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I was presenting this week at the Card Analysis Solutions School of Credit Card Program Management and the issue of reevaluations of rate increases came up. Wait, let’s back up a bit. I would highly recommend the School of Credit Card Program Management for any credit union looking to get into (or back into) the credit card market or to simply improve the performance of their current credit card portfolio. My short presentation aside, it was a very valuable program. It appeared to me that the credit unions attending left with more than just a bunch of good ideas-they left with valuable data and a plan to implement those ideas.
Ok, now back to reevaluations of rate increases. This is one of the more onerous and perplexing CARD Act additions to Reg Z and often engenders some confusion. The rule can be found here, and states, in sum, that anytime a card issuer increases a credit card APR it must reevaluate that increase every six months and decrease the APR if the factors considered in the reevaluation so warrant. Let’s break this rule down a bit.
To what type of APR increases does it apply? Any change based on the consumer’s credit risk or other circustances specific to that consumer and changes based on aggregate conditions or data, such as market conditions or the issuer’s cost of funds. Additionally, if a 45 day change in terms notice of the APR increase is required, then the reevaluation reg applies.
What are the exceptions?
-Temporary rates (you have to disclose the rate that will apply after the temporary rate, you can’t reserve the right to increase generally).
-Variable rates.
-Workout agreements.
-Reversion to previous rate under the Service Member Civil Relief Act.
-Increases due to delinquency. Note, however, that if the member makes 6 consecutive required minimum payments under 1026.55(b)(4)(ii) and the rate is not reduced, then the reevaluation reg is triggered.
-Acquired portfolio. If you acquire a portfolio and review all acquired accounts within 6 months, essentially re-scoring everyone, then you do not have to reevaluate for those that are increased. You get a fresh start.
When does the obligation to review every six months end? when you reduce the APR to what is was before the increase, or lower. If the previous rate was variable, when you reduce the rate to the current rate based on the previously used index and margin.
What if I don’t reduce the APR? Then the obligation to reevaluate goes on FOREVER.
What if I go from a variable rate to a lower fixed. If down the road, say, in five years, the previously used variable rate dips below the fixed, I don’t have to start reevaluating then, right? That would be crazy! That would be crazy, but yes, you have to do that. A change from variable to fixed or vice versa does not trigger a reevaluation unless it results in an increase. That increase could happen at the time of the change, or in the case of a variable to fixed, at any time in the future. So if you go from variable to fixed, you need to somehow track that old variable rate in case it ever breaches the fixed rate.
What factors do I need to use in the reevaluation? Either those you used in raising the rates or the factors you currently use for determining APRs on similar accounts.
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