[Federal Register Volume 75, Number 241 (Thursday, December 16, 2010)]
[Proposed Rules]
[Pages 78636-78645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-31529]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1399]
RIN 7100-AD59
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: Effective July 21, 2011, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) amends the Truth in Lending
Act (TILA) by increasing the threshold for exempt consumer credit
transactions from $25,000 to $50,000. In addition, the Dodd-Frank Act
provides that, on or after December 31, 2011, this threshold must be
adjusted annually by any annual percentage increase in the Consumer
Price Index for Urban Wage
[[Page 78637]]
Earners and Clerical Workers. Accordingly, the Board is proposing to
make corresponding amendments to Regulation Z, which implements TILA,
and to the accompanying staff commentary. Because the Dodd-Frank Act
also increases the Consumer Leasing Act's threshold for exempt consumer
leases from $25,000 to $50,000, the Board is proposing similar
amendments to Regulation M elsewhere in today's Federal Register.
DATES: Comments must be received on or before February 1, 2011.
Comments on the Paperwork Reduction Act analysis set forth in Section V
of Supplementary Information must be received on or before February 14,
2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1399 and
RIN No. 7100-AD59, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Stephen Shin, Attorney, or Benjamin K.
Olson, Counsel, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412;
for users of Telecommunications Device for the Deaf (TDD) only, contact
(202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act
This proposed rule implements Section 1100E of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act),
which was signed into law on July 21, 2010. Public Law 111-203 Sec.
1100E, 124 Stat. 1376 (2010). Section 1100E amends Section 104(3) of
the Truth in Lending Act (TILA) by establishing a new threshold for
exempt consumer credit transactions. Currently, TILA Section 104(3)
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, in which the total amount financed exceeds $25,000.'' 15
U.S.C. 1603(3). Regulation Z implements this exemption in Sec.
226.3(b).
Effective July 21, 2011, the Dodd-Frank Act raises TILA's $25,000
exemption threshold to $50,000. In addition, the Dodd-Frank Act
provides that, on or after December 31, 2011, this threshold shall be
adjusted annually for inflation by the annual percentage increase in
the Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W), as published by the Bureau of Labor Statistics. Therefore,
from July 21, 2011 to December 31, 2011, the threshold dollar amount
will be $50,000. Beginning on January 1, 2012, the $50,000 threshold
will be adjusted annually based on any annual percentage increase in
the CPI-W.
The Board is proposing to amend Sec. 226.3(b) and the accompanying
commentary for consistency with the amendments made by the Dodd-Frank
Act. In addition, because the Dodd-Frank Act makes similar amendments
to the exemption threshold in the Consumer Leasing Act (which is part
of TILA), the Board is proposing elsewhere in today's Federal Register
to amend Regulation M, which implements the Consumer Leasing Act.
Effective Date
Section 1100H of the Dodd-Frank Act provides that Section 1100E
will become effective on the designated transfer date, as defined by
Section 1062 of that Act. Section 1062 of the Dodd-Frank Act requires,
in relevant part, the Secretary of the Treasury to designate a single
calendar date for the transfer of certain functions from other agencies
to the newly established Bureau of Consumer Financial Protection.
Pursuant to Section 1062(a), the Secretary of the Treasury has
determined that the designated transfer date shall be July 21, 2011.
See 75 FR 57252 (Sept. 20, 2010). Accordingly, because Section 1100E
will become effective on July 21, 2011, the Board intends to make the
amendments to Regulation Z effective on that date.
Comment Period
Because the new threshold for exempt consumer credit transactions
in TILA Section 104(3) goes into effect on July 21, 2011, the Board
must issue the final rule implementing the new threshold sufficiently
in advance of that date to permit creditors to make the necessary
changes to bring their systems and practices into compliance. To ensure
that the Board has adequate time to analyze the comments received on
the proposed rule, the Board is requiring that comments be submitted by
the later of February 1, 2011 or 30 days after publication of the
proposal in the Federal Register (although comments on the Board's
Paperwork Reduction Act analysis are not due until 60 days after
publication). Because the proposal is narrow in scope, the Board
believes that interested parties will have sufficient time to review
the proposed rule and prepare their comments.
II. Statutory Authority
TILA mandates that the Board prescribe regulations to carry out
TILA's purposes and specifically authorizes the Board, among other
things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with that Act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in TILA and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
For the reasons discussed below, the Board believes that it is
necessary and appropriate to make amendments to Regulation Z in order
to effectuate the purposes of TILA, to prevent circumvention, and to
facilitate compliance.
[[Page 78638]]
III. Section-by-Section Analysis
Section 226.3 Exempt Transactions
3(b) Credit Over Applicable Threshold Amount
Section 226.3(b) of Regulation Z implements the exemption for
certain consumer credit transactions in TILA Section 104(3).
Specifically, Sec. 226.3(b) currently provides that Regulation Z does
not apply to ``[a]n extension of credit not secured by real property,
or by personal property used or expected to be used as the principal
dwelling of the consumer, 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.'' Section 1100E(a)(1) of the Dodd-Frank Act
increases the dollar amount of the exemption threshold in TILA Section
104(3) from $25,000 to $50,000. Furthermore, Section 1100E(b) requires
that this amount be adjusted annually for inflation. Accordingly, the
Board is proposing amendments to Sec. 226.3(b) and the accompanying
commentary to implement Section 1100E.
3(b)(1) General Exemption
As an initial matter, current Sec. 226.3(b) would be redesignated
as Sec. 226.3(b)(1)(i) and a new Sec. 226.3(b)(1)(ii) would be added
to provide that the threshold amount will be adjusted annually to
reflect any annual percentage increase in the CPI-W.\1\ Because the
threshold amount could change from year to year, Sec. 226.3(b)(1)(i)
would refer to the ``applicable threshold amount,'' rather than stating
a specific amount. Instead, new Sec. 226.3(b)(1)(ii) would explain
that the threshold amount applicable to a specific extension of credit
or express written commitment to extend credit is listed in the
official staff commentary. The Board also proposes to revise and
reorganize the commentary to Sec. 226.3(b).\2\
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\1\ The Board notes that, consistent with the Dodd-Frank Act,
proposed Sec. 226.3(b)(1)(ii) requires that the annual adjustment
for inflation reflect the ``annual percentage increase'' in the CPI-
W, as applicable. Therefore, an annual period of deflation or no
inflation would not require a change in the threshold amount.
\2\ For consistency with revised Sec. 226.3(b), the Board also
proposes to make corresponding amendments to comments 2(a)(19)-3 and
23(a)(1)-5.
