Oct 1 - "Clarifications of Rules for Open-End..."

Our bank has open-end variable rate (tied to an independent index) non-HELOC credits with floors. Since we have a floor the index is now considered to be under the bank's control effective Oct. 1, 2011. My interpretation is that if we want to avoid change in terms notices every time the rate changes we need to amend the terms of those loan agreements to eliminate the floors. It also appears we need to issue a change in terms notice when we amend the loan agreements to eliminate the floor. Am I correct, and does this change in terms notice trigger the right to opt out.

Bump. I have the same question.

Here are 2 articles I've found helpful in trying to figure out these changes going into effect Oct. 1:

http://www.creditunionmagazine.com/articles/reg-z-rate-changes

http://www.creditunionmagazine.com/articles/the-14day-question

I'm not sure about triggering the right to opt-out...

Thanks for the links!

Thanks for the links.
Here's a new twist. What happens if the index rate increases but it does not bring the rate above the floor on the loan. Is a notice required since the rate to the borrower is still the floor rate. Does it only change when the increase in the index causes the rate to go above the floor and any subsequent increases?

My apologies, but another twist. This relates to my previous question about a rate increase that does not bring the customer's effective rate above the floor. The loan documents can typically refer to the customer's rate or APR being prime plus a margin of "x"% with a floor of 7.50%. Since the regulation refers to increases in the "APR" and the customer's "APR" did increase with an increase in prime (it just did not increase above the floor). So what happens in that instance, notice or no notice. I know I'm splitting hairs, but I think it is a legitimate question.

Curious as to whether others are going to modify their LOC's to remove floors to avoid the 45-day prior notice requirement (anybody else think this is exactly the outcome that the Feds wanted?)...

The 14 day notice only applies to those open end loans with no grace period, correct?

No, the 14 day requirement applies even if there's no grace period. See 226.5(b)(2)(ii)(B)(2).

Thank you. One more question, this does not apply to home secured open end credit, right? In reading, it looks like home secured is still covered under 226.5b.

Does the employee discount disclosure change only apply to disclounted credit cards or other open end products and if so - does that mean HELOC's as well as out other lines.

There are specific requirements for HELOCs in 226.5b, but these general requirements apply to all open-end credit plans, including HELOCS.

Which change are you guys referring to? I am reading RIN No. 7100-AD55 and from what I can tell, it seems to cover only open end accounts accessed by a card (unless it can be accessed to purchase goods or services.) Am I missing something?

Apparently, I've missed something too...

I was responding to lmh0104's questions about the periodic statement requirements in 226.5 - at least I thought that's what the questions pertained to since there was a reference to 14 days. Maybe I misunderstood the questions. If so, I apologize.

Well, the original poster's question and Nashville Gal's links are talking about the CARD Act and its amendments to Reg Z (I think). But I am not seeing where the changes affect anything other than credit cards unless you offer a LOC that can be drawn upon directly for purchases or services (p. 6 of 323).

Based on the posts that follow those comments, I am thinking I am missing something or maybe everyone is referring to another change? There have been so many, I just searched for effective date October 1, 2011.

Maybe this change in definitions will help:

Effective 10/1/11 and with compliance optional before that date, paragraph 226.2(a)(15)(ii) is revised to read as follows:

(ii) Credit card account under an open-end (not home-secured) consumer credit plan means any open-end credit account that is accessed by a credit card, except:

(A) A home-equity plan subject to the requirements of § 226.5b that is accessed by a credit card; or

(B) An overdraft line of credit accessed by a debit card or an account number.

ETA: But it does look like some parts affect OE LOC's regardless of method of access.

I think the timing requirements for periodic statements apply to all open-end credit. There are two separate sections, one that applies to "credit card accounts under an open-end (not home-secured) consumer credit plan" and another that applies to "open-end consumer credit plans." The requirements for each type of plan differ, but I think all types of open-end credit are covered in one section or the other. I could definitely be wrong though.

Take a look at 226.5 in Alphabet Soup. Also, read the second article posted by NashvilleGal above.

