One of the many changes from the Credit CARD Act of 2009 was the limitation on using the term "fixed" in relation to credit card rates. Credit unions that want the ability to increase the APRs on their credit cards in the future need to very carefully manage their advertising and disclosure of credit card rates.
Three Types of APRs
After the Credit CARD Act changes, credit unions have three options for their credit card rates: (1) variable; (2) non-variable; and (3) "fixed." While most credit unions do not use the term "non-variable" - it is the term used by regulators to describe a rate that is not variable and for which the credit union reserves the right to increase the APR (for future transactions). The first step for credit unions is to determine the type of APR that applies to its credit cards. This is necessary in order to determine if its advertisements, disclosures and - just as importantly - its procedures are compliant.
Restrictions on Using "Fixed"
Section 1026.16(f) of Regulation Z contains the restriction on using the term "fixed" to describe a credit card APR. Specifically, if a credit union uses the term "fixed" in an advertisement without including a time period the APR on the credit card account cannot increase. In other words, if your advertisement states that your credit union has a "Fixed 8.99% APR" credit card - the credit union must continue to honor that 8.99% APR for as long as the account is opened.
Everyone understands how a mortgage rate that is Fixed for 30 years works. When your credit union discloses a "Fixed 8.99% APR" without including a time period, your ability to increase the APR on that credit card account is removed. Rather than a loan for 30 years, your APR is "fixed" for as long as the member keeps the credit card account open (there are also restrictions that apply when a member moves to a new credit card at the CU).
The Alternative: Non-Variable
If your credit union does not want to offer variable accounts, what are your options? The best approach is to offer "non-variable" rate credit cards. With a non-variable APR (such as "8.99% APR"), the credit union has made no promises regarding how long the APR will remain at 8.99% APR. Thus, the credit union has the ability to increase the APR - for future transactions - by following the formal "change-in-terms" process under Regulation Z.
Variable-Rate Credit Cards
Many credit unions offer variable-rate credit cards to their members. Variable-rate credit cards have the benefit of an APR that increases (or decreases) as the underlying index adjusts. A variable-rate credit card includes an "index" and a "margin" that, together, make up the credit card APR. A change in the underlying index does not require the credit union to notify members (as the index was disclosed up front to the members). However, a change in the margin would trigger a formal change-in-terms process.
Conclusion
There is no "right" answer to which type of credit card product to offer to your members. However, it is incredibly important to understand the restrictions and limitations that are attached to each type. A credit union's decision to offer a particular type - such as a "Fixed" rate card - should be a conscious decision. Further, any changes from one type of credit card APR to another should be conducted very carefully as additional restrictions impact those transitions.
Additional Information
Howard & Howard Attorneys can help your credit union navigate these complex issues and develop a consistent plan for your credit card products. If you have any questions or would like additional information, please contact Steve Van Beek.