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Threshold Amount
Revised comment 3(b)-1 would list the threshold amount in effect
for specific periods of time.\3\ In particular, the comment would
clarify that, prior to July 21, 2011, the threshold amount is $25,000
and that, from July 21, 2011 through December 31, 2011, the threshold
amount will be $50,000. This comment would also explain that the
threshold amount will be adjusted effective January 1 of each year by
any annual percentage increase in the CPI-W that was in effect on the
preceding June 1.\4\ The comment will be amended to provide the
threshold amount for the upcoming year after the annual percentage
change in the CPI-W that was in effect on the previous June 1 becomes
available.
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\3\ For organizational purposes, the guidance in current comment
3(b)-1 would be moved to other comments, as discussed below.
\4\ The Dodd-Frank Act specifically requires that the threshold
amount be adjusted annually by any annual percentage increase in the
CPI-W, as published by the Bureau of Labor Statistics; however, it
does not specify which Bureau of Labor Statistics report should be
used to determine that increase. Consistent with its approach for
annual adjustments in Sec. 226.32(a)(1)(ii), the Board proposes to
use the CPI-W reported by the Bureau of Labor Statistics for June 1
of each year. See 12 CFR 226.32(a)(1)(ii) and its commentary. The
Board believes this approach would permit the publication of an
increased threshold amount sufficiently in advance of the January 1
effective date.
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Revised comment 3(b)-1 further clarifies that any increase in the
threshold amount will be rounded to the nearest $100 increment. For
example, if the annual percentage increase in the CPI-W would result in
a $950 increase in the threshold amount, the threshold amount will be
increased by $1,000. However, if the annual percentage increase in the
CPI-W would result in a $949 increase in the threshold amount, the
threshold amount will be increased by $900. This approach is consistent
with Section 1100E(b) of the Dodd-Frank Act, which provides that annual
CPI-W adjustments should be ``rounded to the nearest multiple of $100,
or $1,000, as applicable.'' The Board believes that Congress did not
intend for an annual CPI-W adjustment to be rounded to the nearest $100
in some circumstances but to the nearest $1,000 in others, which could
lead to anomalous results. Because $1,000 is itself a multiple of $100,
the Board believes that the proposed commentary clarifies the statutory
language in a manner consistent with the intent of Section 1100E.
Open-End Credit
Revised comment 3(b)-2 would provide guidance on the application of
Sec. 226.3(b)(1) to open-end credit accounts. Consistent with the
existing commentary, comment 3(b)-2.i would clarify that an open-end
account qualifies for exemption under Sec. 226.3(b) (unless secured by
any real property, or by personal property used or expected to be used
as the consumer's principal dwelling) if either: (1) The creditor makes
an initial extension of credit that exceeds the threshold amount in
effect at the time the account is opened; or (2) the creditor makes a
firm written commitment to extend a total amount of credit in excess of
the threshold amount in effect at the time the account is opened with
no requirement of additional credit information for any advances on the
account (except as permitted from time to time with respect to open-end
accounts pursuant to Sec. 226.2(a)(20)).
In addition, the Board would clarify that the initial extension of
credit or firm commitment must be made at account opening in order for
an open-end account to be exempt under Sec. 226.3(b). The Board
understands that some open-end lines of credit associated with
brokerage accounts are structured to be exempt under Sec. 226.3(b)
based on a requirement that the initial extension of credit must exceed
$25,000, even if that extension does not occur until months or years
after account opening. The Board is concerned that this approach could
produce uncertainty as to whether the account is exempt at account
opening or only becomes exempt when the initial extension in excess of
$25,000 actually occurs. Currently, Sec. 226.3(b) does not address
when the initial extension of credit must occur for purposes of the
exemption. Therefore, in order to provide greater certainty for
consumers and creditors, the Board believes it is appropriate to
determine whether an account is exempt under Sec. 226.3(b) at account
opening. The Board, however, solicits comment on any operational
difficulties posed by this proposed guidance and whether greater
flexibility would be appropriate.
Revised comment 3(b)-2.ii would provide general guidance regarding
the effect of subsequent changes to an open-end account or the
threshold amount on the account's exempt status. Specifically, this
comment would clarify which changes to an open-end account or the
threshold amount may result in the account no longer qualifying for the
exemption in Sec. 226.3(b). 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 (except as otherwise provided). For example, if an open-end
credit account ceases to be exempt, the creditor must within a
reasonable period of time provide the disclosures required by Sec.
226.6 reflecting the current terms of the account and begin to provide
periodic statements consistent with Sec. 226.7. The Board
[[Page 78639]]
solicits comment on whether additional specificity is needed regarding
the amount of time necessary to begin to comply with Regulation Z.
Revised comment 3(b)-2.iii would address the effect of subsequent
changes when an open-end account is exempt under Sec. 226.3(b) based
on an initial extension of credit. The comment would clarify that, if a
creditor makes an initial extension of credit at account opening that
exceeds the threshold amount in effect at that time, the account
remains exempt under Sec. 226.3(b) regardless of a subsequent increase
in the threshold amount as a result of an increase in the CPI-W.
Furthermore, in these circumstances, the account remains exempt even if
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 (such as through
repayment of the extension), or the credit limit for the account is
subsequently reduced below the threshold amount. Comment 3(b)-2.iii
would also clarify that, if the initial extension of credit on an
account does not exceed the threshold amount in effect at the time of
the extension, the account will not become exempt under Sec. 226.3(b)
even if the account balance later exceeds the threshold amount (for
example, due to the subsequent accrual of interest).
Revised comment 3(b)-2.iv would address the effect of subsequent
changes when an open-end account is exempt under Sec. 226.3(b) based
on a firm commitment to extend credit, rather than an initial extension
of credit. In particular, the comment would clarify that if the firm
commitment does not exceed the threshold amount, the account is not
exempt under Sec. 226.3(b) even if the account balance later exceeds
the threshold amount (for example, due to the subsequent accrual of
interest). In addition, the comment would clarify that, in order for an
open-end account to remain exempt under Sec. 226.3(b) based on a firm
commitment, the amount of the firm commitment must continue to exceed
the threshold amount currently in effect, as adjusted annually. Thus,
in order for an account to remain exempt, a creditor could not reduce
its firm commitment below the threshold amount currently in effect and
may be required to increase its firm commitment when the threshold
amount is increased as a result of an increase in the CPI-W.
Illustrative examples are provided in the commentary.
