The Federal Reserve Board has issued two proposals that would expand Regulation Z's coverage of consumer credit transactions and Regulation M's coverage of consumer leases by increasing each regulation's exemption threshold to $50,000. Currently, credit transactions and leases in excess of $25,000 are exempt.

Published in today's Federal Register, the proposals implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that amended the corresponding thresholds in the Truth in Lending Act and the Consumer Leasing Act. Because those amendments become effective on July 21, 2011 (the date announced by the Secretary of the Treasury as the "designated transfer date" under the Dodd-Frank Act), the Fed intends to also make its proposed amendments of Regulations Z and M effective on that date.

As required by the Dodd-Frank Act, both proposals provide that the threshold amount be adjusted annually, effective January 1, to reflect any annual percentage increase in the Consumer Price Index (CPI).  Proposed revisions to each Regulation's commentary provide that a closed-end credit transaction or a lease that is exempt based on the threshold amount in effect at the time of consummation would remain exempt, regardless of a subsequent increase in the threshold amount based on the CPI.

The Regulation Z proposal also contains commentary revisions intended to provide guidance as to how the new threshold amount applies to open-end credit. Those revisions include the following:

  • For an account to be exempt based on the amount of the initial extension of credit or a firm commitment, that extension or commitment must be made at account opening.
  • If an account is exempt based on a firm commitment at account opening to extend credit above the threshold amount then in effect, the amount of the commitment must continue to exceed the currently effective threshold amount for the account to remain exempt. As a result, an account can lose its exempt status if the creditor subsequently reduces the commitment below the threshold amount then in effect or does not increase the commitment when the threshold amount increases based on the CPI (unless, before reducing or increasing the commitment, the creditor has made an initial extension of credit that is a single advance exceeding the threshold amount in effect at the time of the extension).
  • If an account opened before July 21, 2011 has a firm commitment to extend credit in excess of $25,000 or the account's terms require the initial extension of credit to be more than $25,000 but that extension has not occurred before July 21, 2011, the account will remain exempt until July 21, 2012. However, the account will lose its exempt status if, before that date, the creditor takes a security interest in real property or personal property used or expected to be used as the consumer's principal dwelling or reduces any firm commitment to extend credit to $25,000 or less. If the creditor makes an initial extension of credit of more than $25,000 before July 21, 2012, the account will remain exempt regardless of subsequent increases in the threshold amount based on the CPI.

Comments on the proposals are due by February 14, 2011.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.


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