Jennifer Aguilar, Regulatory Compliance Counsel, NAFCU

A couple weeks ago, we blogged on a few FAQs related to mergers. As it continues to baffle those of you out there dealing with mergers, today’s blog expands on the last FAQ – converting a credit card portfolio post-merger. For a refresher, here’s the scenario:

Kenosha Credit Union merges into Point Place Federal Credit Union. Kenosha CU had a credit card plan that Point Place FCU does not want to continue administering. Point Place FCU wants to encourage members with this credit card to open a new card and transfer the balance from the old card. If it does so, must the existing balance be protected?

As was discussed in the FAQ, the rules in section 1026.55 on increasing an APR apply to acquired accounts and when a balance is transferred from one card to another card at the same credit union. The commentary to section 1026.55(d) specifically mentions accounts obtained through a merger as a type of acquired account the rules apply to. If Point Place FCU wants to increase the APR as part of the balance transfer, either initially or in the future, it may do so only if one of the exceptions in section 1026.55(b) apply. The two exceptions that generally apply here – temporary rate and advance notice – both create a protected balance.

There are many reasons credit unions may want to have members move from an older credit card to its own card but it can be a challenge to get these members to want to change. This is especially true if the older credit card has a fixed rate, lower margin or fewer fees. So, one way to encourage members to transfer the balance is to offer a balance transfer promotion, such as 0% APR for the first six months. If the member wanted to take advantage of the offer, she would apply for the new card and, if approved, transfer the balance from the old card to this new card.

However, in order to increase the rate after the promotional period is over, the rules outlined section 1026.55(b)(1) must be followed. First, the promotional period must be at least six months or longer. This NAFCU blog further explains how to determine the length of the promotional period. Second, the length of promotional period and the APR that will apply at the end of the promotional period must be disclosed before the promotional period begins. Third, for transactions that occurred prior to the start of the promotional period, the APR that will apply after the period cannot exceed the APR that applied before the period. This third requirement is what creates a protected balance. Any increase in the APR can only apply to new transactions.

As an alternative to the temporary rate promotion or for those members who did not take advantage of the offer, credit unions may choose to increase the rate by providing advance notice. Section 1026.55(b)(3) permits credit unions to increase the rate if the credit union provides 45 day’s advance notice of the change. However, the rule prohibits credit unions from applying the increased rate to any transaction that occurred before and within 14 days of providing the notice, creating a protected balance. Here too, any increase in the APR can only apply to new transactions.

Keep in mind these rules apply not only to numerical increases in the rate, such as an increase from 8% to 11%. They also apply to actions that result in an increased rate, such as increasing the margin used to calculate a variable rate or changing the type of rate from fixed to variable. This NAFCU Monitor Article (NAFCU member login required) further discusses the rules for changing the type of rate.

These same rules apply if the credit union wants to increase any of the following fees: any annual or periodic fee for issuance or availability, including a fee based on account activity or inactivity; a fixed finance charge; any minimum interest charge; and fees for any required credit insurance, debt cancellation or debt suspension coverage.