The Board believes that if creditors were not required to exceed
the applicable threshold amount on an ongoing basis for open-end
accounts, it could produce anomalous results and, in some cases, raise
concerns about circumvention of Regulation Z. For example, if an open-
end account remained exempt permanently based on a firm commitment at
account opening to extend credit in excess of the threshold amount, an
account opened in December might qualify for an exemption based on a
firm commitment while an identical account with the same firm
commitment opened in January would not because the applicable threshold
amount had increased. Furthermore, the proposed rule would prevent
accounts from being established with firm commitments that qualify for
the exemption at account opening but then have the commitment reduced
below the threshold. Under the proposed rule, the account would lose
its exempt status in these circumstances. The Board believes that,
because Section 1100E was intended to broaden the scope of TILA, it is
consistent with Congress's intent to construe the exemption in Sec.
226.3(b) narrowly.
However, proposed comment 3(b)-2.iv would provide creditors with
flexibility when an open-end account no longer qualifies for an
exemption under Sec. 226.3(b) based on a firm commitment.
Specifically, the comment would clarify that the creditor may either
begin to comply with Regulation Z or, if permitted by the account
agreement and applicable state law, permit the consumer to repay any
outstanding balance on the account consistent with the account terms
without providing additional extensions of credit. The Board believes
that additional flexibility is necessary in these circumstances, so
that creditors that do not have the systems in place to comply with
Regulation Z do not close the account and require the consumer to
immediately repay the outstanding balance. However, the Board solicits
comment on whether the proposed guidance poses any operational
difficulties and whether additional flexibility is warranted in these
circumstances.
Finally, revised comment 3(b)-2.iv addresses circumstances in which
an account qualifies for a Sec. 226.3(b) exemption at account opening
based on a firm commitment and the creditor subsequently makes an
initial extension of credit that exceeds the applicable threshold
amount. The comment would clarify that, in these circumstances, the
account may qualify for a Sec. 226.3(b) exemption based on the initial
extension of credit if that extension is a single advance exceeding the
threshold amount at the time of the extension. As a result, the account
would remain exempt under Sec. 226.3(b) even if the credit limit is
subsequently reduced below the threshold amount or if the threshold
amount is subsequently increased to reflect an increase in the CPI-W.
For example, assume that, at account opening on January 1 of year
one, the threshold amount under Sec. 226.3(b) is $50,000 and an open-
end account qualifies for an exemption because the creditor has made a
firm commitment to extend $52,000 in credit. On July 1 of year one, the
consumer uses the account for a single advance of $52,000, which is the
initial extension of credit on the account. As a result of this
extension of credit, the account will remain exempt under Sec.
226.3(b) even if, after July 1 of year one, the creditor reduces the
firm commitment to less than $50,000 or if, on January 1 of year two,
the threshold amount increases to $52,500 to reflect an increase in the
CPI-W.
As discussed above, the Board believes that, as a general matter,
whether an account is exempt under Sec. 226.3(b) should be determined
at account opening. However, when an account qualifies for an exemption
at account opening based on a firm commitment, the Board believes that
it may be appropriate to permit the account to retain that exemption
based on an initial extension of credit that occurs after account
opening. However, the Board solicits comment on this approach.
Closed-End Credit
Revised comment 3(b)-3 would provide guidance on the application of
Sec. 226.3(b)(1) to closed-end loans. Specifically, comment 3(b)-3.i
would clarify that a closed-end loan is exempt under Sec. 226.3(b) in
either of two circumstances (unless the extension of credit is secured
by any real property, or by personal property used or expected to be
used as the consumer's principal dwelling; or is a private education
loan as defined in Sec. 226.46(b)(5)).
First, the comment clarifies that a closed-end loan would be exempt
if the creditor makes an extension of credit at consummation that
exceeds the threshold amount in effect at the time of consummation. In
these circumstances, the loan remains exempt under Sec. 226.3(b) even
if the account balance is subsequently reduced below the threshold
amount, such as through repayment.
Second, the comment clarifies that a closed-end loan would be
exempt if the
[[Page 78640]]
creditor makes a loan commitment at consummation to extend a total
amount of credit in excess of the threshold amount in effect at the
time of consummation. The comment would further clarify that, in these
circumstances, the loan remains exempt under Sec. 226.3(b) even if the
total amount of credit actually extended does not exceed the threshold
amount.\5\ This guidance addresses loan commitments (such as certain
construction loans) with terms that provide for scheduled advances or
advances at the consumer's option, where the total amount of credit
ultimately drawn may be less than the original loan commitment on which
the exemption was based. The Board, however, solicits comment on
whether this guidance sufficiently addresses other types of closed-end
loan products.
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\5\ This guidance is currently set forth in comment 3(b)-1.
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Revised comment 3(b)-3.ii would also provide guidance on the effect
of subsequent changes to a closed-end loan or loan commitment or to the
threshold amount. Specifically, the comment would clarify that, if a
creditor makes an extension of credit or loan commitment to extend
credit that exceeds the threshold amount in effect at the time of
consummation, the closed-end loan remains exempt under Sec. 226.3(b)
regardless of a subsequent increase in the threshold amount as a result
of an increase in the CPI-W. In addition, the revised comment
incorporates existing guidance regarding the refinancing of an exempt
closed-end loan.
Additional Commentary
New comment 3(b)-4 would provide guidance where a security interest
in any real property, or in personal property used or expected to be
used as a consumer's principal dwelling, is added to an existing
account or loan that is exempt under Sec. 226.3(b). The proposed
comment would incorporate guidance from current comments 3(b)-2.ii and
3(b)-3 with respect to open-end credit and closed-end credit,
respectively.
Finally, new comment 3(b)-5 would incorporate the guidance
currently provided in comment 3(b)-1 regarding credit extensions
secured by mobile homes. Specifically, this comment would clarify that
the exemption in Sec. 226.3(b) does not apply to a credit extension
secured by a mobile home used or expected to be used as the principal
dwelling of the consumer.
3(b)(2) Special Exemption; Open-End Accounts Exempt Prior to July 21,
2011
The Board proposes to add a new Sec. 226.3(b)(2) in order to
address transition issues related to open-end accounts that are exempt
under current Sec. 226.3(b) but may not be exempt under revised Sec.
226.3(b)(1). Specifically, new Sec. 226.3(b)(2) would provide that an
open-end account that is exempt under Sec. 226.3(b) on July 20, 2011
based on an extension of credit in excess of $25,000 or an express
written commitment to extend credit in excess of $25,000 remains exempt
until July 21, 2012. However, the account would cease to be exempt
under Sec. 226.3(b)(2) if the creditor takes a security interest in
any real property, or in personal property used or expected to be used
as the consumer's principal dwelling; or if the creditor reduces any
express written commitment to extend credit to $25,000 or less. New
Sec. 226.3(b)(2) is proposed pursuant to the Board's authority under
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of, and to facilitate compliance with, TILA. 15
U.S.C. 1604(a).
