For example, assume an issuer offers a variable-rate credit card account with a rate of 13%, which is calculated by adding a margin of seven percentage points to an index with a current value of 6%.
However, the terms of the account provide for a “floor” that prevents the variable rate from falling below 13%.
Therefore, the variable rate can only increase, and the cardholder will not benefit if the value of the index falls below 6%. That’s because the floor prevents the rate from decreasing the same as a true variable-rate account should.
The final rule permits a card issuer to use a published prime rate such as that in The Wall Street Journal. Although a publicly available index need not be published in a newspaper, it must be one the consumer can independently obtain and use to verify the APR on the account.
As a practical matter, section 55(b)(2) precluded card issuers from imposing a variable rate that is subject to a fixed minimum or “floor” rate.
Therefore, the February 2010 final rule required card issuers to eliminate floor rates on credit card accounts.
‘The final rule permits a card issuer to use a published prime rate.’
Because the February 2010 final rule applied these requirements to credit card accounts, the April 2011 final rule clarified that these requirements also apply to all other open-end loans except home equity lines of credit (HELOC).
The April 2010 final rule also stated that Regulation Z does not prohibit variable rates that are subject to a minimum or “floor,” but accounts with a floor rate must comply with the advance notice requirements of Section 1026.9(c).
In other words, any variable-rate open-end loan with a floor (except a HELOC) must provide a 45-day advance notice of change in terms before increasing the rate due to an increase in the index.
A card issuer that wishes the advance notice exception to apply to their variable-rate open-end loans must eliminate any floor rate on the variable-rate loan.
The elimination of a floor rate is beneficial for cardholders, so no notice under Regulation Z would be required.
However, even though a notice is not required when the issuer eliminates a floor rate, a credit union may wish to let members/cardholders know anyway to garner positive publicity.
Finally, if a credit union eliminates a floor rate, it may need to amend its loan documents to eliminate any reference to that rate.
Credit Union Magazine’s Spring 2023 issue features the 2023 Credit Union Heroes and examines CUNA-League advocacy priorities, board leadership, the impact of financial well-being efforts, fee-related compliance issues, predictions for the year ahead, and more.