Thanks all! I guess I should have read the whole thing not just the first few pages. I now have five different colored highlighters on my desk and I am pouring through this! Looks like a fun weekend for me!

Just to make sure there's no confusion...non-home secured ODP lines (as well as personal lines of credit) are subject to the 45-day notice of change in terms if you have a floor rate and the rate increases above the floor, regardless of the method of access.

The right to reject a change in account terms pertains solely to a credit card account under an open-end (not home secured) consumer credit plan. This term is defined under Regulation Z as follows:

A credit card account under an open-end (not home-secured) consumer credit plan means 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 §226.5b; or

(B) An overdraft line of credit accessed by a debit card or account number.

The discussion on the right to reject only pertaining to credit cards is discussed at pages 22964 and 22965 under “Right to Reject”.

Bringing this up again:

Original poster says "Since we have a floor the index is now considered to be under the bank's control effective Oct. 1, 2011"

Is the reason because of the floor or is it because it is in an independent index? What is an independent index anyway?

The floor is not considered an index. The index (i.e. WSJ Prime) is considered the index...it is independent because the bank is not in control of it. The floor, however, IS under the bank's control. It's the mere fact that the floor is under the bank's control that created this whole mess.

OK - I get it. I just misread his/her first sentence. So the fact the non-HELOC LOC has a floor puts it under our control and requires a 45 day advance notice to increase (or decreases?)the rate, so some banks are eliminating the floor, right?

I am sorry I am so dense on this, but I am coming into it late.

No problem.....it is only necessary to send them a 45-day notice if the rate is increasing over the floor.

Some are removing the floor...some are leaving the floor and will just send the 45-day notices (that's what we have opted to do). The only catch is...some of our lines have a rate change frequency of "daily"...some are "monthly". In order for it to work on our core (FiS Bankway) we will need to change the rate change frequency to every 45 days and code it as a Consumer ARL. The system will look at the rate every 45 days - if it is higher than the floor, it will generate a notice and increase the rate (in 45 days).

Thank you Many Hats! That helps a lot!

Clarifiying again, because I can't put a finger on it directly in the reg (and I'm being told we aren't doing anything unless the reg says we have to):

Personal open-ended lines of credit with variable rate and a floor are subject to the 45 day notice requirements even if they do not have access via card, is that correct?

No mention of access devices in this applicable section:

Effective 10/1/2011, with earlier compliance optional, paragraph (A) above is revised to read as follows:

(A) General. For plans other than home-equity plans subject to the requirements of § 226.5b, except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and (c)(2)(v) of this section, when a significant change in account terms as described in paragraph (c)(2)(ii) of this section is made, a creditor must provide a written notice of the change at least 45 days prior to the effective date of the change to each consumer who may be affected. The 45-day timing requirement does not apply if the consumer has agreed to a particular change as described in paragraph (c)(2)(i)(B) of this section; for such changes, notice must be given in accordance with the timing requirements of paragraph (c)(2)(i)(B) of this section. Increases in the rate applicable to a consumer’s account due to delinquency, default or as a penalty described in paragraph (g) of this section that are not due to a change in the contractual terms of the consumer’s account must be disclosed pursuant to paragraph (g) of this section instead of paragraph (c)(2) of this section.

Thanks!

Is the 45 day notice requirement the only requirement that will affect the personal open-end line of credits??? We already mail out our statements 21 days prior to pymt date. Late coming into this....from prior post I though these changes only affected credit cards...so I'm playing catch up.

Shea- there are changes to the location of certain disclosures in and below the table, changes to periodic statements (includes HELOCs) that have deferred interest, payments (conforming and non-conforming) and advertising.

I was like you and thought it affected only credit cards until I sat down and read the whole thing. Now are playing catch up too! You are NOT alone!

That's not wanted I wanted to hear Skidoo....but thank you for your help. I guess I need to get busy

I am having a real difficult time trying to figure out which rules all to what...We offer PLC and HELOC accounts but neither are accessed by a credit card. Sorry to seem dense, but is there an easy way to determine which rules apply?