The Board understands that many creditors currently choose to
comply with Regulation Z in circumstances where the initial extension
or firm commitment exceeds $25,000. For example, the Board understands
that creditors offering closed-end automobile loans typically provide
Regulation Z disclosures regardless of the amount of the loan. However,
because some currently exempt open-end credit accounts may be serviced
on platforms that cannot presently provide Regulation Z disclosures,
the Board believes that a transition period providing additional
flexibility may be needed in order to facilitate compliance with the
revisions to Sec. 226.3(b).
In particular, the Board understands that this concern arises with
respect to certain open-end lines of credit associated with brokerage
accounts that are serviced on platforms that cannot currently provide
Regulation Z disclosures.\6\ In some cases, the creditor may provide in
the account terms that the initial extension of credit must exceed
$25,000. However, credit is not necessarily extended at account
opening, and may be extended only upon request by the consumer at a
later date, which may be months or years after account opening. Thus,
if an extension in excess of $25,000 has not occurred prior to July 21,
2011, the account would cease to qualify for an exemption under Sec.
226.3(b), consistent with proposed comment 3(b)-2.
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\6\ Because the creditors who provide these accounts are not
broker-dealers, the accounts are not exempt under Sec. 226.3(d).
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In these circumstances, it appears that additional time may be
required to enable creditors to either develop the systems necessary to
comply with Regulation Z or to take steps necessary to retain exempt
status for the account (such as by making a firm commitment in excess
of the threshold amount). If additional time were not provided, the
Board believes some creditors might choose to close unused accounts
shortly before July 21, 2011, which could harm consumers who rely on
their ability to access those accounts. Accordingly, in this narrow set
of circumstances, the Board proposes to provide creditors with an
additional 12 months (in other words, until July 21, 2012) to make the
necessary adjustments. However, the Board solicits comment on whether
any transition period is necessary and, if so, whether a different time
period (shorter or longer) would be more appropriate.
In other cases, a creditor may provide a firm commitment to extend
credit in an amount equal to the value of the securities in the
associated brokerage account. Thus, a line of credit secured by
collateral valued at $30,000 would cease to be exempt on July 21, 2011.
While creditors relying on an exemption under Sec. 226.3(b) based on a
firm commitment will have to account for regular increases in the
exemption threshold as a result of increases in the CPI-W, the Board
believes that, for the reasons discussed above, it may be appropriate
to provide creditors with additional time to adjust to the increase in
the threshold amount from $25,000 to $50,000. As above, the Board
solicits comment on whether any transition period is necessary and, if
so, whether a different time period (shorter or longer) would be more
appropriate.
New comment 3(b)-6 would provide guidance and illustrative examples
regarding the application of Sec. 226.3(b)(2). In particular, it would
clarify that Sec. 226.3(b)(2) applies only to open-end accounts opened
prior to July 21, 2011 and does not apply if a security interest is
taken in any real property, or in personal property used or expected to
be used as the consumer's principal dwelling.
IV. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an initial and final regulatory
flexibility analysis on the impact a rule is expected to have on small
entities. However, under section 605(b) of the RFA, the regulatory
flexibility analysis otherwise required
[[Page 78641]]
under section 604 of the RFA is not required if an agency certifies,
along with a statement providing the factual basis for such
certification, that the rule will not have a significant economic
impact on a substantial number of small entities. The Board has
prepared the following initial regulatory flexibility analysis pursuant
to section 603 of the RFA.
Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule would not have a significant economic
impact on a substantial number of small entities.
1. Statement of the need for, and objectives of, the proposed rule.
The proposed rule would implement Section 1100E of the Dodd-Frank Act,
which increases the threshold for consumer credit transactions exempt
under TILA from $25,000 to $50,000. Section 1100E also provides that
this amount shall be increased annually to reflect any annual
percentage increase in the Consumer Price Index for Urban Wage Earners
and Clerical Workers (CPI-W). The supplementary information above
describes in detail the reasons, objectives, and legal basis for each
component of the proposed rule.
2. Small entities affected by the proposed rule. All creditors that
offer closed-end or open-end consumer credit extensions that exceed
$25,000 but do not exceed $50,000, as adjusted annually to reflect
increases in the CPI-W, would be affected by the proposed rule. Based
on June 2010 call report data, the Board estimates that there are
approximately 4,360 banks with assets of $175 million or less and 6,655
credit unions with assets of $175 million or less, that would be
required to comply with the Board's proposed rule. The Board
acknowledges, however, that the total number of small entities likely
to be affected by the proposed rule is unknown, in part because
Regulation Z has broad applicability to individuals and businesses that
extend even small amounts of consumer credit. In addition, it is
unclear how many of these small entities currently do not have systems
in place to comply with Regulation Z because they only extend credit in
excess of $25,000. It is also unclear how many of those entities will
choose to engage in consumer credit transactions between $25,000 and
$50,000, as opposed to only making loans above the new threshold. The
Board invites comment on the effect of the proposed rule on small
entities.
3. Recordkeeping, reporting, and compliance requirements. The
proposed rule would impose new recordkeeping, reporting, and compliance
requirements under Regulation Z on creditors that extend consumer
credit in amounts that exceed $25,000 but do not exceed $50,000, as
adjusted annually to reflect increases in the CPI-W. The Board
understands that small entities that offer consumer credit generally
have systems in place to comply with Regulation Z for extensions of
credit of $25,000 or less. The Board notes that the precise costs to
small entities to provide Regulation Z disclosures to accounts with
consumer credit extensions of more than $25,000 but not more than
$50,000, and the costs of updating their systems to comply with the
proposed rule, are difficult to predict. These costs would depend on a
number of factors that are unknown to the Board, including, among other
things, the specifications of the current systems used by such entities
to prepare and provide disclosures and administer accounts, the
complexity of the terms of the products that they offer, and the range
of such product offerings. The Board seeks information and comment on
any costs, compliance requirements, or changes in operating procedures
arising from the application of the proposed rule to small entities.
Proposed Amendments
This subsection summarizes several of the proposed amendments to
Regulation Z and their likely impact on small entities. More
information regarding these and other proposed changes can be found in
III. Section-by-Section Analysis.
On July 21, 2011, the amendments to proposed Sec. 226.3(b)(1)(i)
and its accompanying commentary would raise the threshold for exempt
consumer credit transactions from $25,000 to $50,000. For accounts
which do not qualify for the exemption under the new threshold,
creditors that are small entities would be required to comply with all
applicable Regulation Z requirements. The Board anticipates that
creditors that are small entities, with some additional burden, would
service accounts which do not meet the increased threshold for
exemption on the same systems in place for non-exempt accounts.
