Card Issuers Adapt to New Fed Rule on Floor Rates

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Thursday, Feb 4, 2010 •  Posted by


On January 12th, the Federal Reserve Board approved a final rule amending Regulation Z (Truth in Lending) to “protect consumers who use credit cards from a number of costly practices.” The majority of the final rule, implementing the CARD Act of 2009, becomes effective February 22, 2010.

One provision of the rule prohibits credit card issuers from increasing rates on new charges and existing balances. However, variable rate cards are excluded from this rule which means the APR on variable rate cards, such as those linked to the Prime rate, will be permitted to increase when the Prime rate increases.

Some of the details regarding this exception for variable rate cards have been known for sometime and, as a result, the majority of direct mail offers for new credit cards now promote variable go-to purchase APRs tied to the Prime rate.

The final rule has surprised a number of issuers by adding a requirement that variable rate APRs must be allowed to decrease as well as increase. This impacts those issuers promoting variable rate plans with a “floor” or minimum rate whereby an APR can fluctuate, based on Prime, but can’t be reduced any lower than a specified rate.

Only a handful of issuers utilize a floor rate pricing strategy. Some of the larger proponents of floor rate pricing in 2009 included U.S. Bank, via its Elan Financial Services unit, HSBC, GE, USAA and Wells Fargo/Wachovia.

Each of these issuers promote a variable go-to purchase APR that varies with the Prime rate. In each case, the minimum rate matches the promoted go-to APR. The most frequently mailed offer in 2009 was for HSBC’s Platinum MasterCard promoting a “Variable Customary APR” that matched the “Minimum Customary APR.”

Issuers with floor rate strategies are likely to have their CARD Act compliance plans in place ahead of the February 22nd deadline. They will now have to adapt those plans to accommodate the new rule. The most likely outcome is that the change will drive further increases to go-to purchase APRs as issuers look cover any risk associated with dropping the minimum rate.