Pub. 6 2011-2012 Issue 4

www.nebankers.org 16 Extraordinary Service for Extraordinary Members. T ILA REQUIRES LENDERS TO DIS- close key terms of consumer loans and prohibits lenders from engaging in certain prac- tices with respect to those loans. Since enactment, a non-dwelling-secured consumer credit transaction was subject to TILA and its implementing Regulation Z, if the transaction had (a) an amount financed in the amount of $25,000 or less, in the case of closed- end credit or (b) a written credit limit of $25,000 or less, in the case of open-end credit (the Old Coverage Rule). Due to inflation, Congress deter- mined it was necessary to update TILA’s threshold for non-dwelling- secured consumer credit transactions. Under §1100E of the Dodd-FrankWall Street Reform and Consumer Protec- tion Act of 2010, the dollar threshold for TILA coverage increased from $25,000 to $50,000, effective July 21, 2011. On April 4, 2011, the Board of Governors of the Federal Reserve System issued a final rule amending Regulation Z to implement §1100E (the New Coverage Rule). 2 This article reviews certain requirements of the NewCoverage Rule, including potential hazards in connection with (a) reduc- ing the credit limit, (b) subsequent security interests, (c) exempt accounts opened prior to July 21, 2011, and (d) refinancing. I. New Thresholds As discussed, the New Coverage Rule incorporates the requirements of §1100E of Dodd-Frank. The Federal Reserve, however, did not simply sub- stitute “$50,000” for “$25,000” in the existing regulation. Rather, the Fed- eral Reserve used the opportunity to provide more detail regarding how the threshold amount exemption works. The New Coverage Rule provides that a consumer credit account is ex- empt from the requirements of Regu- lation Z if (a) the initial extension of credit on the account exceeds $50,000 or (b) the lender makes a firm com- Congress enacted the Truth in Lending Act (TILA) “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various [available] credit terms . . . and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” 1 Regulation Z Reminder: New Thresholds, New Challenges Joyce Dixon & Jeff Makovicka , Husch Blackwell LLP COUNSELOR’S CORNER mitment at account opening to extend credit in excess of $50,000. A key distinction between the Old Coverage Rule and the NewCoverage Rule is that the old threshold for closed-end credit was based on the value of the amount financed, while the new rule is based on the amount of credit extended. The amount financed is not neces- sarily equivalent to the loan amount. Rather, it is the net amount of credit extended for the consumer’s use. To illustrate this difference, assume un- der the original threshold of $25,000 (under the Old Coverage Rule) that a consumer signs a car note in the amount of $25,435. The note amount includes $500 in pre-computed in- terest, $35 paid to a credit reporting agency for a credit report, and a $50 service charge. The amount financed may be calculated by first subtracting all finance charges included in the note amount ($25,435 - $500 - $35 - $50 = $24,850). The amount financed under those conditions is $24,850, resulting in the loan being subject to Regulation Z as the amount financed ($24,850) does not exceed $25,000. Alternatively, assume under the new $50,000 threshold (under the New Coverage Rule) that a consumer signs a car note in the amount of $50,435 and pays the same $500 in pre-computed interest, $35 credit report fee, and $50 service charge. Although the amount financed is $49,850 ($50,435 - $500 - $35 - $50 = $49,850), the loan would not be subject to Regulation Z as the amount of credit extended ($50,435) exceeds $50,000. Moreover, the New Coverage Rule requires the threshold to be adjusted (only increased never decreased) on Jan. 1 of each year to reflect any in- crease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The applicable threshold will be $50,000 until Dec. 31, 2011. Recently, the Federal Reserve announced the first adjustment to $51,800 effective Jan. 1 through Dec. 31, 2012.