Furthermore, the Board understands that some creditors that are small
entities generally do not rely on the exemption in Sec. 226.3(b) and
provide Regulation Z disclosures regardless of the amount of the credit
extension. Therefore, the Board does not anticipate significant
additional burden on small entities by raising the exemption threshold
dollar amount.
Under proposed Sec. 226.3(b)(1)(ii), the threshold amount must be
adjusted annually by any annual percentage increase in the CPI-W. To
the extent creditors that are small entities rely on the exemption
under Sec. 226.3(b), proposed Sec. 226.3(b)(1)(ii) would require
those creditors to establish processes and alter their systems in order
to comply with the provision. The cost of such changes would depend on
the size of the institution and the composition of its portfolio. The
Board anticipates that creditors that are small entities, with some
additional burden, would service accounts which do not or may not meet
the applicable threshold for exemption on the same systems in place for
non-exempt accounts. In addition, as noted above, the Board understands
that many creditors that are small entities generally provide
Regulation Z disclosures regardless of the amount of the credit
extension. As a result, the Board does not anticipate significant
additional burden on small entities by adjusting the exemption
threshold dollar amount annually for inflation.
Proposed Sec. 226.3(b)(2) would address circumstances where
certain previously exempt open-end accounts would cease to qualify for
an exemption on July 21, 2011 under the revised threshold amount. Under
proposed Sec. 226.3(b)(2), these accounts would have until July 21,
2012 (one year after the effective date) to comply with the revised
threshold amount in effect at that time. The Board would reduce the
burden on small entities by providing transition guidance for these
accounts in order to ease compliance with the proposed rule.
Accordingly, the Board believes that, in the aggregate, the
provisions of its proposed rule would not have a significant economic
impact on a substantial number of small entities.
4. Other Federal rules. The Board has not identified any Federal
rules that duplicate, overlap, or conflict with the proposed revisions
to Regulation Z.
5. Significant alternatives to the proposed revisions. The
provisions of the proposed rule would implement the statutory
requirements of the Dodd-Frank Act, which establish new threshold
requirements for exempt consumer credit transactions. As discussed in
the supplementary information, the Board has sought to provide small
entities with additional time to come into compliance where necessary,
while effectuating the statute in a manner that is beneficial to
consumers. In addition, the proposed rule would clarify that, if an
initial extension of credit in excess of the existing threshold
($25,000) is made prior to July 21, 2011, the account remains exempt,
notwithstanding subsequent increases in the threshold amount. The Board
welcomes comment on any significant alternatives, consistent with
Section 1100E of the
[[Page 78642]]
Dodd-Frank Act, which would minimize the impact of the proposed rule on
small entities.
V. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). In addition, as permitted by the PRA,
the Board proposes to extend for three years the current recordkeeping
and disclosure requirements in connection with Regulation Z. The
collection of information that is required by this proposed rule is
found in 12 CFR Part 226. The Board may not conduct or sponsor, and an
organization is not required to respond to, this information collection
unless the information collection displays a currently valid OMB
control number. The OMB control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z,
including for-profit financial institutions, small businesses, and
institutions of higher education. TILA and Regulation Z are intended to
ensure effective disclosure of the costs and terms of credit to
consumers. For open-end credit, creditors are required to, among other
things, disclose information about the initial costs and terms and to
provide periodic statements of account activity, notices of changes in
terms, and statements of rights concerning billing error procedures.
Regulation Z requires specific types of disclosures for credit and
charge card accounts and for home-equity plans. For closed-end loans,
such as mortgage and installment loans, cost disclosures are required
to be provided prior to consummation. Special disclosures are required
in connection with certain products, such as reverse mortgages, certain
variable-rate loans, and certain mortgages with rates and fees above
specified thresholds. TILA and Regulation Z also contain rules
concerning credit advertising. Creditors are required to retain
evidence of compliance for twenty-four months (Sec. 226.25), but
Regulation Z does not specify the types of records that must be
retained.
Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Board that engage in lending covered by
Regulation Z and, therefore, are respondents under the PRA. Appendix I
of Regulation Z defines the Board-regulated institutions as: state
member banks, branches and agencies of foreign banks (other than
Federal branches, Federal agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A of
the Federal Reserve Act. Other Federal agencies account for the
paperwork burden on other entities subject to Regulation Z. To ease the
burden and cost of compliance with Regulation Z (particularly for small
entities), the Board provides model forms, which are appended to the
regulation.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 1,497,362 hours for the 1,138
institutions \7\ supervised by the Board that are deemed to be
respondents for the purposes of the PRA.
---------------------------------------------------------------------------
\7\ The number of Federal Reserve-supervised creditors was
obtained from numbers published in the Board of Governors of the
Federal Reserve System Annual Report: 878 State member banks, 258
Branches & agencies of foreign banks, and 2 Commercial lending
companies.
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On July 21, 2011, the amendments to proposed Sec. 226.3(b)(1)(i)
and its accompanying commentary would raise the threshold for exempt
consumer credit transactions from $25,000 to $50,000. In addition,
proposed Sec. 226.3(b)(1)(ii) would require that the threshold dollar
amount be adjusted annually for inflation to reflect any annual
percentage increase in the CPI-W. Creditors would be required to begin
complying with Regulation Z requirements for certain accounts with
extensions of consumer credit of more than $25,000 but not more than
$50,000, as adjusted annually to reflect increases in the CPI-W.
The Board estimates that the proposed rule would impose a one-time
increase in the total annual burden under Regulation Z. The 1,138
respondents would take, on average, 40 hours (one business week) to
update their systems to begin to comply with the requirements of
Regulation Z for loans that are no longer exempt. This one-time
revision would increase the burden by 45,520 hours. On a continuing
basis, the Board estimates that 1,138 respondents would take, on
average, 8 hours (one business day) annually to comply with the
requirements of Regulation Z for loans that are no longer exempt and
would increase the ongoing burden by 9,104 hours. Thus, the total
annual burden is estimated to increase by 54,624 hours (from 1,497,362
to 1,551,986 hours) during the first year after a final rule is
adopted. Thereafter, the ongoing total annual burden would be
1,506,466.\8\
---------------------------------------------------------------------------
\8\ The burden estimate for this rulemaking does not include the
burden addressing changes to implement the following provisions
announced in separate rulemakings:
Closed-End Mortgages (Docket No. R-1366) (74 FR 43232)(75 FR
58470), Home-Equity Lines of Credit (Docket No. R-1367) (74 FR
43428),
Reverse Mortgages (Docket No. R-1390) (75 FR 58539), or
Appraisal Independence (Docket No. R-1394) (75 FR 66554).
