The Federal Reserve Board has issued final rules expanding Regulation Z’s coverage of consumer credit transactions and Regulation M’s coverage of consumer leases by increasing each regulation’s exemption threshold to $50,000.

Currently, credit transactions (with certain exceptions) and leases in excess of $25,000 are exempt. The final rules, which were published yesterday in the Federal Register and become effective on July 21, 2011, implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that amended the corresponding thresholds in the Truth in Lending Act and the Consumer Leasing Act.

Both rules require the threshold amount to be adjusted annually, effective January 1 of each year, to reflect any annual percentage increase in the Consumer Price Index (CPI). Revisions to each Regulation’s commentary provide that a closed-end credit transaction or a lease that is exempt based on the threshold amount in effect at the time of consummation remains exempt, regardless of a subsequent increase in the threshold amount based on the CPI.

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

  • For an account to be exempt based on the amount of the initial extension of credit, that extension does not have to be made at account opening as the Fed’s proposal would have required. Under the final rule, an account will be exempt if the initial extension of credit at or after account opening exceeds the threshold amount in effect when the extension is made. However, if an initial extension made after closing does not exceed the then-effective threshold, the creditor will be in violation of Reg. Z if it had not satisfied all applicable Reg. Z requirements from the date the account was opened (or earlier, if applicable), such as account-opening disclosures and limits on increasing rates and fees if it is a credit card account. An account that is exempt based on an initial credit extension above the threshold amount in effect at that time remains exempt, regardless of a subsequent increase in the threshold amount based on the CPI or a subsequent reduction in the account balance or the credit limit below the threshold amount.
  • If an account is exempt based on a firm commitment at account opening to extend credit above the threshold amount then in effect, the account will lose its exempt status if the creditor subsequently reduces the commitment below the threshold amount then in effect (unless the creditor has previously made an initial extension of credit that is a single advance exceeding the threshold amount in effect at the time of the extension). In a change from the proposal, the final rule does not require a creditor to increase a commitment when the threshold amount increases based on the CPI for the account to remain exempt.
  • An account that is exempt based on the amount of an initial extension of credit or a firm commitment will lose its exempt status if the creditor takes a security interest in real property or personal property used or expected to be used as the consumer’s principal dwelling.
  • In a change from the proposal, there is no transition rule for accounts opened before July 21, 2011, that are exempt based on an initial extension of credit of more than $25,000. If the initial credit extension was not made before July 21, 2011, it must exceed $50,000 when made for the account to remain exempt.
  • The transition rule for accounts opened before July 21, 2011, that are exempt based on a firm commitment to extend credit in excess of $25,000 provides that the account will remain exempt until December 31, 2011. To remain exempt after that date based on the firm commitment amount, the creditor must increase the firm commitment to an amount in excess of $50,000 on or before that date. This represents a change from the proposal, which would have continued the exemption until July 21, 2012. However, the account can lose its exempt status before that date if the creditor takes a security interest in real property or personal property used or expected to be used as the consumer’s principal dwelling or reduces the firm commitment to $25,000 or less.

A creditor that wishes to retain the exemption for an account opened before July 21, 2011, based on the amount of the initial extension of credit without having to satisfy the new threshold amount, must make an initial extension of credit that is greater than $25,000 before July 21, 2011, to avoid being in non-compliance. If an account opened before July 21, 2011, is exempt based on the amount of a firm commitment that a creditor does not want to increase to more than $50,000, the creditor should consult with legal counsel regarding the steps needed to bring the account into compliance with Reg. Z by December 31, 2011, or other available options.