By the Division of Banks

Permissibility Of Credit Card Agreement Provision Allowing Creditor To Increase Account Interest Rate If Borrower Makes A Late Payment

A state-chartered credit union, whose credit card agreements are governed by Massachusetts law, asked whether it was permissible to add a provision to the credit card agreement which would permit the credit union to increase the interest rate under the plan by four percentage points if the borrower fails to make a minimum monthly payment, in full and on or before its due date. Mass. Gen. Laws chapter 140, section 114B governs finance charges and delinquency charges on open-end credit plans. Section 114B establishes a maximum interest rate of eighteen percent per annum, unless otherwise provided by the statute, and a maximum delinquency or late charge, on any payment not paid in full within 15 days of its due date, of ten percent of the outstanding balance or $10.00, whichever is less.

It is the Division's position that the proposed interest rate increase in the credit card agreement is not a delinquency charge within the meaning of section 114B. Such a provision renders the credit product a variable interest rate product, with the delinquency being the event triggering the change in the interest rate. A credit card agreement governed by Massachusetts law, therefore, could contain a provision to increase the interest rate in the event of default by the cardholder, provided the interest rate charged at no time violates the maximum interest rate provisions of said section 114B.