Fed Provides CARD Act Clarification

Does changing from a nonvariable rate to a variable rate trigger the duty to review the account?

November 24, 2010

Recently the Fed provided us with another proposal related to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009.

However, this one is actually helpful.

Although it attempts to close some loopholes that were discovered during implementation, it also contains several necessary clarifications.

One of those clarifications relates to a reevaluation of rate increases for credit unions that changed the type of rate–non-variable to variable–without actually changing the rate.

During the CARD Act implemenation fiasco, many credit unions switched from nonvariable to variable rates. Although the type of rate changed, the margin was set so that the new variable rate was not an increase from the old nonvariable rate.

The question under the re-evaluation provision (Reg Z, section 226.59) was, does changing from a nonvariable rate to a variable rate trigger the duty to periodically review the account, even though the rate did not increase?

The current rule (effective August 22, 2010) didn’t specifically speak to this situation, and in other instances the rules generally address a change in the type of rate as equivalent to a rate increase because the rate may eventually increase.

Therefore, the conservative route under the current rule is to treat a change to a variable rate as a rate increase and begin reviewing the account periodically.

However, under the proposed rule, it states that a change from a nonvariable rate to a variable rate generally is not a rate increase for purposes of re-evaluation, if there is no increase in the rate at the time it is changed to a variable rate.

For example, if you had a nonvariable rate of 12% and you did a proper change in terms under the rule to a variable rate of 12%, until the variable rate exceeds 12%, you do not have to begin periodically reviewing the account under Reg Z, section 226.59.

So, watch for the final rule with the hope that it is adopted as proposed.

ANDREA STRITZKE is vice president, regulatory compliance, for PolicyWorks, Des Moines, Iowa, and a frequent contributor to The Works, a compliance blog. Contact her at 866-518-0209. PolicyWorks provides regulatory compliance solutions for credit unions and government and public affairs consulting.

Editor's note: This article originally appeared as a blog entry on The Works. Visit our compliance page for regular updates to The Works.

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