---------------------------------------------------------------------------
The total burden increase represents averages for all respondents
regulated by the Board. The Board expects that the amount of time
required to implement each of the proposed changes for a given
financial institution or entity may vary based on the size and
complexity of the respondent.
The other Federal financial institution supervisory agencies (the
Office of the Comptroller of the Currency (OCC), the Office of Thrift
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC),
and the National Credit Union Administration (NCUA)) are responsible
for estimating and reporting to OMB the total paperwork burden for the
domestically chartered commercial banks, thrifts, and Federal credit
unions and U.S. branches and agencies of foreign banks for which they
have primary administrative enforcement jurisdiction under TILA Section
108(a), 15 U.S.C. 1607(a). These agencies may, but are not required to,
use the Board's methodology for estimating burden. Using the Board's
method, the total current estimated annual burden for the approximately
16,200 domestically chartered commercial banks, thrifts, and Federal
credit unions and U.S. branches and agencies of foreign banks
supervised by the Board, OCC, OTS, FDIC, and NCUA under TILA would be
approximately 21,813,445 hours. The proposed rule would impose a one-
time increase in the estimated annual burden by 648,000. On a
continuing basis, the proposed rule would impose an increase in the
estimated annual burden by 129,600. Thus, the total annual burden is
estimated to increase by 777,600 hours to 22,591,045 hours during the
first year after a final rule is adopted. Thereafter, the ongoing total
annual burden would be 21,943,045. The above estimates represent an
average across all respondents and reflect variations between
institutions based on their size, complexity, and practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance
[[Page 78643]]
of the Board's functions, including whether the information has
practical utility; (2) the accuracy of the Board's estimate of the
burden of the proposed information collection, including the cost of
compliance; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collection of information should be sent to
Cynthia Ayouch, Acting Federal Reserve Board Clearance Officer,
Division of Research and Statistics, Mail Stop 95-A, Board of Governors
of the Federal Reserve System, Washington, DC 20551, with copies of
such comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0199), Washington, DC 20503.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System, Reporting
and recordkeeping requirements, Truth in Lending.
Text of Proposed Revisions
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 is revised to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and
1639(l); Pub. L. 111-24 Sec. 2, 123 Stat. 1734 [rtrif]; Pub. L.
111-203, 124 Stat. 1376[ltrif].
Subpart B--Open-End Credit
2. Section 226.3(b) is revised to read as follows:
Sec. 226.3 Exempt transactions.
* * * * *
(b) Credit over [rtrif]applicable threshold amount[ltrif] [$25,000
not secured by real property or a dwelling]. [rtrif](1) General
exemption. (i) Requirements.[ltrif] An extension of credit in which the
amount [rtrif]of credit extended[ltrif] [financed] exceeds [rtrif]the
applicable threshold amount[ltrif] [$25,000] or in which there is an
express written commitment to extend credit in excess of [rtrif]the
applicable threshold amount[ltrif] [$25,000], unless the extension of
credit is:
[rtrif](A)[ltrif] [(1)] Secured by [rtrif]any[ltrif] real property,
or by personal property used or expected to be used as the principal
dwelling of the consumer; or
[rtrif](B)[ltrif] [(2)] A private education loan as defined in
Sec. 226.46(b)(5).
[rtrif](ii) Annual adjustments. For purposes of this paragraph, the
threshold amount is adjusted annually to reflect increases in the
Consumer Price Index for Urban Wage Earners and Clerical Workers, as
applicable. See the official staff commentary to this paragraph for the
threshold amount applicable to a specific extension of credit or
express written commitment to extend credit.
(2) Special exemption; open-end accounts exempt prior to July 21,
2011. An open-end account that is exempt under paragraph (b) of this
section on July 20, 2011 based on an extension of credit in excess of
$25,000 or an express written commitment to extend credit in excess of
$25,000 remains exempt until July 21, 2012. However, an account ceases
to be exempt under this paragraph if:
(i) The creditor takes a security interest in any real property, or
in personal property used or expected to be used as the consumer's
principal dwelling; or
(ii) The creditor reduces any express written commitment to extend
credit to $25,000 or less.[ltrif]
* * * * *
3. In Supplement I to Part 226:
A. Under Section 226.2--Definitions and Rules of Construction,
under 2(a)(19) Dwelling, paragraph 3. is revised.
B. Under Section 226.3--Exempt Transactions, the heading 3(b)
Credit over $25,000 not secured by real property or a dwelling and
paragraphs 1. through 3. are revised and paragraphs 4. through 6. are
added.
C. Under Section 226.23--Right of Rescission, under 23(a)
Consumer's Right to Rescind, under Paragraph 23(a)(1), paragraph 5. is
revised.
The additions and revisions read as follows:
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
* * * * *
2(a)(19) Dwelling.
* * * * *
3. Relation to exemptions. Any transaction involving a security
interest in a consumer's principal dwelling (as well as in any real
property) remains subject to the regulation despite the general
exemption in Sec. 226.3(b) [for credit extensions over $25,000].
* * * * *
Section 226.3--Exempt Transactions
* * * * *
3(b) Credit over [rtrif]applicable threshold amount[ltrif]
[$25,000 not secured by real property or a dwelling].
[rtrif]1. Threshold amount. For purposes of Sec. 226.3(b), the
threshold amount in effect during a particular period is the amount
stated below for that period. The threshold amount is adjusted
effective January 1 of each year by any annual percentage increase
in the Consumer Price Index for Urban Wage Earners and Clerical
Workers (CPI-W) that was in effect on the preceding June 1. This
comment will be amended to provide the threshold amount for the
upcoming year after the annual percentage change in the CPI-W that
was in effect on June 1 becomes available. Any increase in the
threshold amount will be rounded to the nearest $100 increment. For
example, if the annual percentage increase in the CPI-W would result
in a $950 increase in the threshold amount, the threshold amount
will be increased by $1,000. However, if the annual percentage
increase in the CPI-W would result in a $949 increase in the
threshold amount, the threshold amount will be increased by $900.
i. Prior to July 21, 2011, the threshold amount is $25,000.
ii. From July 21, 2011 through December 31, 2011, the threshold
amount is $50,000.
