[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Rules and Regulations]
[Pages 18354-18365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7376]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1399]
RIN No. 7100-AD59
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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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 Earners and Clerical Workers. Accordingly,
the Board is making 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 making
similar amendments to Regulation M elsewhere in today's Federal
Register.
DATES: Consistent with Sections 1062 and 1100H of the Dodd-Frank Act,
this final rule is effective on the transfer date designated by the
Secretary of the Treasury, which is July 21, 2011.
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 final 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, and other than private education loans (as that term is
defined in section 140(a)), 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. Effective January 1, 2012, the $50,000 threshold will
be adjusted annually based on any annual percentage increase in the
CPI-W.
In December 2010, the Board proposed to amend Sec. 226.3(b) and
the accompanying commentary for consistency with the amendments made by
the Dodd-Frank Act. See 75 FR 78636 (Dec. 16, 2010) (December 2010
Proposed Regulation Z Rule). 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 simultaneously proposed
to amend Regulation M, which implements the Consumer Leasing Act (CLA).
See 75 FR 78632 (Dec. 16, 2010) (December 2010 Proposed Regulation M
Rule).
The Board received 10 comments on the December 2010 Regulation Z
Proposed Rule. As discussed below, the Board is adopting the rule
largely as proposed with some modifications to facilitate compliance.
Elsewhere in today's Federal Register, the Board is also adopting a
final rule amending Regulation M in order to implement the amendments
to CLA's exemption threshold for consumer leases.
II. Summary of Final Rule
Revisions to Sec. 226.3(b)
Consistent with the Dodd-Frank Act, the Board's final rule revises
Sec. 226.3(b) and the accompanying staff commentary to provide that,
effective July 21, 2011, a consumer credit account is exempt from the
requirements of Regulation Z if: (1) The initial extension of credit on
the account exceeds $50,000; or (2) the creditor makes a firm
commitment at
[[Page 18355]]
account opening to extend credit in excess of $50,000. This final rule
further provides that, effective January 1, 2012, the $50,000 threshold
will be adjusted annually by any annual percentage increase in the CPI-
W.
The Board has also adopted a transition rule in Sec. 226.3(b)(2)
to reduce the compliance burden with respect to certain accounts that
are currently exempt under the $25,000 threshold. Specifically, this
transition rule provides that, if an open-end credit account is exempt
on July 20, 2011 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.
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 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, this final rule will be effective on that date. However,
if the Secretary of Treasury designates a later transfer date pursuant
to Section 1062, this final rule will instead be effective on that
date.
Consumer group commenters argued that, because Section 1100E placed
creditors on notice of the increased threshold amount, creditors should
be required to begin complying with all aspects of the Board's rule on
July 21, 2011. In contrast, one industry commenter requested that the
Board delay compliance by one year (i.e., until July 21, 2012). This
commenter asserted that--in light of the extensive regulatory changes
required by the Dodd-Frank Act and other statutes--it would be
burdensome for small institutions to comply with Regulation Z for
credit extensions and firm commitments of $50,000 or less by July 21,
2011. However, the Board understands that institutions that extend
consumer credit generally already have the systems in place to comply
with Regulation Z. Thus, as a general matter, it should not be unduly
burdensome for these institutions to comply with Regulation Z with
respect to accounts opened after July 21, 2011. Nevertheless, as
discussed in detail below with respect to the transition rule in Sec.
226.3(b)(2), the Board believes it is appropriate to provide additional
time for compliance with respect to certain exempt accounts opened
prior to July 21, 2011.
III. 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.
IV. 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 an extension 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, unless: (1) The extension of credit
is secured by real property, or by personal property used or expected
to be used as the principal dwelling of the consumer; or (2) the
extension of credit is a private education loan (as defined in Sec.
226.46(b)(5)). 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
amending Sec. 226.3(b) and the accompanying commentary to implement
Section 1100E.
3(b)(1) Exemption
The Board proposed to redesignate current Sec. 226.3(b) as Sec.
226.3(b)(1)(i) and add a new Sec. 226.3(b)(1)(ii) 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) refers to the
``applicable threshold amount,'' rather than stating a specific
amount.\2\ Instead, new Sec. 226.3(b)(1)(ii) provides 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 proposed to amend Sec. 226.3(b) to
require that, in order for an account to be exempt based on an initial
extension of credit, the amount of credit extended (rather than the
amount financed) must exceed the applicable threshold amount.
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\1\ The Board notes that, consistent with the Dodd-Frank Act,
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, the Board proposed to remove the references
to the $25,000 threshold from comments 2(a)(19)-3 and 23(a)(1)-5.
The Board did not receive any comments on these revisions, which are
adopted as proposed.
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One industry commenter requested that the Board only increase the
exemption threshold amount to $50,000 without making subsequent annual
adjustments for inflation. The Board believes that such an approach
would be inconsistent with Section 1100E(b), which requires that the
exemption threshold amount be adjusted annually based on increases in
the CPI-W.
