Pub. 6 2011-2012 Issue 4

November/December 2011 19 Extraordinary Service for Extraordinary Members. For example, if the threshold at consummation of the existing loan was $50,000 and the existing loan amount was $52,000 at consummation, the existing loan is exempt from Regulation Z. Assume that in five years the loan bal- ance is $45,000. The loan remains exempt from Regula- tion Z, even though the balance is below the original or any subsequent threshold. However, if there is a refinancing with the existing loan balance of $45,000 paid in full and replaced by a new loan below the threshold (e.g., in the amount of $45,000), the new replacement loan is subject to Regulation Z. This is an area where great opportunity for non-compliance could occur, and lenders should set clear guidelines for determining whether a refinancing has occurred. Comment 226.3(b) -3.ii of the Commentary to the New Coverage Rule provides additional guidance with respect to the potential loss of an exemption by satisfying and replacing an existing exempt loan. What This Means to You As a result of Dodd-Frank, a large number of previously exempt transactions will become subject to Regulation Z. Going forward, banks should actively monitor any further adjustments to the new $50,000 threshold and must be prepared to treat certain loan amounts under the applicable threshold as subject to TILA and Regulation Z. Further, unless a bank has historically treated all consumer-purpose open-end accounts to consumers as non-exempt (and has provided Regulation Z disclosures), existing open-end ac- counts opened prior to July 21, 2011, with credit limits more than $25,000 and less than $50,000must be reviewed prior to Dec. 31, 2011. These accounts should be examined to determine if the initial advance exceeded the new threshold amount at the time of the initial advance and, if not, whether (a) the credit limit should be increased tomore than $50,000 or (b) the account should be brought into compliance with Regulation Z disclosure requirements. Every bank should take time to identify and mitigate compliance risk exposure before the Dec. 31, 2011, date. This includes review of lending document platforms to ensure that the appropriate thresh- old is observed and, if applicable, to provide required TILA disclosures. Below is a Regulation Z threshold decision tree to aid in this task: Assuming that the credit is ex- tended to a consumer for per- sonal, family, or household use, is the amount of credit extended, the written credit limit, or the initial advance equal to or less than the applicable threshold? Regulation Z Applies Regulation Z does not apply. However, in the case of open-end credit, the exemption is lost if:  the amount of firm commitment is subsequently reduced below the “then-existing” threshold amount (does not include balance reductions from standard loan paydowns).  the consumer’s principal dwelling is taken as collateral after account opening.  on or before Dec. 31, 2011 (on accounts exempt because of firm commitment of more than $25,000 before July 21, 2011) there is a failure to increase the credit limit in excess of $50,000. and in the case of closed-end credit, the exemption is lost if:  a refinancing causes the loan amount to be below the applicable threshold amount. For more information, contact Joyce Dixon or Jeff Makovicka at Husch Blackwell LLP at (402) 964-5000 or joyce. dixon@huschblackwell.com / jeff.makovicka@huschblackwell.com. Both Dixon and Makovicka are members of Husch Blackwell LLP’s Banking & Finance practice where they concentrate on bank regulatory compliance matters. 1 Section 102(a) of TILA, 15 U.S.C. §1601(a). 2 76 Fed. Reg. 18,354 (April 4, 2011). 3 This also applies to exempt (prior to July 21, 2011) accounts during the transition period (described below) in which such “then-current” threshold would be $25,000. 4 This applies even during the transition period described above. NO YES