2. Open-end credit.
i. Qualifying for exemption. An open-end account is exempt under
Sec. 226.3(b) (unless secured by any real property, or by personal
property used or expected to be used as the consumer's principal
dwelling) if either of the following conditions is met:
A. The creditor makes an initial extension of credit at account
opening that exceeds the threshold amount in effect at the time the
account is opened; or
B. The creditor makes a firm written commitment at account
opening to extend a total amount of credit in excess of the
threshold amount in effect at the time the account is opened with no
requirement of additional credit information for any advances on the
account (except as permitted from time to time with respect to open-
end accounts pursuant to Sec. 226.2(a)(20)).
ii. Subsequent changes generally. Subsequent changes to an open-
end account or the threshold amount may result in the account no
longer qualifying for the exemption in Sec. 226.3(b). In these
circumstances, the creditor must begin to comply with all of the
applicable requirements of this Part within a reasonable period of
time after the account ceases to be exempt (except as otherwise
provided). For example, if an open-end credit account ceases to be
exempt, the creditor must within a reasonable period of time provide
the disclosures required by Sec. 226.6 reflecting the current terms
of the account and begin to provide periodic statements consistent
with Sec. 226.7. See also comment 3(b)-4.
iii. Subsequent changes when exemption based on initial
extension of credit. If a
[[Page 78644]]
creditor makes an initial extension of credit at account opening
that exceeds the threshold amount in effect at that time, the open-
end account remains exempt under Sec. 226.3(b) regardless of a
subsequent increase in the threshold amount as a result of an
increase in the CPI-W. Furthermore, in these circumstances, the
account remains exempt even if 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 (such as through repayment of the extension), or
the credit limit for the account is subsequently reduced below the
threshold amount. However, if the initial extension of credit on an
account does not exceed the threshold amount in effect at the time
of the extension, the account is not exempt under Sec. 226.3(b)
even if the account balance later exceeds the threshold amount (for
example, due to the subsequent accrual of interest).
iv. Subsequent changes when exemption based on firm commitment.
A. General. If an open-end account is exempt under Sec.
226.3(b) based on a firm commitment to extend credit, the account
remains exempt even if the amount of credit actually extended does
not exceed the threshold amount. However, if the firm commitment
does not exceed the threshold amount, the account is not exempt
under Sec. 226.3(b) even if the account balance later exceeds the
threshold amount (for example, due to the subsequent accrual of
interest). In addition, in order for an open-end account to remain
exempt under Sec. 226.3(b) based on a firm commitment, the amount
of the firm commitment must continue to exceed the threshold amount
currently in effect, as adjusted annually. For example:
(1) Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
226.3(b) based on the creditor's firm commitment to extend $55,000
in credit. If during year one the creditor reduces its firm
commitment to $40,000, the account is no longer exempt under Sec.
226.3(b).
(2) Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
226.3(b) based on the creditor's firm commitment to extend $55,000
in credit. If the threshold amount increases to $50,900 on January 1
of year two as a result of an increase in the CPI-W, the account
remains exempt under Sec. 226.3(b). However, if the threshold
amount increases to $55,000 on January 1 of year six, the creditor
would have to increase its firm commitment to an amount above
$55,000 in order for the account to remain exempt.
B. Accounts no longer qualifying for exemption. If an open-end
account that was exempt under Sec. 226.3(b) based on a firm
commitment no longer qualifies for that exemption, the creditor may
begin to comply with all of the applicable requirements of this Part
within a reasonable period of time after the account ceases to be
exempt. However, in the alternative, the creditor may, at its
option, permit the consumer to repay any outstanding balance on the
account consistent with the account terms without providing
additional extensions of credit, if permitted by the terms of the
account and applicable state law.
C. Subsequent initial extension of credit. If an open-end
account qualifies for a Sec. 226.3(b) exemption at account opening
based on a firm commitment, that account may also subsequently
qualify for a Sec. 226.3(b) exemption based on an initial extension
of credit. However, that initial extension must be a single advance
in excess of the threshold amount in effect at the time the
extension is made. Although the initial extension of credit need not
be made at account opening in these circumstances, the account must
qualify for an exemption based on the firm commitment at account
opening and continue to qualify for an exemption on that basis until
the initial extension of credit is made. For example:
(1) Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
226.3(b) based on the creditor's firm commitment to extend $55,000
in credit. The account is not used for an extension of credit during
year one. On January 1 of year two, the threshold amount increases
to $51,000 as a result of an increase in the CPI-W. On July 1 of
year two, the consumer uses the account for an initial extension of
$52,000. As a result of this extension of credit, the account
remains exempt under Sec. 226.3(b) even if, after July 1 of year
two, the creditor reduces the firm commitment to $51,000 or less, or
if, during year three, the threshold amount increases to $53,000 to
reflect an increase in the CPI-W.
(2) Same facts as in paragraph (1) above except that the
consumer uses the account for an initial extension of $30,000 on
July 1 of year two and for an extension of $22,000 on July 15 of
year two. In these circumstances, the account is not exempt under
Sec. 226.3(b) based on the $30,000 initial extension of credit
because that extension did not exceed the applicable threshold
amount ($52,000), although the account remains exempt based on the
firm commitment to extend $55,000 in credit.
(3) Same facts as in paragraph (1) above except that, on April 1
of year two, the creditor reduces the firm commitment to $50,000,
which is below the $51,000 threshold then in effect. Because the
account ceases to qualify for a Sec. 226.3(b) exemption on April 1
of year two, the account does not qualify for a Sec. 226.3(b)
exemption based on a $52,000 initial extension of credit on July 1
of year two.
3. Closed-end credit.
i. Qualifying for exemption. A closed-end loan is exempt under
Sec. 226.3(b) (unless the extension of credit is secured by any
real property, or by personal property used or expected to be used
as the consumer's principal dwelling; or is a private education loan
as defined in Sec. 226.46(b)(5)), if either of the following
conditions is met:
A. The creditor makes an extension of credit at consummation
that exceeds the threshold amount in effect at the time of
consummation. In these circumstances, the loan remains exempt under
Sec. 226.3(b) even if the amount owed is subsequently reduced below
the threshold amount.
B. The creditor makes a commitment at consummation to extend a
total amount of credit in excess of the threshold amount in effect
at the time of consummation. In these circumstances, the loan
remains exempt under Sec. 226.3(b) even if the total amount of
credit extended does not exceed the threshold amount.
ii. Subsequent changes. If a creditor makes a closed-end
extension of credit or commitment to extend closed-end credit that
exceeds the threshold amount in effect at the time of consummation,
the closed-end loan remains exempt under Sec. 226.3(b) regardless
of a subsequent increase in the threshold amount as a result of an
increase in the CPI-W. Furthermore, in these circumstances, the loan
remains exempt even if the amount owed is subsequently reduced below
the threshold amount (such as through repayment of the loan).
However, a closed-end loan is not exempt under Sec. 226.3(b) merely
because it is used to satisfy and replace an existing exempt loan,
unless the new extension of credit is itself exempt under the
applicable threshold amount. For example, assume a closed-end loan
that qualified for a Sec. 226.3(b) exemption at consummation in
year one is refinanced in year ten and that the new loan amount is
less than the threshold amount in effect in year ten. In these
circumstances, the creditor must comply with all of the applicable
requirements of this Part with respect to the year ten transaction
if the original loan is satisfied and replaced by the new loan,
which is not exempt under Sec. 226.3(b). See also comment 3(b)-4.
