CUNA’s compliance staff went back to basics in a recent CompBlog entry examining floor rates on variable-rate open-end loans. These rates are governed by the Credit Card Accountability and Disclosure (CARD) Act.
A section of Regulation Z, which implements the Truth in Lending Act, provides that no notice of a change in terms is required when the change is an increase in a variable annual percentage rate in accordance with a credit card or other account agreement that provides for changes in the rate, according to operation of an index that is not under the control of the creditor and is available to the general public.
According to the Regulation Z commentary, the index is under the creditor’s control when the variable rate is subject to a fixed minimum rate (floor) that does not permit the variable rate to decrease consistent with reductions in the index.
However, a creditor is permitted to establish a fixed maximum rate that does not permit the variable rate to increase beyond a certain point.
The 2011 CARD Act final rule clarified that a variable-rate open-end loan that is subject to a fixed minimum or floor rate does not meet the conditions of the exception to the advance-notice requirements.
Therefore, a variable-rate open-end loan with a floor will require a 45-day advance-notice before the rate may be increased as a result of an increase in the index.
Furthermore, for the advance-notice exception to apply: the creditor must eliminate floors on all open-end loans and must use an external or public index that is not under the control of the creditor.