‘Fixed’ rates on open-end loans

Has your credit union advertised or disclosed rates on open-end loans as “fixed” without specifying a time period that the rate will be fixed?

If so, you’ll likely have to maintain that fixed rate until the account is closed either by the member or by the credit union.

In February 2010, the Federal Reserve Board issued a Regulation Z final rule that amended the general disclosure requirements for certain open-end loans and the advertising requirements for all open-end loans (Reg Z Sections 1026.5 and 1026.16, respectively).

The Fed adopted the two amendments to restrict the use of the term “fixed” (or any similar term to describe a rate disclosed in tabular disclosures provided with account-opening documents and in advertisements) for open-end loans to instances when the rate would not increase until the expiration of a specified time period.

However, if no time period is specified, and the term “fixed” or a similar term is used, the rate must not be increased while the plan is open.

In other words, if no time period is specified for the “fixed” rate in either the account-opening documents or in the advertisement, the credit union must maintain the rate as “fixed” until such time as the borrower closes the account or the credit union terminates the account.

The Fed points out in the supplemental material to the final rule that Section 127 of the Truth in Lending Act states that a rate described as “fixed” may not change or vary for any reason.

The Fed also states that you may not increase a rate that’s described as “fixed.”

However, the Fed realized that it would be beneficial to consumers to permit a creditor to reduce the rate at any time even though a rate described as “fixed” may not be increased.

Reg Z Section 1026.55’s provisions regarding treatment of protected balances on credit card accounts prevents a creditor from closing a fixed-rate card account to move the borrower to a new card account at a higher rate.

That’s because the provisions concerning protected balances continues to apply to a card balance transferred from one credit card account to another card account issued by the same creditor.

Even though other open-end loans are not subject to the provisions regarding treatment of protected balances, any attempt to increase a “fixed” rate (with no specified time-period) would fail to comply with Reg Z requirements.

It could also lead to an Unfair, Deceptive, or Abusive Act or Practices (UDAAP) claim.

The amendments to the general disclosure requirements of Section 5 apply to all open-end loans, including credit card accounts.

But they don’t apply to home-secured loans such as home equity lines of credit (HELOC).

The amendments to the advertising requirements of Section 16(f) apply to all open-end loans, including home-secured loans such as HELOCs.

The amendment in the open-end general disclosure section of Section 1026.5 states: “If an annual percentage rate is required to be presented in a tabular format pursuant to this section, the term ‘fixed,’ or a similar term, may not be used to describe such rate unless the creditor also specifies a time period that the rate will be fixed and the rate will not increase during that period, or if no such time period is provided, the rate will not increase while the plan is open.”

In addition, the amendment in the open-end advertisements section of 1026.16(f) under the heading, “Misleading terms,” states: “An advertisement may not refer to an annual percentage rate as “fixed,” or use a similar term, unless the advertisement also specifies a time period that the rate will be fixed and the rate will not increase during that period, or if no such time period is provided, the rate will not increase while the plan is open.”

Section 1026.24 covering closed-end advertising, prohibits the use of “fixed” to refer to rates or payments in an advertisement for variable-rate loans unless “adjustable-rate mortgage” or “variable-rate mortgage” appears in the advertisement before the first use of the word “fixed.”

In addition, the lender must disclose the time period the rate or payment is fixed as well as the fact that the rate or payment may increase after that period.

MICHAEL McLAIN is CUNA’s senior  federal compliance counsel. Contact him at 608-231-4185 or at mmclain@cuna.coop.