4. Addition of a security interest in real property or a
dwelling after account opening or consummation.
i. Open-end credit. For open-end accounts, if, after account
opening, a security interest is taken in any real property, or in
personal property used or expected to be used as the consumer's
principal dwelling, a previously exempt account ceases to be exempt
under Sec. 226.3(b) and the creditor must begin to comply with all
of the applicable requirements of this Part within a reasonable
period of time. See comment 3(b)-2.ii. If a security interest is
taken in the consumer's principal dwelling, the creditor must give
the consumer the right to rescind the security interest consistent
with Sec. 226.15.
ii. Closed-end credit. For closed-end loans, if, after
consummation, a security interest is taken in any real property, or
in personal property used or expected to be used as the consumer's
principal dwelling, an exempt loan remains exempt under Sec.
226.3(b). However, the addition of a security interest in the
consumer's principal dwelling is a transaction for purposes of Sec.
226.23 and the creditor must give the consumer the right to rescind
the security interest consistent with that section. See Sec.
226.23(a)(1) and the accompanying commentary. In contrast, if a
closed-end loan that is exempt under Sec. 226.3(b) is satisfied and
replaced by a loan that is secured by any real property, or by
personal property used or expected to be used as the consumer's
principal dwelling, the new loan is not exempt under Sec. 226.3(b)
and the creditor must being to comply with all the applicable
requirements of this Part. See comment 3(b)-3.
[[Page 78645]]
5. Application to extensions secured by mobile homes. Because a
mobile home can be a dwelling under Sec. 226.2(a)(19), the
exemption in Sec. 226.3(b) does not apply to a credit extension
secured by a mobile home that is used or expected to be used as the
principal dwelling of the consumer. See comment 3(b)-4.
6. Special exemption for open-end accounts exempt prior to July
21, 2011. Section 226.3(b)(2) applies only to open-end accounts
opened prior to July 21, 2011. Section 226.3(b)(2) does not apply if
a security interest is taken by the creditor in any real property,
or in personal property used or expected to be used as the
consumer's principal dwelling.
i. Initial extension of credit.
A. If, prior to July 21, 2011, a creditor makes an initial
extension of credit of more than $25,000 on an open-end account, the
account remains exempt under Sec. 226.3(b)(1) regardless of
subsequent increases in the threshold amount.
B. If the terms of an open-end account require that the initial
extension of credit on that account be more than $25,000 but that
extension has not occurred prior to July 21, 2011, the account
remains exempt under Sec. 226.3(b)(2) until July 21, 2012. However,
if an initial extension of credit of more than $25,000 is actually
made prior to July 21, 2012, the account remains exempt under Sec.
226.3(b)(1) regardless of subsequent increases in the threshold
amount. If an initial extension of credit of more than $25,000 is
not made prior to July 21, 2012, the account is no longer exempt
under Sec. 226.3(b). However, if, prior to that date, the creditor
makes a firm commitment to extend credit in excess of the threshold
amount in effect at that time, the account remains exempt under
Sec. 226.3(b)(1).
ii. Firm commitment. If, prior to July 21, 2011, a creditor
makes a firm commitment to extend credit in excess of $25,000 on an
open-end account, the account remains exempt under Sec. 226.3(b)(2)
until July 21, 2012 (unless the firm commitment is reduced to
$25,000 or less). If an initial extension of credit of more than
$25,000 is made prior to July 21, 2012, the account remains exempt
under Sec. 226.3(b)(1) regardless of subsequent increases in the
threshold amount. However, if no such extension of credit is made,
the firm commitment must be increased prior to July 21, 2012 to the
threshold amount in effect at that time in order for the account to
remain exempt under Sec. 226.3(b)(1).[ltrif]
[1. Coverage. Since a mobile home can be a dwelling under Sec.
226.2(a)(19), this exemption does not apply to a credit extension
secured by a mobile home used or expected to be used as the
principal dwelling of the consumer, even if the credit exceeds
$25,000. A loan commitment for closed-end credit in excess of
$25,000 is exempt even though the amounts actually drawn never
actually reach $25,000.
2. Open-end credit. i. An open-end credit plan is exempt under
Sec. 226.3(b) (unless secured by real property or personal property
used or expected to be used as the consumer's principal dwelling) if
either of the following conditions is met:
A. The creditor makes a firm commitment to lend over $25,000
with no requirement of additional credit information for any
advances (except as permitted from time to time pursuant to Sec.
226.2(a)(20)).
B. The initial extension of credit on the line exceeds $25,000.
ii. If a security interest is taken at a later time in any real
property, or in personal property used or expected to be used as the
consumer's principal dwelling, the plan would no longer be exempt.
The creditor must comply with all of the requirements of the
regulation including, for example, providing the consumer with an
initial disclosure statement. If the security interest being added
is in the consumer's principal dwelling, the creditor must also give
the consumer the right to rescind the security interest. (See the
commentary to Sec. 226.15 concerning the right of rescission.)
3. Closed-end credit--subsequent changes. A closed-end loan for
over $25,000 may later be rewritten for $25,000 or less, or a
security interest in real property or in personal property used or
expected to be used as the consumer's principal dwelling may be
added to an extension of credit for over $25,000. Such a transaction
is consumer credit requiring disclosures only if the existing
obligation is satisfied and replaced by a new obligation made for
consumer purposes undertaken by the same obligor. (See the
commentary to Sec. 226.23(a)(1) regarding the right of rescission
when a security interest in a consumer's principal dwelling is added
to a previously exempt transaction.)]
* * * * *
Section 226.23--Right of Rescission
* * * * *
23(a) Consumer's Right to Rescind
Paragraph 23(a)(1).
* * * * *
5. Addition of a security interest. Under footnote 47, the
addition of a security interest in a consumer's principal dwelling
to an existing obligation is rescindable even if the existing
obligation is not satisfied and replaced by a new obligation, and
even if the existing obligation was previously exempt [rtrif]under
Sec. 226.3(b)[ltrif] [(because it was credit over $25,000 not
secured by real property or a consumer's principal dwelling)]. The
right of rescission applies only to the added security interest,
however, and not to the original obligation. In those situations,
only the Sec. 226.23(b) notice need be delivered, not new material
disclosures; the rescission period will begin to run from the
delivery of the notice.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 10, 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2010-31529 Filed 12-15-10; 8:45 am]
BILLING CODE 6210-01-P