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Thursday, February 22, 2018

Promotional Rates

QUESTION
In designing our new ad campaign, we have to decide whether to offer a promotional rate or a discounted rate. But we are unsure if these two rates can be one and the same thing. What is the difference between these rates and if they are the both in a transaction, do we need two different disclosures for each one?

ANSWER
This is most certainly not a distinction without a difference! A “promotional rate,” in connection with a variable rate plan, is an APR that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than a reasonably current APR that would be in effect under the index and margin that will be used to make rate adjustments under the plan. [12 CFR § 226.16(d)(6)(i)(A); 12 CFR Supplement 1 to Part 226 – Official Staff Commentary § 226.16(d)-5.i]

A “Discounted rate” is an initial APR that is not based on the index and margin used to make later rate adjustments in a variable rate plan. [12 CFR § 226.16(d)(2)]

Therefore, a discounted rate encompasses only an initial rate, whereas a promotional rate encompasses a rate that could be in effect any time during the life of a credit transaction.

Thus, a rate can be both a discounted rate and a promotional rate and subject to the disclosure requirements for both types of rates.

Jonathan Foxx
Managing Director
Lenders Compliance Group