April 23, 1998
Irene Bull, Lending Manager
Unit No. 1 Federal Credit Union
55 Stevens Street
P.O. Box 830
Lockport, NY 14095-0830
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.
�07;12 C.F.R. �6. 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. �6.9(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.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3211
98-0141
cc: Region I