Generally, a credit union is prohibited from increasing the APR or a fee on a credit card that is required to be disclosed in the account opening disclosures. But as we all know there are exceptions to the rules. So when can we increase the APR, fee or a charge on a credit card? There are quite a few exceptions (which are not all discussed here) such as the temporary rate exception, delinquency exception and most notably, the advance notice exception. Today, we are going to discuss the variable rate exception and what happens if a credit union imposes a floor rate, also known as a “fixed minimum rate.”
Section 1026.55 of Regulation Z discusses the limitations on increasing annual percentage rates, fees, and charges. However, paragraph (b)(2) discusses the variable rate exception stating that a card issuer may increase an annual percentage rate when:
“(i) The annual percentage rate varies according to an index that is not under the card issuer’s control and is available to the general public; and
(ii) The increase in the annual percentage rate is due to an increase in the index.” (Emphasis added.)
The commentary to this section provides additional guidance on the increase in comment 55(b)(2)-1 stating:
“Increases due to increase in index. Section 1026.55(b)(2) provides that an annual percentage rate that varies according to an index that is not under the card issuer’s control and is available to the general public may be increased due to an increase in the index. This section does not permit a card issuer to increase the rate by changing the method used to determine a rate that varies with an index (such as by increasing the margin), even if that change will not result in an immediate increase. However, from time to time, a card issuer may change the day on which index values are measured to determine changes to the rate.”
Based on the above regulation, a credit union can increase the APR on a credit card as long as the APR varies according to an index that is not under the credit unions control, is available to the general public, and the increase in the rate is due to an increase in the index.
How do you know whether an index is under the credit unions control? Comment 55(b)(2)-2.ii explains this stating that an index is “under the card issuer’s control” if:
“The variable rate is subject to a fixed minimum rate or similar requirement that does not permit the variable rate to decrease consistent with reductions in the index. A card issuer is permitted, however, to establish a fixed maximum rate that does not permit the variable rate to increase consistent with increases in an index. For example, assume that, under the terms of an account, a variable rate will be adjusted monthly by adding a margin of 5 percentage points to a publicly-available index. When the account is opened, the index is 10% and therefore the variable rate is 15%. If the terms of the account provide that the variable rate will not decrease below 15% even if the index decreases below 10%, the card issuer cannot increase that rate pursuant to § 1026.55(b)(2). However, § 1026.55(b)(2) does not prohibit the card issuer from providing in the terms of the account that the variable rate will not increase above a certain amount (such as 20%).” (Emphasis added).
Under the above, if a variable rate is subject to a fixed minimum rate (sometimes referred to as a “floor rate”), then the index is considered to be under the card issuers control. If the card issuer has control of the index, then a card issuer is not meeting the exception under section 1026.55(b)(2) to increase the annual percentage rate.
By setting a floor rate to a credit card, a credit union is unable to then increase the rate using the exception in section 1026.55(b)(2) which permits a credit union to increase the rate without advance notice. A credit union cannot use this exception since setting a floor rate puts the rate under the control of the credit union. However, a credit union may still use the advance notice exception to increase the rate found under section 1026.55(b)(3).
Section 1026.55(b)(3) [the advance notice exception] allows credit unions to increase an APR or fee after complying with notice requirements in Section 1026.9(b), (c), or (g), provided that:
“(i) If a card issuer discloses an increased annual percentage rate, fee, or charge pursuant to §1026.9(b), the card issuer must not apply that rate, fee, or charge to transactions that occurred prior to provision of the notice;
(ii) If a card issuer discloses an increased annual percentage rate, fee, or charge pursuant to §1026.9(c) or (g), the card issuer must not apply that rate, fee, or charge to transactions that occurred prior to or within 14 days after provision of the notice; and
(iii) This exception does not permit a card issuer to increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (iii), or (xii) during the first year after the account is opened, while the account is closed, or while the card issuer does not permit the consumer to use the account for new transactions. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.” (Emphasis added).
Therefore, in order to take advantage of this exception, the credit union must provide members with 45-days advance notice of the change in terms and may not apply the increased rate to transactions that occurred prior to or within 14 days after provision of the notice. Furthermore, if a credit union decides to increase a rate under section 1026.55(b)(3) [advance notice exception], the credit union must protect the “protected balance.” Section 1026.55(c) defines a protected balance as “the amount owed for a category of transactions to which an increased annual percentage rate or an increased fee or charge required to be disclosed under [account opening disclosures] …cannot be applied after the annual percentage, fee, or charge for that category of transactions has been increased pursuant to [section 1026.55(b)(3)].”