Consumer groups and a member of Congress requested that the Board
amend Sec. 226.3(b) to eliminate the exemption for accounts with an
express written commitment (or firm commitment) to extend credit in
excess of the threshold amount. These commenters noted that TILA
Section 104(3) does not provide a firm commitment exemption.
Furthermore, they expressed concern that a credit card account with a
credit limit that exceeds the threshold amount would be exempt from
TILA and therefore from the consumer protections in the Credit Card
Accountability Responsibility and Disclosure Act of 2009 (Credit Card
Act), which amended TILA.
For purposes of obtaining an exemption, Regulation Z has treated a
[[Page 18356]]
creditor's firm commitment to extend credit in excess of the threshold
amount as the functional equivalent of an extension of credit in excess
of that amount since the 1980s. As a result, creditors ranging from
large financial institutions to small community banks and credit unions
have been relying on this exemption for more than twenty years. Section
1100E did not repeal the firm commitment exemption, and the Board's
December 2010 Regulation Z Proposed Rule did not request comment on
whether the exemption should be eliminated. Thus, if the Board were to
eliminate this exemption, it would do so without the benefit of public
comment regarding the operational burden on creditors and the effect on
the cost and availability of credit for consumers. For these reasons,
this final rule retains the firm commitment exemption.\3\
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\3\ As an alternative to eliminating the firm commitment
exemption, consumer group commenters requested that, in order to
prevent evasion, the Board prohibit creditors from reducing a firm
commitment for at least six months after account opening. However,
this requirement would involve a substantial limitation to the firm
commitment exemption that was not set forth in the proposed rule and
therefore was not the subject of public comment.
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The Board also 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. Instead, as
discussed in detail below, 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 threshold amount. Furthermore, the creditor must honor
transactions up to the committed amount without requiring additional
credit information (although creditors are permitted to, for example,
verify the value of collateral before making an extension and perform
periodic reviews of the consumer's creditworthiness).\4\ Thus, unless a
credit card issuer can satisfy these requirements, a credit card
account with a credit limit above the threshold amount does not qualify
for a firm commitment exemption and is subject to TILA and the Credit
Card Act.
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\4\ Because a creditor that makes a firm commitment must honor
transactions up to the committed amount without requiring additional
credit information, the Board understands that some creditors do not
utilize the firm commitment exemption because of the cost associated
with maintaining capital to honor advances for available credit on a
committed line.
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The member of Congress also suggested that, for accounts that are
exempt based on an initial extension of credit, the Board require a
creditor to begin to comply with Regulation Z if, at any point in time
during the life of the account, the outstanding balance does not exceed
the threshold amount. He argued this approach would be consistent with
TILA Section 104(3), which refers to ``the total amount financed.''
Because, however, the balance on an account will almost always fall
below the threshold amount as it is repaid, the Board is concerned that
this approach would be contrary to the purpose of TILA Section 104(3)
because it would effectively prevent any account from remaining exempt
based on an initial extension of credit above the threshold.
Furthermore, the Board believes that conditioning the exemption on the
amount of credit extended--and not the amount financed--promotes
consumer understanding.\5\
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\5\ For a discussion of the results of the Board's consumer
testing regarding the ``amount financed,'' see 74 FR 43232, 43308
(Aug. 26, 2009).
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Therefore, in order to effectuate the purposes of TILA and to
facilitate compliance, the Board uses its authority under TILA Section
105(a) to adopt Sec. 226.3(b)(1) as proposed, with non-substantive
revisions to its headings. 15 U.S.C. 1604(a). As discussed below, the
Board is also revising and reorganizing the commentary to Sec.
226.3(b).
Threshold Amount
The Board proposed a new comment 3(b)-1 listing the threshold
amounts in effect for specific periods of time.\6\ In particular, the
proposed comment clarified 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. The proposed comment also
clarified 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.\7\ 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. For example, after the annual percentage change in
the CPI-W in effect on June 1, 2011 becomes available, comment 3(b)-1
will be amended to provide the threshold amount in effect beginning on
January 1, 2012. The Board received only one comment regarding this
approach, which stated that the proposed timeframe would provide
adequate time for creditors to comply with any inflation adjustment in
the threshold amount.
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\6\ For organizational purposes, the guidance in current comment
3(b)-1 has been moved to other comments, as discussed below.
\7\ 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 will 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 permits the publication of an increased
threshold amount sufficiently in advance of the January 1 effective
date.
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Proposed comment 3(b)-1 further clarified 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 this commentary clarifies the statutory
language in a manner consistent with the intent of Section 1100E. The
only comment the Board received on this aspect of the proposal
supported the proposed clarification with respect to rounding.
Accordingly, for the reasons discussed above, the Board is adopting
comment 3(b)-1 as proposed.
