NAFCU's Offices Closed Today; Disclosing APRs - Fixed, Non-Variable, or Variable
The federal government's offices in Washington, D.C. are closed today. NAFCU follows their lead, so our offices are closed as well. It really is a mess out there, folks.
NAFCU members: If you have a compliance issue, email us at compliance@nafcu.org. We'll do our best to respond remotely.
Posted by Steve Van Beek
The new Regulation Z rules, both from the Credit CARD Act and the prior final rule, have created quite a bit of confusion about the disclosure of APRs. Â In order to properly disclose your APR on account opening disclosures - you will need to be clear on what type of account you are offering. Â
Fixed APR.  The January 2009 final rule and the Credit CARD Act placed limitations on using the term "fixed" to describe an account.  In short, credit unions can only use the term "fixed" to describe an APR if they also state a time period for which the APR will be fixed - and the APR that will apply after the "fixed" time period.  If no time period is given, the credit union is not allowed to increase the APR on that account as it is truly fixed (like a 30-year fixed mortgage).Â
Also, as this chart indicates - the limitations apply to all open-end lending (see 226.16(f)).  These limitations become effective February 22, 2010 and apply to both advertisements and account opening disclosures (see pages 16-17 and page 1 for the reference to 226.5(a)(2)(iii) referring to "fixed."  This PDF contains the regulatory text of 226.5(a)(2)(iii).  Only the "fixed" section is effective February 22, 2010 - the other parts of 226.5(a)(2)(iii) will become effective July 1, 2010.
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Non-variable APR. Â This is the term the Federal Reserve has been using to describe accounts that are not tied to an index and margin and are not fixed. Â For these accounts, credit unions have a specific APR (i.e. 8.99%) that applies to the account - but they are not prohibited by increasing the APR in the future (through a 45-day change-in-term) as they would be if they referred to that account as "fixed" and did not give a specified time period. Â Keep in mind that according to 226.55(b)(3), the credit union is only able to increase the APR on future transactions by using the "advance notice exception." Â
So, do credit unions need to disclose the account as a "8.99% Non-variable APR" account? Â No, rather the account would simply be an account with a "8.99% APR." Â This is the default situation. Â When the account has special characteristics (such as "fixed" or is a variable-rate account) the credit union has to disclose additional information. Â However, if the account simply has a 8.99% APR - this is what the credit unions need to disclose. Â The fact that the account is "non-variable" and the credit union can increase the APR on future transactions using a 45-day change-in-terms does not need to be disclosed in an advertisement or the account opening disclosures.
In the past, some credit unions had referred to these accounts as "fixed." Â The Fed's January 2009 final rule explains why these limitations on the use of the term "fixed" are being adopted. Â
"Advertising âÂÂâÂÂfixedâÂÂâ rates. Creditors sometimes advertise the APR for open end accounts as a âÂÂâÂÂfixedâÂÂâ rate even though the creditor reserves the right to change the rate at any time for any reason. Consumer testing indicated that many consumers believe that a âÂÂâÂÂfixed rateâÂÂâ will not change, and do not understand that creditors may use the term âÂÂâÂÂfixedâÂÂâ as a shorthand reference for rates that do not vary based on changes in an index or formula."
Credit unions will need to make sure they do not inadvertently refer to their accounts as fixed, when they are, in fact, non-variable rate accounts. Â
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Variable-rate APR.  Many credit unions have converted to variable-rate credit card accounts and are disclosing the applicable APRs for the first time.  Effective July 1, 2010, credit unions will need to change the way they disclose these variable rates on their account opening disclosures (and other disclosures).  Here is how this section will look:
"(A) Variable-rate information . If a rate disclosed under paragraph (b)(2)(i) of this section is a variable rate, the creditor shall also disclose the fact that the rate may vary and how the rate is determined. In describing how the applicable rate will be determined, the creditor must identify the type of index or formula that is used in setting the rate. The value of the index and the amount of the margin that are used to calculate the variable rate shall not be disclosed in the table. A disclosure of any applicable limitations on rate increases or decreases shall not be included in the table." Â (emphasis added). Â 12 C.F.R. 226.6(b)(2)(i)(A).
The Fed's consumer testing indicated the disclosure of the actual index and margin was confusing to members and should not be included in the table. Â Rather, inside the table the credit union will need to disclose that "This APR will vary with the market according to the [Prime Rate]." Â See page 26 of this PDF for a model form (notice also the purchase APR must be in 16 point font starting July 1, 2010).
There is additional information the credit union must disclose about the variable rate account:
"(ii) Variable-rate accounts . For interest rate changes that are tied to increases in an index or formula (variable-rate accounts) specifically set forth in the account agreement:(A) The fact that the annual percentage rate may increase.(B) How the rate is determined, including the margin.(C) The circumstances under which the rate may increase.(D) The frequency with which the rate may increase.(E) Any limitation on the amount the rate may change.(F) The effect(s) of an increase.(G) A rate is accurate if it is a rate as of a specified date within the last 30 days before the disclosures are provided." Â 12 C.F.R. 226.6(b)(4)(ii).
This detailed information can not be included in the account opening table but should be included in another part of the account opening disclosures or account agreement. Â
Also, advertisements for variable-rate accounts need to state the fact that the account is variable and that the APR will vary with the market.  The detailed information in 226.6(b)(4)(ii) does not need to be included (but must include the current rate or give the rate as of a particular date.)