Compliance Bulletin

Regulation Z Exemption Adjusted Pursuant to Dodd-Frank Act
March 29, 2011

Pursuant to the Dodd-Frank Act, the Federal Reserve Board issued a final regulation increasing the threshold for consumer credit transactions that are exempt from the Truth in Lending Act from $25,000 to $50,000. The $25,000 threshold amount had been in place since the 1980s. 

TILA Section 104(3) currently exempts “[c]redit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, and other than private education loans (as that term is defined in section 140(a)), in which the total amount financed exceeds $25,000.” The exemption, codified in Section 226.3(b) of Regulation Z, exempts extensions of credit in which the amount financed exceeds $25,000 or in which there is an express written commitment to extend credit in excess of $25,000.

Open-End Credit

An open-end account is exempt if the creditor makes an initial extension of credit at or after account opening that exceeds the threshold amount in effect at the time the initial extension is made. Thus, assuming that the threshold amount in effect on January 1 is $50,000 and the account is opened on February 1, if the creditor makes an initial extension of credit of $60,000 on July 1 then the account is exempt. If instead on July 1 the creditor extends credit of $50,000 or less, the creditor must have satisfied all of the applicable requirements of Regulation Z from the date the account was opened (or earlier, if applicable) [1]. The Board notes that a credit card account is not exempt from TILA and the Credit Card Act simply because the credit card issuer sets the credit limit on the account above the threshold amount.

An open-end account does not qualify for an exemption based on a firm commitment unless the creditor makes an express commitment in writing to extend a total amount of credit that exceeds the applicable threshold amount. And the creditor must honor transactions up to the committed amount without requiring additional credit information other than verifying the value of collateral and periodically reviewing the consumer’s creditworthiness.

Subsequent changes to an exempt open-end account or the threshold amount may result in the account no longer qualifying for the exemption. In these circumstances, the creditor must begin to comply with all of the applicable requirements of Regulation Z within a reasonable period of time after the account ceases to be exempt. For example, if an account ceases to be exempt, the card issuer may not increase the rate that applies to the account’s existing balance even if that balance consists of transactions that occurred while the account was exempt. But the creditor is not required to comply with the requirements of Regulation Z retroactively for the period of time during which the account was exempt [2].

If a creditor makes an initial extension above the threshold, the account remains exempt even if any of the following occurs: the threshold is subsequently increased; there are no further extensions of credit; subsequent extensions of credit do not exceed the threshold amount; the account balance is subsequently reduced below the threshold amount; or the credit limit is later reduced below the threshold amount. If the initial extension of credit does not exceed the threshold, the account is not exempt even if a subsequent extension exceeds the threshold or if the balance later exceeds the threshold amount [3].

If a creditor makes a firm written commitment at account opening to extend credit exceeding the threshold, the account remains exempt even if the threshold is subsequently increased. Also, the account remains exempt even if the amount of credit actually extended does not exceed the threshold amount. But if the firm commitment does not exceed the threshold amount at account opening, the account is not exempt even if the account balance later exceeds the threshold. If a creditor reduces a firm commitment, the account ceases to be exempt unless the reduced firm commitment exceeds the threshold amount in effect at the time of the reduction [4].

If an open-end account is exempt based on a firm commitment, that account may also subsequently be exempt based on an initial extension of credit if the initial extension is a single advance greater than the threshold amount in effect at the time of the extension and the account continues to qualify for an exemption based on the firm commitment until the initial extension of credit is made [5].

If after account opening an open-end account a security interest is taken in the consumer’s principal dwelling, a previously exempt account ceases to be exempt and the creditor must begin to comply with the applicable portions of Regulation Z, including giving the consumer the right to rescind the security interest [6].

Closed-End Credit

Like an open-end loan, a closed-end loan is exempt (except as to dwelling-secured credit and private education loans) if the creditor extends credit at consummation that exceeds the threshold amount in effect at consummation. The loan remains exempt even if the amount owed is subsequently reduced below the threshold amount [7].

A closed-end loan is also exempt if the creditor makes a commitment at consummation to extend a total amount of credit greater than the threshold in effect at consummation. The loan remains exempt even if the total amount of credit extended does not exceed the threshold amount [8].

An exempt closed-end loan remains exempt regardless of a subsequent increase in the threshold amount. But a loan is not exempt merely because it is used to satisfy and replace an existing exempt loan (unless the new extension of credit is itself exempt) [9].

If after consummation of a closed-end loan a security interest is taken in the consumer’s principal dwelling, an exempt loan remains exempt but the creditor must give the consumer the right to rescind the security interest. If an exempt closed-end loan is satisfied and replaced by a loan that is secured by the consumer’s principal dwelling, the new loan is not exempt.

Transition Rules

For open-end accounts exempt before July 21, 2011 based on a firm commitment to extend credit greater than $25,000, the account remains exempt until December 31, 2011 (unless the firm commitment is reduced to $25,000 or less). If the firm commitment is increased on or before December 31, 2011 to an amount greater than $50,000, the account remains exempt regardless of subsequent increases in the threshold amount. If the firm commitment is not increased on or before December 31, 2011 to an amount greater than $50,000, the account ceases to be exempt and Regulation Z applies.

The final rule is effective on the Transfer Date under the Dodd-Frank Act as designated by the Secretary of the Treasury, which is July 21, 2011. Click here for a link to the rule.

  1. See Comment 3(b)-2.i to Regulation Z.
  2. See Comment 3(b)-2.ii.
  3. See Comment 3(b)-2.iii.
  4. See Comment 3(b)-2.iv.A. Examples are provided.
  5. See Comment 3(b)-2.iv.B for examples.
  6. See Comment 3(b)-4.i.
  7. Comment 3(b)-3.i.A.
  8. Comment 3(b)-3.i.B.
  9. Comment 3(b)-3.ii.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

Commands