Open-End Credit
Proposed comment 3(b)-2 provided guidance on the application of
Sec. 226.3(b)(1) to open-end credit accounts. Consistent with the
existing commentary, proposed comment 3(b)-2.i clarified 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; or (2) the creditor makes a firm written commitment
to extend a total amount of credit in excess of the threshold amount
with no requirement of additional credit information for any advances
on the account (except as permitted from time
[[Page 18357]]
to time with respect to open-end accounts pursuant to Sec.
226.2(a)(20)).
In addition, in order to provide certainty regarding the exemption
status of an account, the Board proposed to clarify in comment 3(b)-2.i
that the initial extension of credit or firm commitment must be made at
account opening for purposes of determining whether an open-end account
is exempt under Sec. 226.3(b). Some industry commenters supported the
requirement that a firm commitment to extend credit in excess of the
threshold amount occur at account opening; however, other industry
commenters specifically opposed this requirement with respect to
initial extensions of credit. In particular, they argued that many
consumers open an account in order to have access to credit at a future
time and do not want an extension at account opening. In addition, some
industry commenters argued that the proposed requirement would impose a
significant compliance burden on creditors who offer open-end lines of
credit associated with brokerage accounts, which are serviced on
systems that cannot presently provide Regulation Z disclosures. They
stated that these lines of credit are structured to be exempt under
Sec. 226.3(b) based on a contractual requirement that the initial
extension of credit must exceed the applicable threshold amount, even
if that extension does not occur at account opening.
Based on the comments and further consideration, the Board believes
that it is not necessary to require that the initial extension of
credit be made at account opening for purposes of Sec. 226.3(b).
Instead, the Board has revised comment 3(b)-2.i to clarify that an
account is exempt under Sec. 226.3(b) based on an initial extension of
credit at or after account opening, provided that extension exceeds the
threshold amount in effect at the time the extension is made. In
addition to providing flexibility, this approach is consistent with
Section 1100E of the Dodd-Frank Act because, regardless of when the
account is opened, the initial extension of credit must exceed the
threshold amount (as adjusted based on the CPI-W) that is in effect at
the time the extension is made. Neither the Dodd-Frank Act nor TILA
requires that the initial extension occur at account opening.
However, in order to ensure that consumers are fully protected, the
final rule clarifies that, if a creditor makes an initial extension of
credit after account opening that does not exceed the threshold amount
in effect at the time the extension is made, the creditor must have
satisfied all of the applicable requirements of Regulation Z from the
date the account was opened (or earlier, if applicable). For example,
assume that the threshold amount is $50,000 and that, after account
opening, the creditor makes an initial extension of credit of $50,000
or less. In this circumstance, the account is not exempt and the
creditor must have satisfied all of the applicable requirements of
Regulation Z from the date the account was opened (or earlier, if
applicable), including but not limited to the requirements of Sec.
226.6 (account-opening disclosures), Sec. 226.7 (periodic statements),
Sec. 226.52 (limitations on fees), and Sec. 226.55 (limitations on
increasing annual percentages rates, fees, and charges). Illustrative
examples are provided. Comment 3(b)-2.i is otherwise adopted as
proposed.
Proposed comment 3(b)-2.ii provided general guidance regarding
circumstances in which an account that was exempt under Sec. 226.3(b)
no longer qualifies for an exemption. An account would cease to be
exempt, for example, if a security interest is taken at a later time in
any real property, or in the consumer's principal dwelling.
Specifically, the comment clarified that a creditor must begin to
comply with all of the applicable requirements of Regulation Z within a
reasonable period of time after an account ceases to be exempt. For
example, if an open-end 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.
Industry commenters, including trade associations representing
credit unions and community banks, argued that the proposed guidance
would impose significant operational difficulties and requested further
clarification regarding creditors' responsibilities when an account no
longer qualifies for an exemption under Sec. 226.3(b). Consumer group
commenters generally supported the proposed guidance, but requested
that, to the extent that a creditor imposed charges that were
inconsistent with Regulation Z while the account was exempt, the
creditor be required to refund those charges once the exemption is
lost.
In order to clarify the proposed guidance, the Board is revising
comment 3(b)-2.ii to state that, once an exempt account ceases to be
exempt, the applicable requirements of Regulation Z apply prospectively
to any balances on the account. For example, if a credit card account
under an open-end (not home-secured) consumer credit plan ceases to be
exempt, the protections in Sec. 226.55 generally prevent the card
issuer from increasing the rate that applies to the account's existing
balance, even if that balance consists of transactions that occurred
while the account was exempt. The Board further clarifies, however,
that 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. Thus, for example, a creditor is not required to
refund amounts charged during the period the account was exempt or to
provide disclosures regarding transactions or changes in account terms
that occurred during that period. Finally, because the Board
understands that many creditors voluntarily comply with Regulation Z
for exempt accounts, the final rule clarifies that, if a creditor
provided disclosures consistent with the requirements of Regulation Z
while the account was exempt (including account-opening disclosures
consistent with Sec. 226.6 and change-in-terms notices consistent with
Sec. 226.9), the creditor is not required to provide the disclosures
required by Sec. 226.6 reflecting the current terms of the account if
the account ceases to be exempt.
