Increase in Prime Interest Rate and What it Means for Variable Rate Products

On March 16, the Federal Reserve Board (FRB) approved the first rate increase in more than three years. The 25-basis point increase is the first of several that are planned by the FRB over the next couple of years.

The increase in the prime interest rate may affect the rates that credit unions charge on their variable rate loans and lines of credit and may trigger additional disclosures under certain conditions.

The prime rate used by many credit unions is tied to the Federal Funds Target Rate, which is set by a committee within the Federal Reserve System called the Federal Open Market Committee. When the Federal Funds Target Rate changes, the Wall Street Journal (WSJ) Prime Rate will also change. The WSJ prime rate typically is 3% higher than the Federal Funds Target Rate. Since most credit unions base their index on the WSJ prime rate, an increase in the WSJ prime rate will increase a credit union’s variable-rate index.

The increase in the variable-rate index impacts various credit products differently. The focus will be on:

  • Variable-rate open-end lines of credit;
  • Non-variable rate open-end lines of credit;
  • Adjustable-rate mortgages (ARMs)

Variable-Rate Open-End Lines of Credit

These products include credit cards, personal lines of credit, and Home Equity Lines of Credit (HELOCs). If terms of the variable-rate accounts are properly disclosed in the account opening disclosures and the rate is based on a publicly available index that is not under the control of the lender, then a rate increase in the index (WSJ prime rate) would not trigger the 45-day advance notice of change in terms.

For the variable-rate exception to the advance notice requirement to apply, the rate increase must be based on a change to the index, not a change to the margin.

Because the credit union has already disclosed how the loan interest rate changes with changes to the index or prime rate, there is no conscious decision by the credit union to change or increase the account rate when the prime rate increases—that relationship is already dictated by the disclosures in the account opening document or loan agreement. Therefore, the credit union will not be required to provide any advance notice of the rate change.

There are certain circumstances when the index would be considered under the credit union’s control:

  • When there is a floor rate for the account that does not permit the variable rate to decrease consistently with the index change; or
  • When the index is based on the credit union’s own prime rate or cost of funds.

Under these circumstances, the change in a rate would be treated as a non-variable rate open-end line of credit.

Non-Variable Rate Open-End Line of Credit

The products could also include credit cards, personal lines of credit, or HELOCs. These accounts are not considered variable rate products since the account opening disclosures do not contain the variable-rate disclosures or the index used is considered to be under the credit union’s control. Regulation Z requires a 45-day advance notice of change in terms before the interest rate for these products may be increased.

A rate change for these types of products would not be automatic since the credit union can only apply the increased rate after providing the 45-day advance notice of change in terms that disclose the new interest rate (APR) and the effective date of the change.

Adjustable-Rate Mortgages (ARMs)

Regulation Z requires lenders to provide certain disclosures in connection with interest rate increases for ARMs that result in a corresponding change in the payment amount. The disclosures must be provided to consumers at least 60, but no more than 120, days before the first payment at the adjusted level is due. However, for ARMs with uniformly scheduled rate adjustments, such as an adjustment every 60 days or more frequently, the credit union must provide disclosures at least 25 days but no more than 120 days before the first payment at the adjusted level is due.

Question of the Week

Q. Regarding a Uniform Transfers to Minors Account (UTMA), when does the minor gain access to the funds? At 18? 21? 25?

A. The first thing to know is that it is up to the custodian to transfer the funds, not the credit union. If the custodian fails to transfer the property, the minor needs to petition the court to direct the custodian to turn over the property, not the credit union.

In Washington, the custodian of a UTMA should transfer the funds to the minor or the minor’s estate upon the happening of a specific occurrence. If the UTMA was created through a gift, or specifically called out in a will or trust, the transfer should occur when the minor reaches 21 years of age. If, on the other hand, the UTMA was created because of the decision of someone acting as a fiduciary (like a personal representative) or the decision of an obligor (a person who owes a liquidated debt to a minor), the transfer should occur when the minor reaches 18 years of age. Lastly, the transfer should occur upon the death of the minor if not before (meaning that the minor’s heirs will inherit the property outright, not subject to the custodian’s control).

In addition, when the account is opened, the person giving the money can extend the custodianship so that the minor does not have direct access to the funds until he or she reaches 25 years of age (or upon death), with a few exceptions. First, an extension of the custodianship is valid only if the transfer creating custodianship is made on or after July 1, 2007. Further, an extension is not possible if the UTMA is created by a will or trust that specifically provides otherwise. If the UTMA was created by an obligor, the person nominating the custodian gets to choose to extend the custodianship, not the obligor. If there is no custodian, the court establishing the custodianship may extend the custodianship if it determines that doing so would not be contrary to the minor’s interest.

For Oregon UTMA accounts, the custodian should transfer the account to the minor when the beneficiary’s attainment of 21 years of age with respect to custodial property transferred under ORS 126.816 or (2) The beneficiary’s attainment of 18 years of age with respect to custodial property transferred under ORS 126.822.

In Idaho, the custodian will transfer the account to the minor upon the minor turning 21 with respect to property transferred under 68-804 or 68-805 or 18 years of age, with respect to property transferred to under 68-806 or 68-807.

Related Links

RCW 11.114.200

RCW 11.114.040

RCW 11.114.050

RCW 11.114.060

Compliance Alerts

National Credit Union Administration

Heightened Risk of Social Engineering and Phishing Attacks: The NCUA issued Risk Alert 22-RISK-01 to remind credit unions of the ongoing threat of social engineering and phishing attacks and reiterate the continued importance of educating employees and members on how to avoid these threats.

Consumer Financial Protection Bureau

CFPB Issues Policy On Contractual ‘Gag’ Clauses and Fake Review Fraud: The CFPB issued policy guidance regarding practices related to consumer reviews.  The guidance highlights that practices such as posting fake reviews or inserting clauses that forbid a customer from publishing an honest review may violate the Consumer Financial Protection Act.

Emergency Savings and Financial Security: Insights from the Making Ends Meet Survey and Consumer Credit Panel: The CFPB issued a report that examines how consumers’ financial profiles vary by levels of emergency savings.

New Data on the Characteristics of Mortgage Borrowers During the COVID-19 Pandemic: The CFPB issued an updated report to provide insight into mortgage borrowers who remain in forbearance in January 2022.  The forbearance rate dropped from 4.7% in March 2021 to 1.3% in January 2022.

2021 HMDA Data on Mortgage Lending Now Available: The CFPB announced that the FFIEC has posted the 2021 HMDA LAR data on its website.

CFPB Extends Comments for “Junk” Fees: The CFPB extended the deadline for public input for the Request for Information on ‘exploitive junk fees’.

United States Department of Housing and Urban Development

Action Plan to Advance Property Appraisal and Valuation Equity: The Interagency Property Appraisal and Evaluation Equity (PAVE) task force released its Action Plan to Advance Property Appraisal and Valuation Equity.  The report outlines a series of action steps that will require the NCUA and other regulatory agencies to issue guidance and implement new policies to improve the processes under which a valuation may be reconsidered if the initial valuation is lower than expected.

Office of Foreign Assets Control

OFAC has updated the SDN list as of March 25. The last update prior to this was March 21.


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