Risk Based Pricing - Disclosure Notice

Irene Bull, Lending Manager
Unit No. 1 Federal Credit Union
55 Stevens Street
P.O. Box 830
Lockport, NY 14095-0830

Re: Risk Based Pricing - Disclosure Notice

Dear Ms. Bull:

You have asked for a legal opinion on a "change of terms" notice your credit union, Unit No. 1 Federal Credit Union (the FCU), sent to members to advise them about a possible change in interest rates on an open end line of credit. The notice informed members that future advances would be at a rate based on their financial history and could fall within a range of interest rates. Specifically, you are interested in determining whether the notice complies with the Truth in Lending Act and Regulation Z. 15 U.S.C. §1607;12 C.F.R. §226. The notice was not sufficient and the FCU should send a revised notice.

The FCU uses risk based pricing for its open end line of credit program. Members may receive an advance on their line of credit by telephone. Each time funds are advanced, a new risk analysis is performed. The member does not receive notice of the actual interest rate, which depends on the member's score, until after the funds are advanced. Members received a notice prior to this program going into effect stating that the interest rate on future advances could be between 9.995% and 16.5% depending on the member's financial history.

We contacted the Federal Reserve Board, the agency responsible for interpreting the Truth in Lending Act, to determine if the general notice sent to members meets the requirements of Regulation Z. Regulation Z requires that the member be given 15 days advance notice prior to changing the interest rate. 12 C.F.R. §226.9(c). We were advised that the specific 15-day notice requirement can only be waived if the original notice specifically sets forth the formula for the new rate. In other words, for the notice to be sufficient in this case, it needs to inform the member, not just of the range of interest rates, but how the rate will be calculated. A general statement saying the rate could be between 9.995% and 16.5% does not meet this requirement. The original notice Irene Bull must disclose the formula used to determine the new rate under the FCU's risk based pricing program. We suggest that the FCU consult with its legal counsel about a revised notice that should be sent to members. If you have further questions, you or your legal counsel may want to contact the Federal Reserve Board directly.