Proposed comment 3(b)-2.iii addressed 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 clarified that, if a
creditor makes an initial extension of credit 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 also clarified 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).
Industry commenters generally supported the Board's proposal.
Although one industry commenter requested that an account become
[[Page 18358]]
exempt once the total amount of the transactions on the account exceeds
the threshold, the Board does not believe that this approach would be
consistent with the intent of TILA Section 104(3). Accordingly, the
Board is adopting comment 3(b)-2.iii as proposed with revisions for
clarity and consistency.
Proposed comment 3(b)-2.iv addressed 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, proposed comment 3(b)-2.iv.A clarified 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 proposed comment stated 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 under
the proposed rule, a creditor could not reduce its firm commitment
below the threshold amount currently in effect and would have been
required to increase its firm commitment when it no longer exceeded the
threshold amount due to increases in the threshold as a result of
increases in the CPI-W.
Trade associations representing credit unions and community banks
opposed the proposed requirement that, in order for an account to
remain exempt based on a firm commitment, the amount of the commitment
must continue to exceed the threshold amount currently in effect. These
commenters argued that the continuous monitoring of such accounts would
impose significant operational costs and compliance burdens,
particularly on small institutions. Several industry commenters
requested the Board clarify that if an account is exempt based on a
firm commitment in excess of the threshold amount at account opening,
the account will remain exempt regardless of subsequent increases in
the threshold amount as a result of inflation. In addition, some
industry commenters argued that the account should remain exempt even
if the creditor reduces the firm commitment below the applicable
threshold amount. One industry commenter, however, noted that creditors
frequently renew lines of credit and that the amount of firm commitment
is rarely reduced before renewal. This commenter requested that the
Board provide additional flexibility to creditors when the consumer
requests a reduction in the firm commitment amount.
As discussed above, consumer groups and a member of Congress
requested that the Board eliminate the firm commitment exemption. In
the alternative, consumer group commenters urged the Board to adopt the
proposed requirement that the firm commitment continue to exceed the
threshold amount.
Based on the comments and further analysis, the Board is revising
proposed comment 3(b)-2.iv.A in order to ease some of the compliance
burden for creditors, while retaining protections against
circumvention. As discussed below with respect to the transition rule
in Sec. 226.3(b)(2), all creditors that currently rely on the firm
commitment exemption must 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. Although this requirement will
impose a one-time burden on creditors, the Board believes that, because
Section 1100E of the Dodd-Frank Act was intended to expand TILA's
coverage to transactions involving higher dollar amounts, it would be
inconsistent with that intent to allow existing accounts to remain
exempt based on firm commitments of less than $50,000. In contrast,
however, the Board does not believe it would be appropriate to require
creditors to continually review and adjust accounts that are exempt
based on a firm commitment due to any incremental CPI-W increases in
the threshold amount. In particular, the Board notes that, for smaller
institutions with limited resources, the burden of monitoring the firm
commitment amount in accordance with annual increases in the threshold
amount is likely to be significant. In some cases, the Board
understands that small institutions would have to conduct this review
manually. Accordingly, the Board has revised comment 3(b)-2.iv.A to
clarify that if a creditor makes a firm commitment at account opening
to extend a total amount of credit 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. For example, if the applicable
threshold amount is $50,000 and an account is exempt at account opening
based on a firm commitment of $55,000, the account remains exempt even
if the threshold amount subsequently increases to $56,000 as a result
of increases in the CPI-W.
However, in order to prevent circumvention, the Board is adopting
the proposed guidance in comment 3(b)-2.iv.A with respect to a
reduction in a firm commitment. Accordingly, the revised comment
clarifies that 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. For example,
if the applicable threshold amount is $56,000 and a $60,000 firm
commitment on an exempt account is reduced to $52,000, the account no
longer qualifies for an exemption based on the firm commitment.
However, if the firm commitment on the exempt account is reduced to
$58,000, the account remains exempt because the firm commitment still
exceeds the threshold amount in effect at the time of the reduction.
This guidance applies to any reduction in the firm commitment, whether
upon the creditor's initiative or the borrower's request. The Board
believes that the final rule does not impose any unwarranted monitoring
burden in these circumstances because the creditor presumably would
review the account in order to determine whether to reduce the firm
commitment.
Proposed comment 3(b)-2.iv.B clarified that when an open-end
account no longer qualifies for an exemption under Sec. 226.3(b) based
on a firm commitment, the creditor would not be required to begin
complying with Regulation Z if it permitted the consumer to repay any
outstanding balance on the account consistent with the account terms
without providing additional extensions of credit. This guidance was
based on the Board's concern that, if an account ceased to be exempt,
the creditor would close the account and require the consumer to repay
the outstanding balance rather than begin to comply with Regulation Z.
