Pub. 6 2011-2012 Issue 4

November/December 2011 17 Extraordinary Service for Extraordinary Members. II. Open-End Credit For open-end credit extensions, the New Coverage Rule offers two methods for determining if an account is exempt under the revised threshold: (a) an exemption based on the firm credit limit at the time the account is opened or (b) an exemption based on the amount of the initial extension of credit. If the account qualifies under either method, it is exempt, but an account can lose its exemption in certain circumstances based on subsequent events. Credit Limit As long as the firmwritten credit limit at account opening exceeds the threshold and is not secured by real or personal property used or expected to be used as the consumer’s principal dwelling, the account is exempt from Regulation Z, even if the threshold is later increased by the Federal Re- serve reflecting changes in the CPI-W. By way of example, if a credit card was issued on Aug. 1, 2011, with a $52,000 credit limit, and the consumer’s balance on the first periodic statement was $5,000, the account is exempt, regardless of the actual balance on the card. If after account opening, however, the lender reduces the credit limit below the threshold then in effect (e.g., in response to negative information froma consumer reporting agency), the exemption ceases to apply unless the account is exempt based on the amount of the initial credit exten- sion (discussed below). 3 For example, assume that, at ac- count opening in year one, the threshold amount in effect is $50,000 and the account is exempt based on the lender’s firm commitment to extend $55,000 in credit. If the threshold amount is $56,000 on Jan. 1 of year six as a result of increases in the CPI-W, the account remains exempt. However, if the lender reduces its firm commitment to $54,000 on July 1 of year six, the account ceases to be exempt fromRegulation Z. Increasing account balances do not cause a non-exempt account to become exempt. If the credit limit at account opening does not exceed the applicable threshold amount, the account is subject to Regulation Z, even if the account balance exceeds the applicable threshold at a later date unless the initial extension of credit exceeds the applicable threshold (see discussion below). Initial Credit Extension Even if the credit limit at account opening fails to exceed the applicable threshold, an account will be exempt from Regulation Z if the initial credit extension exceeds the ap- plicable threshold. Comment 226.3(b)-2.i.A.1 of the Com- mentary to the New Coverage Rule provides the following example: “Assume that the threshold amount in effect on Jan. 1 is $50,000. On Feb. 1, an account is opened but the lender does not make an initial extension of credit at that Q Regulation Z Reminder — continued on page 18