IN case anyone else was thinking of a different kind of 'grace period', it helps to read the commentary.

Curiously, does anyone out there have a personal LOC that has the no-interest type grace period that isn't a credit card?

Grace periods.

i. Definition of grace period. For purposes of § 226.5(b)(2)(ii)(B), “grace period” means a period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate. A deferred interest or similar promotional program under which the consumer is not obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time is not a grace period for purposes of § 226.5(b)(2)(ii)(B). Similarly, a period following the payment due date during which a late payment fee will not be imposed is not a grace period for purposes of § 226.5(b)(2)(ii)(B). See comments 7(b)(11)-1, 7(b)(11)-2, and 54(a)(1)-2.

ii. Applicability of § 226.5(b)(2)(ii)(B)(1). Section 226.5(b)(2)(ii)(B)(1) applies if an account is eligible for a grace period when the periodic statement is mailed or delivered. Section 226.5(b)(2)(ii)(B)(1) does not require the creditor to provide a grace period or prohibit the creditor from placing limitations and conditions on a grace period to the extent consistent with § 226.5(b)(2)(ii)(B) and § 226.54. See comment 54(a)(1)-1. Furthermore, the prohibition in § 226.5(b)(2)(ii)(B)(1)(ii) applies only during the 21-day period following mailing or delivery of the periodic statement and applies only when the creditor receives a payment within that 21-day period that satisfies the terms of the grace period.

iii. Example. Assume that the billing cycles for an account begin on the first day of the month and end on the last day of the month and that the payment due date for the account is the twenty-fifth of the month. Assume also that, under the terms of the account, the balance at the end of a billing cycle must be paid in full by the following payment due date in order for the account to remain eligible for the grace period. At the end of the April billing cycle, the balance on the account is $500. The grace period applies to the $500 balance because the balance for the March billing cycle was paid in full on April 25. Accordingly, § 226.5(b)(2)(ii)(B)(1)(i) requires the creditor to have reasonable procedures designed to ensure that the periodic statement reflecting the $500 balance is mailed or delivered on or before May 4. Furthermore, § 226.5(b)(2)(ii)(B)(1)(ii) requires the creditor to have reasonable procedures designed to ensure that the creditor does not impose finance charges as a result of the loss of the grace period if a $500 payment is received on or before May 25. However, if the creditor receives a payment of $300 on April 25, § 226.5(b)(2)(ii)(B)(1)(ii) would not prohibit the creditor from imposing finance charges as a result of the loss of the grace period (to the extent permitted by § 226.54).

In my reading of the new rule, I pulled out the following key elements that my bank who does not offer credit cards would have to comply with:

1) Verify if any open-end credit product is designed in a way that a customer could simply provide the loan account number and make a purchase. At our bank, the loan has to be connected to a checking account, so the actual loan account number cannot make purchases; therefore, it is not a credit card.

2) Verify that all open-end credit plans get their periodic statement at least 14 days in advance.

3) If we offer a discounted rate to employees on OD lines and personal lines, if the rate changes after they are no longer employed at the bank we need to give the 45 day notice of the rate change. We would also have to adjust our initial disclosures as additional information would have to appear on the first page of the note. We have no other preferential rates.

4) If we have any variable rate personal lines of credit or OD lines with a floor, we would have to give the customer a 45 day notice of the change.

Am I missing anything major here? We are your typical community bank that offers pretty standard products.

Thanks

Don't the periodic statement changes just apply to those types of open end credit(not home-secured) that is accessible by a credit card??

There are no changes that we need to make to our HELOC or other Open End Lines of Credit periodic statements, right??

This stuff is driving me nuts!!

That's the way I read it, but I'm not positive since others seem to have a different opinion.

I'm basing the 14 day requirment applying to all open-end on 226.5(b)(2)(ii)(1) which is on page 23006 of the Federal Register version. Also, there is discussion on page 22950 of the federal register in the section by section analysis that leads me to this as well.

We had switched everything to 21 days a few years back before that techincal revision came out and never changed it back.

What a mess.