Consumer group commenters opposed adoption of this guidance, arguing
that creditors should be required to comply with Regulation Z in these
circumstances. In addition, an industry trade association stated that
creditors generally comply with Regulation Z even if an account
qualifies for an exemption under Sec. 226.3(b). Based on these
comments and further analysis, the Board believes that this guidance is
not necessary. Furthermore, as discussed above, the Board has revised
comment 3(b)-2.ii to provide additional guidance and flexibility for
accounts that no longer qualify for an exemption under Sec. 226.3(b).
Accordingly, the final
[[Page 18359]]
rule does not adopt proposed comment 3(b)-2.iv.B.
Finally, proposed comment 3(b)-2.iv.C addressed 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 clarified that, in these circumstances, the account
qualifies 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 firm commitment is
subsequently reduced below the threshold amount. For example, assume
that, at account opening on January 1 of 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 $53,000 in credit. On
July 1 of year one, the consumer uses the account for an initial
extension of $52,000, which is taken in a single advance. As a result
of this extension of credit, the account remains exempt under Sec.
226.3(b) even if, after July 1, the creditor reduces the firm
commitment to $50,000 or less.
One industry commenter suggested that the Board permit accounts to
qualify for an exemption in these circumstances based on multiple
advances that, in total, exceed the applicable threshold amount,
instead of a single, initial advance. For consistency with the guidance
in revised comment 3(b)-2.i, the Board declines to adopt this
suggestion. Therefore, comment 3(b)-2.iv.C is renumbered as comment
3(b)(2)-2.iv.B for organizational purposes and otherwise adopted as
proposed, with non-substantive revisions for clarity and consistency.
Closed-End Credit
Proposed comment 3(b)-3 provided guidance on the application of
Sec. 226.3(b)(1) to closed-end loans. Specifically, comment 3(b)-3.i
clarified 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 clarified 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 amount owed is subsequently reduced below the threshold amount,
such as through repayment.
Second, the comment clarified that a closed-end loan would be
exempt if the 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 further clarified 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.\8\ This guidance addressed loan commitments for
closed-end credit 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.
---------------------------------------------------------------------------
\8\ This guidance is currently set forth in comment 3(b)-1.
---------------------------------------------------------------------------
Proposed comment 3(b)-3.ii provided guidance on the effect of
subsequent changes to a closed-end loan or loan commitment or to the
threshold amount. Specifically, the comment clarified 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, such as an
increase as a result of Section 1100E or an increase in the CPI-W. In
addition, the proposed comment incorporated existing guidance regarding
the refinancing of an exempt closed-end loan. Consumer groups and one
industry commenter generally supported the proposed comment.
Accordingly, the Board is adopting comment 3(b)-3 as proposed with non-
substantive revisions for clarity.
Additional Commentary
Proposed comment 3(b)-4 provided guidance when a security interest
in any real property, or in personal property used or expected to be
used as the consumer's principal dwelling, is added to an existing
account or loan that is exempt under Sec. 226.3(b). The proposed
comment incorporated guidance from current comments 3(b)-2.ii and 3(b)-
3 with respect to open-end credit and closed-end credit, respectively.
The Board did not receive substantive comments on proposed comment
3(b)-4, which is adopted as proposed with non-substantive revisions for
clarity.
Proposed comment 3(b)-5 incorporated the guidance currently
provided in comment 3(b)-1 regarding credit extensions secured by
mobile homes. Specifically, this comment clarified 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. The only comment to address this guidance supported
adoption of the proposal. Accordingly, the Board is adopting comment
3(b)-5 as proposed.
3(b)(2) Transition Rule for Open-End Accounts Exempt Prior to July 21,
2011
The Board proposed 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 the revised
threshold. Specifically, proposed Sec. 226.3(b)(2) provided 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. Section
226.3(b)(2) was 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 systems that cannot presently provide Regulation Z disclosures, the
Board proposed a transition period in order to provide additional
flexibility and facilitate compliance with the revisions to Sec.
226.3(b).
In particular, the Board noted that this concern exists with
respect to certain open-end lines of credit associated with brokerage
accounts that are serviced on systems that cannot currently provide
[[Page 18360]]
Regulation Z disclosures.\9\ Industry commenters indicated that
creditors offering this type of product would generally be able to
comply with the increased threshold amount on July 21, 2011 by
requiring that any initial extensions of credit on or after that date
exceed $50,000; however, they requested that the Board delay the
mandatory compliance date for the proposed requirement that an initial
extension of credit occur at account opening. As discussed above, the
Board is revising its commentary to clarify that the initial extension
of credit on an open-end account is not required to occur at account
opening for purposes of Sec. 226.3(b). Therefore, with respect to
accounts that are exempt based on an initial extension of credit, the
Board believes additional compliance time is not required. Accordingly,
the Board is not adopting the proposed transition rule for these
accounts.
---------------------------------------------------------------------------
\9\ To the extent the creditors who provide these accounts are
not broker-dealers, the accounts are not exempt under Sec.
