On Monday, April 4, 2011, the Board of Governors of the Federal Reserve System (the “Board”) issued final rules modifying its Regulation Z (Truth In Lending) and Regulation M (Consumer Leasing) to implement the requirements of Section 1100E of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”). Changes to both regulations take effect on July 21, 2011.
Generally, the Truth In Lending Act governs extensions of credit from covered lenders, such as banks, to consumers, where the credit is made for consumer purposes. The Consumer Leasing Act similarly governs the lease of personal property to consumers for personal, family or household purposes.
Currently, Section 104(3) of the Truth In Lending Act (as implemented by Section 226.3(b) of Regulation Z) exempts from coverage extensions of credit to a consumer where the amount financed exceeds $25,000.00, unless the extension of credit is secured by real property (or personal property used or expected to be used as the principal dwelling of the consumer, such as a mobile home), or the extension of credit is a private education loan. Similarly, the corresponding provision of the Consumer Leasing Act (as implemented by Section 213.2(e) of Regulation M) exempts from coverage any consumer lease having a total contractual obligation of over $25,000.00. If either Regulation Z or Regulation M applies to a transaction, there are numerous disclosure and advertising requirements, as well as possible substantive limitations, imposed on the creditor or lessor.
Section 1100E of the Act increases those thresholds from $25,000.00 to $50,000.00, effective July 21, 2011. Commencing January 1, 2012, and on each January 1 thereafter, the $50,000.00 threshold will automatically be adjusted based on any increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on the previous June 1, as published by the Bureau of Labor Statistics. Once the June 1 CPI-W is published, the Board will modify the Official Staff Commentary to the cited sections of Regulation Z and Regulation M to provide any actual dollar increase in the exemption threshold.
While some financial institutions, through an abundance of caution, require all of their consumer loans to comply with Regulation Z, some loan documentation programs may still provide Truth In Lending disclosures and other documentation based on the size of the transaction. In these latter cases, financial institutions and other covered lenders will have to ensure that appropriate modifications are made to these systems.