I don't think you have an issue leaving it at 21. Seems many banks changed it back then and left it and will continue to leave it. You just couldn't bill sooner than 14.

notuntermywatch, I agree with you that the 14-day requirement does apply to all open-end. I apologize, I was thinking about all the new statement requirements for credit cards having to do with formatting, etc.

notundermywatch and everyone else, I thank you for your reply's. This has been very helpful.

Okay...sorry but I am still confused. If our bank doesn't offer credit card/debit card access to any of our lines of credit, do these changes apply to us?

I believe that you still would have to look into items 2 - 4 that I mentioned above (regardless of access method). See the following pages in the federal register where there is discussion regarding these items. The link to the FR is here. http://edocket.access.gpo.gov/2011/pdf/2011-8843.pdf

14 day requirement page 22950
Employee rates page 22957
Rate change for lines with a floor page 22969

I agree. That's what I'm seeing so far...maybe along with 'back-up'plans to ensure statements are mailed timely in the event of equipment failure.

Another question, do the provisions that state that an account that can be accessed by the account number to make purchases apply to HELOC's. Sooo confusing! It seems like the definition of credit card excludes HELOC's.

Look to your definition. One of the exceptions is home-secured LOC's accessed by a credit card...you need to look to 5b for your specific HELOC requiremetns.

This is my understanding as well. My question is the following: We have maybe 3-4 open-end LOC (not home secured. They are fixed rate. Statements are mailed 10 days before the due date and 21 days before the end of the grace period (meaning no late fee is charged). Unlike a credit card account we charge interest on any outstanding balance so our grace period would still allow for the charge of interest and in my opnion is not a grace period as defined in Reg Z. I origianlly thought we were okay becasue the statement goes out 21 days before the end of our grace period, since our definiation of grace period doesn't align with Reg z's I believe we need to mail statements 14 days prior to the payment due date. Can anyone else offer an opnion?

Agree. 14 days minimum regardless.

If your lines of credit that are subject to the new 45-day advance notice requirements are already at the floor rate (because your index plus adjuster is low), I would recommend you do a little analysis on what removing the floor will do to your interest income numbers. I thought removing the floor was the easy answer but upon further review it would be a big cut to our current interest income.

On another note, I sent an email to the ABA with some questions and I have been told that the 45-day notice is required whenever there is a change to the index even if the customer's rate is not changing because they are sitting at the floor. In one of the posts I read the notice was only required if the rate changed above the floor. I don't think that is the case. Based on what the ABA says, a notice is required whenever the index changes.

In plain English, what product is this section of the commentary referring to:

However, if the account number can also access the line of credit to purchase goods or services (such as an account number that can be used to purchase goods or services on the Internet), the account number is a credit card for purposes of § 226.2(a)(15)(i), regardless of whether the creditor treats such transactions as purchases, cash advances, or some other type of transaction.

Are they trying to say if you have a personal LOC that can be accessed with checks it is a credit card for these purposes? On the other hand, if you draw on a PLOC and it dumps the money into your personal checking account it is NOT a credit card- is that what they are trying to get at?

On page 22952 of the final rule, as it pertains to loans with automatic payments, footnote (3) says, "Similar to employee preferential rates, the Board notes that 45 days' advance notice is required pursuant to 226.9(g) prior to imposition of the higher rate when the consumer ceases to meet the conditions for the preferential rates." The final rule also says that it does not consider this a "penalty" like it does the employee discount so it does not appear in the table. When we give the 45-days notice then, would we use a Change in Terms Notice (rather than a Penalty Rate Notice like we do for termination of employee rates)?

Was this ever resolved? In other words, do we need to send the notice if the index changes, but the rate is still at the floor?

I know there is no such thing as a dumb question.... but, .....must all existing customers (with covered lines, etc.) be notified of the 45-day rate change rules? In other words, is it a true statement that your existing accounts are NOT grandfathered in and changes will likely have to be made and communicated to them?

Bump.