226.3(d).
---------------------------------------------------------------------------
However, the Board believes that it is appropriate to provide
creditors that are currently relying on a firm commitment exemption
with additional time to adjust to the increase in the threshold amount
from $25,000 to $50,000 pursuant to Section 1100E. As noted above, the
Board believes that it would be inconsistent with the intent of Section
1100E to permit accounts to remain exempt based on firm commitments to
extend more than $25,000 (but less than $50,000) in credit. Thus, in
order to comply with the final rule, creditors must review all accounts
that are currently exempt based on a firm commitment and, to the extent
the commitment does not exceed $50,000, either increase the commitment
or begin to comply with Regulation Z. Industry commenters argued that
this task would be burdensome (particularly for small institutions) and
requested additional time to comply. However, as noted above, consumer
group commenters opposed providing any additional time for compliance.
Based on the comments and further analysis, the Board believes it
is appropriate to provide additional time for creditors who currently
rely on the firm commitment exemption to make the necessary adjustments
to comply with the one-time increase from $25,000 to $50,000; however,
the Board does not believe that the proposed one-year transition period
is necessary because the Board understands that these creditors
generally have the systems and procedures in place to comply with
Regulation Z. Accordingly, as adopted in the final rule, Sec.
226.3(b)(2) provides that an open-end account that is exempt on July
20, 2011 based on an express written commitment to extend credit in
excess of $25,000 generally remains exempt until December 31, 2011. The
Board believes that this will provide creditors with sufficient time to
review their accounts and make the necessary adjustments.
The Board is revising proposed comment 3(b)-6 to provide guidance
regarding the application of revised Sec. 226.3(b)(2). In particular,
the comment clarifies that if, on July 20, 2011, an open-end account is
exempt under Sec. 226.3(b) based on a firm commitment to extend credit
in excess of $25,000, the account generally remains exempt under Sec.
226.3(b)(2) 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 in excess of $50,000, the account
remains exempt under Sec. 226.3(b)(1) regardless of subsequent
increases in the threshold amount as a result of increases in the CPI-
W. If the firm commitment is not increased on or before December 31,
2011 to an amount in excess of $50,000, the account ceases to be exempt
under the Sec. 226.3(b) based on a firm commitment. Furthermore,
comment 3(b)-6 clarifies 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.
V. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an initial and a 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 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 final regulatory
flexibility analysis pursuant to section 604 of the RFA.
Based on its initial and final analyses and for the reasons stated
below, the Board believes that this final rule will not have a
significant economic impact on a substantial number of small entities.
1. Statement of the need for, and objectives of, the final rule.
The final rule implements 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
threshold shall be adjusted 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 final rule.
2. Summary of the significant issues raised by public comment on
Board's initial analysis, the Board's assessment of such issues, and a
statement of any changes made as a result of such comments. An industry
group representing credit unions requested that, in order to reduce
regulatory burden, the Board provide additional guidance regarding the
types of records that institutions are required to retain in order to
demonstrate compliance with Regulation Z. Section 226.25 states that
creditors must retain ``evidence of compliance with this regulation
(other than advertising requirements under sections 226.16 and 226.24)
for two years after the date disclosures are required to be made or
action is required to be taken.'' Comment 25-2 clarifies that
``[a]dequate evidence of compliance does not necessarily mean actual
paper copies of disclosure statements or other business records.''
Instead, ``[t]he evidence may be retained on microfilm, microfiche, or
by any other method that reproduces records accurately (including
computer programs).'' Furthermore, ``[t]he creditor need retain only
enough information to reconstruct the required disclosures or other
records. Thus, for example, the creditor need not retain each open-end
periodic statement, so long as the specific information on each
statement can be retrieved.''
Because the current regulation and commentary provide creditors
with considerable flexibility regarding the retention of records, the
Board is concerned that adopting a more specific set of requirements
(such as a list of documents that creditors must retain) could increase
regulatory burden, rather than reducing it. Furthermore, because the
Board did not propose any amendments to the record retention
requirements in Sec. 226.25, any revisions to those requirements would
not have the benefit of input from the public, including small
institutions. Accordingly, the final rule does not alter the
requirements of Sec. 226.25.
[[Page 18361]]
3. Small entities affected by the final 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 final rule. Based on
2010 call report data, the Board estimates that there are approximately
4,360 banks and thrifts 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 final rule. The Board acknowledges,
however, that the total number of small entities likely to be affected
by the final 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.
4. Recordkeeping, reporting, and compliance requirements. The final
rule imposes 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 final 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. One industry
commenter noted that the Board's rule could impose operational burden
on smaller institutions with respect to open-end accounts exempt prior
to July 21, 2011. The Board, however, has revised the rule to provide
creditors, particularly smaller institutions, with additional
flexibility to ease compliance burden.
Final Amendments
This subsection summarizes several of the final amendments to
Regulation Z and their likely impact on small entities. More
information regarding these and other changes can be found in IV.
