I just received notice from our vendor stating, if a variable rate LOC has a lifetime floor, then Reg. Z concludes that the index is "under the creditors control" and a change in terms notice would be required anytime the rate increases.(this is NOT have CC). I believe they stated this was part of the 2/22/10 requirements.

I cannot find this anywhere within Reg. Z, please help clerify

? I thought it was just for credit cards, since it is under 226.55

This is what i received

Section 1
Variable rate overdraft and personal line of credit plans with a lifetime interest rate floor

A. In general, advance written notice of a rate increase is required under Section 226.9(c). However, advance written notice is not required if the rate increase is based on an index that is not under the control of the creditor and that is available to the general public.

As of 2/22/2010, if the variable rate plan is subject to a floor, the index is considered to be “under the creditor’s control”. Therefore, as of 2/22/2010, if the variable rate overdraft protection plan or personal line of credit plan includes a lifetime interest rate floor, advance written notice of a rate increase is required under Section 226.9(c).

B. Special rules for personal lines of credit accessed by a card with floor (Section 226.55)
As of 2/22/2010, additional rate increase restrictions apply to a “credit card account under an open-end (not home-secured) consumer credit plan” which is defined as any open-end credit account accessed by a credit card, except:
(A) A credit card that accesses a home-equity plan subject to the requirements of Section 226.5b; or
(B) An overdraft line of credit accessed by a debit card.

However, the Section 226.55 restrictions do not apply if the rate increase is based on an index that is not under the control of the creditor and that is available to the general public.

The restrictions do apply to a variable rate personal line of credit accessed by a card with a lifetime interest rate floor. In general, Section 226.55 does not permit an increase in APR before the end of the first year and does not permit a rate increase to be applied to an existing balance. After the account has been opened for at least one year, the creditor may increase the APR with respect to new transactions after complying with the change-in-terms notice provisions of Section 226.9(c). (Note that the prohibition on APR increases during the first year after account opening applies only to accounts opened on or after 2/22/2010.)

I went through this about 3 weeks ago so I will share what I learned.

226.9(c)(2)(v)(c)talks about variable rates. Comment 11 in the final rule refers the reader to 226.55(b)(2)comment(2)to clarify what is considered "not under the control of a creditor". Even though 226.55 might not apply to your account the clarification does apply to the variable rate for the account subject to section 226.9 (c)(2)(v).
Bottom line is dropping the floor on the variable rate accounts is much easier than trying to meet all the change in term requirements for credit cards or any of the open end loans not home secured.


Nice of the government to make the rules so clear- WAIT nothing in this REG is really clear!

Thanks for the information, i will continue to look into it

226.9(C)(2)(v)(C) is about cr card agreement disclosure changes.
Comment 11 refers to cr cards also. Comment 11 states "see comment 55(b)(2)-2 for guidance on when an index is deemed to be under the card issuer's control".

ahou, I'm not sure that's correct. The BOL webinar about the open-end changes had a chart that contained a section-by-section reference that shows whether each section of the reg is applicable to all open-end credit, all open-end (not home-secured), or just credit cards. For section 226.9(c)(2), it says it applies to all open-end (not home-secured). Also, this is from the beginning of that section of the reg (emphasis mine):

You are correct, it starts off that way until you get to 226.9(c)(2)(v)(C) it states:
(C) When the change is an increase in a variable annual percentage rate in accordance with a credit card 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 or

FWIW, I've talked to my state bankers association and their opinion is that this requirement/restriction relative to floors is specific to credit cards only, not all open end non home secured. They said this interpretation to apply the requirement to open end non credit card is coming from one or more forms vendors but they do not agree.

ahou, thank you so much for pointing that out. I've read this reg so many times that I guess at some point I read what I think it says - which may or may not be what it actually says. I'm so glad I was wrong on this one.

Good discussion, thank you for the posts. I am in agreement with Ahou, everything that I have read in the federal register specifically states "credit card issuers" or "credit agreement".

I am going to follow the exemption and not provide the 45-day notice because the floor does not pertain to the

This is from FIS (formerly Metavante/Kirchman) so it sounds to me like it might apply to unsecured personal lines of credit - is anyone else dropping their floors?

Change in Terms for Rate Changes

Another major issue that has arisen for overdraft lines of credit, as well as other personal lines, is the change in terms notice requirement. Under Section 226.9(c)(2), a creditor is required to provide a borrower with 45 days’ advance notice when making a significant change in the terms of the plan. A significant change includes increases (but not decreases) to the APR. Despite the general rule, however, the 45-day notice is not required when the change is an increase in a variable APR that is based on changes in an index that is beyond the creditor’s control. In other words, if the creditor can change the rate as it sees fit, it must warn the customer. However, if the rate changes based on a change in the underlying index, and variable rate information was properly disclosed up front, the customer has already been warned and does not need an additional notice. Makes sense, right?

But this is where it gets hairy. The commentary to Section 226.9(c)(2) refers you to the commentary to Section 226.55(b)(2)-2 for guidance on determining whether an index is within a creditor’s control. The commentary to Section 226.55 states:

55(b)(2) Variable rate exception.