To get back to SkiDoos question, I have also been trying to understand this language. I don't think it means the typical Overdraft LOC that is linked to checking accounts and transfers money when the account is overdrawn due to purchases, etc.,this is excluded in 2(a)(15)(ii)(B); however, what does it mean? Can someone give a better example than the regulation did?

I know I have PLOC's that apply to this rule. I am running into a problem with my core software provider. 1) I am being told they don't have a code to delay a rate change for 45 days after the index changes (some of the current choices include daily, monthly, quarterly). I am told they are looking into it. 2) this is my biggest worry - the code controls both increases and decreases - meaning both have to change on the same scheduled i.e. daily, monthly, in 45 days (once they come up with a code for that). Since the law doesn't require a delay for decreases, my note contract doesn't allow language to delay a decrease either - the forms vendor indicated they are making no changes (I realize if I decide to delay decreases too I will have to tell my current clients and figure out a way to change my contract language going forward). The bottom line is it doesn't appear my system will allow for a rate increase in 45 days and a rate decrease on the same day - the time periods have to match. any sugggestions? I hope I am making sense.

Travelgirl - our vendor is not providing a solution for this either. They said there just aren't enough banks demanding it, so we had to go to a manual process. When the rate changes we manually create the notice, diary out 45 days to change the rate. It is a pain in the butt, but what can you do?

TravelGirl and SkiDoo,

Who are your core vendors? We are a ITI/Fiserv shop.

We are ITI/FiServ - my Loan Ops manager has been in touch with them and they have indicated they do not have a 45-day choice for the "Rate Change Frequency" code. Another peer uses them too and they told her the same thing and that this was "news" to them. YIKES!

Our forms vendor is Wolters Kluwer - we use ARTA Lending

Same as Travelgirl - got the same response from FiServ.

Bumping this question again - Was this ever resolved? Does anyone know if CIT notices need to be send if the index changes, but the rate is still at the floor?

I asked this question directly to Nessa Feddis at the ABA via email and her response was that it's not a matter of if the floor comes into play when there is a change in the index, it's a matter that the floor exists - so you need to give the CIT notice even if the rate is really not changing because there is a floor.

But that doesn't make sense....why would you give a CIT if nothing is changing?

FIS Regulatory Services contacted the Fed's and they indicated that it was only req'd if the rate changes above the floor rate.

I agree that it doesn't make any sense. There is no "term" that is changing. The borrower's rate isn't increasing, the index itself hasn't changed, etc. If anything, it teaches the borrower to ignore Change in Terms notices because if it sits on the floor for a long time and nothing ever changes but they get these CIT notices, why pay attention to them?

It doesn't make much sense to me either but I also spoke to our local FDIC examiner and he agreed - CIT is needed.

Any of the moderator's want to weigh in? If there were a way out (short of removing the floors from these loans which we won't do because rates are so low we'd be cutting our interest income too much) I'd do it.

Afer reading this post, I am glad we have fixed rate open ends lines of credit.

Our bank has floors on our Prime-based LOC's. We have decided that we're going to remove our floors, but we're going to sit tight and wait until it looks like an increase in Prime is inevitable or at least within the foreseeable future. It may be a little risky, as sometimes rate increases can come unexpectedly, but management feels there is no good reason to take the floors off now and cut our interest income, as most everyone is in agreement that no rate increases are forecast until late 2012 at the earliest.

Since we have floors on our variable rate LOCs I realize we have to send 45 day notices prior to rate changes. Do we also need to send a change in terms notice to all current customers saying rates will change 45 days following a change in the index rather than next day?

We are sending the change in terms notice to LOC customers that have an agreement that states changes to the index will be next day. We need to clarify it will now be 45-days after the change to the index rate. Can't wait until WSJP starts changing every couple of weeks. Who can spell c-o-n-f-u-s-i-n-g to the customer?
Also, with employees DDA/LOCs we are sending a change in terms since their current LOC agreement indicates their preferred rate will increase as soon as they are no longer employed by the Bank. The change in terms for this group will be that in the event they are no longer employed at the bank, their preferred rate will increase 45-days after they leave the employment of the bank, not the next day.