Section-by-Section Analysis.
On July 21, 2011, the amendments to Sec. 226.3(b)(1)(i) and its
accompanying commentary 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 are required to comply with all applicable Regulation Z
requirements. The Board anticipates that creditors that are small
entities, with some additional burden, will 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 comply with Regulation Z 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 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), Sec. 226.3(b)(1)(ii) requires 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,
will 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 comply with Regulation Z
regardless of the amount of the credit extension. Furthermore, as
discussed above, the Board has revised the proposed rule to reduce the
monitoring burden for small entities that rely on the firm commitment
exemption. As a result, the Board does not anticipate significant
additional burden on small entities by adjusting the exemption
threshold dollar amount annually for inflation.
Section 226.3(b)(2) addresses circumstances where certain
previously exempt open-end accounts would cease to qualify for an
exemption based on a firm commitment on July 21, 2011 under the revised
threshold amount. Under Sec. 226.3(b)(2), these accounts would have
until December 31, 2011 to comply with the revised threshold amount in
effect at that time ($50,000). Therefore, the Board has reduced the
burden on small entities that rely on the firm commitment exemption by
providing additional time to comply with the final rule.
Accordingly, the Board believes that, in the aggregate, the
provisions of its final rule would not have a significant economic
impact on a substantial number of small entities.
5. Significant alternatives to the revisions. The provisions of the
final rule would implement the statutory requirements of the Dodd-Frank
Act, which establish new threshold requirements for exempt consumer
credit transactions. As discussed above in the supplementary
information, the Board has revised the proposed rule to reduce the
compliance burden for small entities and to provide small entities with
additional time to come into compliance, while effectuating the statute
in a manner that is beneficial to consumers.
VI. 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
final 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 extends for three years the current recordkeeping and disclosure
requirements in connection with Regulation Z. The collection of
information that is required by this final 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
[[Page 18362]]
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 24 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 \10\ supervised by the Board that are deemed to be
respondents for the purposes of the PRA.
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\10\ 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 Sec. 226.3(b)(1)(i) and its
accompanying commentary raise the threshold for exempt consumer credit
transactions from $25,000 to $50,000. In addition, Sec.
226.3(b)(1)(ii) requires that the threshold dollar amount be adjusted
annually for inflation to reflect any annual percentage increase in the
CPI-W. As a result, creditors will now be required to comply with
Regulation Z requirements for certain accounts with extensions of
consumer credit--or express written commitments to extend 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 final 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 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 the final rule is adopted. Thereafter, the ongoing
total annual burden would be 1,506,466.\11\
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\11\ 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).
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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 changes for a given financial
institution or entity may vary based on the size and complexity of the
respondent. Furthermore, the Board understands that many creditors
voluntarily comply with Regulation Z for accounts that are currently
exempt. Therefore, the estimated burden increase likely overstates the
actual increase in burden for those creditors.
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 final rule would impose a one-time
increase in the estimated annual burden by 648,000. On a continuing
basis, the final 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 the 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. As noted above, the
estimated burden increase likely overstates the actual increase in
burden because many creditors voluntarily comply with Regulation Z for
exempt accounts.
The Board has a continuing interest in the public's opinion of the
collection of information. 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 Final Revisions
For the reasons set forth in the preamble, the Board amends
Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
0
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; Pub. L. 111-203,
124 Stat. 1376.
[[Page 18363]]
Subpart B--Open-End Credit
0
2. Section 226.3(b) is revised to read as follows:
Sec. 226.3 Exempt transactions.
* * * * *
(b) Credit over applicable threshold amount--(1) Exemption--(i)
Requirements. An extension of credit in which the amount of credit
extended exceeds the applicable threshold amount or in which there is
an express written commitment to extend credit in excess of the
applicable threshold amount, unless the extension of credit is:
(A) Secured by any real property, or by personal property used or
expected to be used as the principal dwelling of the consumer; or
(B) A private education loan as defined in Sec. 226.46(b)(5).
(ii) Annual adjustments. The threshold amount in paragraph
(b)(1)(i) of this section 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 (b)
for the threshold amount applicable to a specific extension of credit
or express written commitment to extend credit.
(2) Transition rule for open-end accounts exempt prior to July 21,
2011. An open-end account that is exempt on July 20, 2011 based on an
express written commitment to extend credit in excess of $25,000
remains exempt until December 31, 2011 unless:
(i) The creditor takes a security interest in any real property, or
in personal property used or expected to be used as the principal
dwelling of the consumer; or
(ii) The creditor reduces the express written commitment to extend
credit to $25,000 or less.
* * * * *
0
3. In Supplement I to part 226:
0
A. Under Section 226.2--Definitions and Rules of Construction, under
2(a)(19) Dwelling, paragraph 3. is revised.
0
B. Under Section 226.3--Exempt Transactions, section 3(b) Credit over
$25,000 not secured by real property or a dwelling is revised.
