Compliance Bulletin

Regulation Z Exemption Threshold Raised to $50,000
July 11, 2011

Pursuant to the Section 1100E of the Dodd-Frank Act, the Truth in Lending Act (TILA) was amended to increase the threshold for transactions that are exempt from Regulation Z from $25,000 to $50,000. The Federal Reserve Board issued a final regulation (“Final Rule”) to implement this change, which will become effective on July 21, 2011.

 The threshold will be adjusted annually in accordance with any increase in the Consumer Price Index beginning in 2012 [1]. Similar changes are made to the Board’s Regulation M, which implements the Consumer Leasing Act.

Open-End Credit

If an open-end credit account is exempt on July 20 this year (that is, before the effective date) based on a firm commitment to extend more than $25,000 in credit, the creditor has until December 31, 2011 to either retain the exemption by increasing the firm commitment to more than $50,000 or begin complying with Regulation Z. This exemption is based on the initial extension of credit at or after account opening [2]. Thus, assuming an applicable threshold of $50,000, an account is opened with no initial extension of credit, but a few months later credit is extended in an amount exceeding the threshold. The account is exempt. If instead the later extension of credit is for an amount that is less than the threshold, then the applicable Regulation Z requirements must be met from the date the account was opened (or earlier, if applicable) [3].

An open end credit is also exempt if the creditor makes a firm written commitment at account opening to extend credit above the threshold amount as long as the creditor honors transactions up to the committed amount without requiring additional credit information (other than to verify the value of collateral, perform periodic credit reviews, and the like) [4]. The Board clarifies that a credit card account is not exempt from TILA and the Credit Card Act simply because the issuer sets the credit limit above the threshold amount.

Changes in exempt status. Once an exempt account ceases to be exempt, then Regulation Z applies prospectively only to balances on the account. An example provided in a comment provides that if an account that had been exempt ceases to be exempt, the creditor must within a reasonable period of time provide the disclosures required by Section 226.6 reflecting the current terms of the account and begin to provide periodic statements under Section 226.7. However, the creditor is not required to disclose fees or charges imposed while the account was exempt. Moreover, if the creditor provided Regulation Z disclosures while the account was exempt, then it is not required to provide the Section 226.6 disclosure [5].

If the initial extension of credit exceeds the threshold amount in effect at that time, the exempt status is not affected by a subsequent increase in the threshold for any reason, including whether there are subsequent extensions of credit, repayments, or reductions of the credit limit. However, if the initial extension does not exceed the threshold, the account will not become exempt even if the balance later exceeds the threshold (for example, due to accrual of interest) [6].

If a creditor makes a firm written commitment at account opening to extend credit that exceeds the threshold in effect at that time, the account remains exempt regardless of a subsequent threshold increase, and even if the credit actually extended does not exceed the threshold. If the firm commitment does not exceed the threshold at account opening, the account is not exempt even if the account balance later exceeds the threshold. If the 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 [7].

An open-end credit that is exempt based on a firm commitment may also be exempt pursuant to an initial extension of credit if that credit is a single advance that exceeds the threshold (applicable at the time of the extension) as long as the account retains the firm commitment exemption until the time of the initial extension. Thus, a reduction of a firm commitment would not render the account non-exempt if the prior initial extension of credit exceeded the applicable threshold [8].

Closed-End Credit

A closed-end loan is exempt if the credit extended at consummation exceeds the threshold, and it remains exempt irrespective of a reduction in the balance. A closed-end loan is also exempt if a commitment is made at consummation for an amount in excess of the threshold. The loan remains exempt even if the credit actually extended is less than the threshold [9].

For either an extension of credit or loan commitment that exceeds the threshold, a closed-end loan remains exempt regardless of a subsequent increase in the threshold. But a loan is not exempt solely because it is used to replace an existing exempt loan unless the extension of credit exceeds the threshold [10].

Addition of Security Interest

The taking of a security interest in a dwelling after account opening on an open-end credit (but not closed-end credit) renders an exempt loan non-exempt. However, the addition of a security interest in the consumer’s principal dwelling is a transaction for purposes of Section 226.23 and the closed-end creditor must still give the consumer the right to rescind [11]. Note that a secured closed-end loan that replaces an exempt loan is not exempt [12].

Transition Rule

An open-end account that is exempt on July 20, 2011 based on a written commitment to extend credit of more than $25,000 remains exempt until December 31, 2011 unless a security interest is taken or the commitment is reduced to $25,000 or less [13]. These creditors must thus review their accounts and either increase their firm commitments to more than $50,000 by December 31, 2011 or begin to comply with Regulation Z after that date [14].

  1. The threshold amount is adjusted effective January 1 of each year in accordance with the increase in the CPI that was in effect on the preceding June 1. Comment (3(b) – 1.
  2. Comment 3(b)-2.i.
  3. Comment 3(b)-2.i.A.
  4. Comment 3(b)-2.i.B.
  5. Comment 3(b)-2.ii.
  6. Comment 3(b)-2.iii.
  7. Comment 3(b)-2.iv.A. See examples provided.
  8. Comment 3(b)-2.iv.B. See examples provided.
  9. Comment 3(b)-3.i.
  10. Comment 3(b)-3.ii.
  11. See Comment 23(a)-5.
  12. Comment 3(b)-4.ii.
  13. 12 CFR 226.3(b)(2).
  14. Comment 3(b)-6. Examples are provided.

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.

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