…

2. Index not under card issuer’s control. A card issuer may increase a variable annual percentage rate pursuant to § 226.55(b)(2) only if the increase is based on an index or indices outside the card issuer’s control. For purposes of § 226.55(b)(2), an index is under the card issuer’s control if:

i. The index is the card issuer’s own prime rate or cost of funds. A card issuer is permitted, however, to use a published prime rate, such as that in the Wall Street Journal, even if the card issuer’s own prime rate is one of several rates used to establish the published rate.

ii. The variable rate is subject to a fixed minimum rate or similar requirement that does not permit the variable rate to decrease consistent with reductions in the index. A card issuer is permitted, however, to establish a fixed maximum rate that does not permit the variable rate to increase consistent with increases in an index. For example, assume that, under the terms of an account, a variable rate will be adjusted monthly by adding a margin of 5 percentage points to a publicly-available index. When the account is opened, the index is 10% and therefore the variable rate is 15%. If the terms of the account provide that the variable rate will not decrease below 15% even if the index decreases below 10%, the card issuer cannot increase that rate pursuant to § 226.55(b)(2). However, § 226.55(b)(2) does not prohibit the card issuer from providing in the terms of the account that the variable rate will not increase above a certain amount (such as 20%).

Section 226.55 only applies to credit cards, and I mean actual credit cards. However, due to the cross-reference from the Section 226.9 commentary, this portion of the commentary to Section 226.55 also applies to non-credit card, non-home secured open end lines of credit. As a result, overdraft lines of credit and other personal, non-home secured lines of credit are subject to the 45-day change in terms notice requirement when the rate is changing based on the index but the line of credit has a floor rate.

So what does this mean for home equity lines of credit? HELOCs are not allowed to have a variable rate that is based on an index that is within the creditor’s control. However, it is very common for a creditor to have a floor in place. Are HELOCs with floor rates now in violation of Regulation Z? According to the Federal Reserve, no. It’s clearly inconsistent to say that floor rates are a problem for non-home secured open end lines of credit but not for HELOCs. However, that’s the Fed’s position today. According to the Fed, it plans to issue clarifications to the Regulation Z revisions for the Credit CARD Act (no kidding!) in the Fall, and it may provide explicit guidance on HELOC floors at that time.

Coping with Regulation Z Revisions

With these new, confusing, and frankly unanticipated ramifications of the Regulation Z revisions, what is a lender to do? These are some steps that we recommend:

Take another look at your overdraft line of credit disclosures and the disclosure requirements under Regulation Z. If the requirement applies to “credit cards” but is not limited to “credit cards under an open end (not home secured) credit plan,” then add the requirement to your overdraft line of credit disclosures. For example, the “Credit Card Tips” box on the account opening disclosures is a requirement that applies to “credit cards.” The Federal Reserve agrees that the language doesn’t really make sense for overdraft lines of credit. However, based on their new use of the term “credit card,” they believe that the disclosure should be included. Since most lenders didn’t include such language in their disclosures, this would be a good time to go back and re-review your documents.

Consider eliminating your floor rate. Since the floor rate on a non-credit card, non-home secured open end line of credit is what causes the rate to be viewed as subject to lender’s control, get rid of it. Concerned about little things like profitability or safety and soundness? Why not increase your margin to compensate for the loss of a floor? Eliminating your floor rate and increasing your margin will simultaneously take your rate outside of your control (so you won’t have to provide a 45-day notice in order to increase the rate when the index changes) and prevent your line from becoming unprofitable. Of course, making more money from loans to consumers probably isn’t exactly what the Fed had in mind when they put these rules in place. But when we asked them about whether they would consider this approach to be evasion, they not only said it wasn’t evasion but also that they expected lenders to do just that! If you decide to take this approach, keep in mind that, ironically, you will need to use a 45-day change in terms notice if you plan to make these changes to your lines of credit.

If you retain a floor rate, get ready for lots of 45-day notices. If you decide to keep a floor rate in place on your non-credit card, non-home secured open end lines of credit, then you will be required to provide a 45-day notice prior to increasing the rate. As previously mentioned, the 45-day notice is not required if the rate is going down. And yes, believe it or not, the Fed indicated to us that this 45-day notice requirement applies every time your rate increases, which will be a logistical nightmare if your rate changes frequently.

Ignore any floor rates that you have on HELOCs. Despite the fact that the rule may change in the future, it hasn’t changed for HELOCs yet. As a result, you won’t have to worry about your floor rate running afoul of the Regulation Z requirement to base variable rates on an index out of your control.

Everyone - it's in PROPOSED rules issued 10/19/10, that just had their comment period end 1/3/11. A new proposed OSC to 226.9c extends the floor rate/advance notice requirements to all open-end not secured by real estate. Time will tell whether that proposal is finalized....

So right now no issues with a consumer non real estate (RLOC and/or close ended) w variable rate? And what if amount is +/- $25,000?? I am going in circles......

State usury might come into play. The $25,000 limit is going to $50,000 shortly.