0
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
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Subpart A--General
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Section 226.2--Definitions and Rules of Construction
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2(a)(19) Dwelling.
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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).
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Section 226.3--Exempt Transactions
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3(b) Credit over applicable threshold amount.
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 or after
account opening that exceeds the threshold amount in effect at the
time the initial extension is made. If a creditor makes an initial
extension of credit after account opening that does not exceed the
threshold amount in effect at the time the extension is made, the
creditor must have satisfied all of the applicable requirements of
this Part from the date the account was opened (or earlier, if
applicable), including but not limited to the requirements of Sec.
226.6 (account-opening disclosures), Sec. 226.7 (periodic
statements), Sec. 226.52 (limitations on fees), and Sec. 226.55
(limitations on increasing annual percentages rates, fees, and
charges). For example:
(1) Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does
not make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $60,000. In this
circumstance, no requirements of this Part apply to the account.
(2) Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does
not make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $50,000 or less. In
this circumstance, the account is not exempt and the creditor must
have satisfied all of the applicable requirements of this Part from
the date the account was opened (or earlier, if applicable).
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. Once an account ceases
to be exempt, the requirements of this Part apply to any balances on
the account. The creditor, however, is not required to comply with
the requirements of this Part with respect to the period of time
during which the account was exempt. 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. However,
the creditor is not required to disclose fees or charges imposed
while the account was exempt. Furthermore, if the creditor provided
disclosures consistent with the requirements of this Part while the
account was exempt, it is not required to provide disclosures
required by Sec. 226.6 reflecting the current terms of the account.
See also comment 3(b)-4.
iii. Subsequent changes when exemption is based on initial
extension of credit. If a creditor makes an initial extension of
credit 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, including an increase
pursuant to Sec. 226.3(b)(1)(ii) 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
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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 a
subsequent extension exceeds the threshold amount or if the account
balance later exceeds the threshold amount (for example, due to the
subsequent accrual of interest).
iv. Subsequent changes when exemption is based on firm
commitment.
A. General. If a creditor makes a firm written commitment at
account opening to extend a total amount of credit 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 pursuant to Sec. 226.3(b)(1)(ii)
as a result of an increase in the CPI-W. However, see comment 3(b)-6
with respect to the increase in the threshold amount from $25,000 to
$50,000. 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. In contrast, if the firm commitment does not
exceed the threshold amount at account opening, the account is not
exempt under Sec. 226.3(b) even if the account balance later
exceeds the threshold amount. In addition, 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. 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 $53,000, the account remains exempt under Sec.
226.3(b). However, 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 is $56,000 on January 1 of year
six as a result of increases in the CPI-W, the account remains
exempt. However, if the creditor reduces its firm commitment to
$54,000 on July 1 of year six, the account ceases to be exempt under
Sec. 226.3(b).
B. 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. In
addition, the account must continue to qualify for an exemption
based on the firm commitment 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 is
increased to $51,000 pursuant to Sec. 226.3(b)(1)(ii) 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.
(2) Same facts as in paragraph iv.B(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 ($51,000), although the account remains exempt based on the
firm commitment to extend $55,000 in credit.
(3) Same facts as in paragraph iv.B(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 (such as through repayment of the loan).
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. 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 also
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 comply with all of the applicable requirements
of this Part. See comment 3(b)-3.
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. Transition rule 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. If, on July 20, 2011, an open-end
account is exempt under Sec. 226.3(b) based on a firm commitment to
extend credit in excess of $25,000, the account remains exempt under
Sec. 226.3(b)(2) 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 in excess of
$50,000, the account remains exempt under Sec. 226.3(b)(1)
regardless of subsequent increases in the threshold amount as a
result of increases in the CPI-W. If the firm commitment is not
increased on or before December 31, 2011 to an amount in excess of
$50,000, the account ceases to be exempt
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under Sec. 226.3(b) based on a firm commitment to extend credit.
For example:
i. Assume that, on July 20, 2011, the account is exempt under
Sec. 226.3(b) based on the creditor's firm commitment to extend
$30,000 in credit. On November 1, 2011, the creditor increases the
firm commitment on the account to $55,000. In these circumstances,
the account remains exempt under Sec. 226.3(b)(1) regardless of
subsequent increases in the threshold amount as a result of
increases in the CPI-W.
ii. Same facts as paragraph i. above except, on November 1,
2011, the creditor increases the firm commitment on the account to
$40,000. In these circumstances, the account ceases to be exempt
under Sec. 226.3(b)(2) after December 31, 2011, and the creditor
must begin to comply with the applicable requirements of this Part.
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Section 226.23--Right of Rescission
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23(a) Consumer's right to rescind Paragraph 23(a)(1).
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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 under Sec.
226.3(b). 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.
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By order of the Board of Governors of the Federal Reserve
System, March 24, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-7376 Filed 4-1-11; 8:45 am]
BILLING CODE 6210-01-P