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
