Truth in Lending, 78636-78645 [2010-31529]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 241 (Thursday, December 16, 2010)]
[Proposed Rules]
[Pages 78636-78645]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31529]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1399]
RIN 7100-AD59


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: Effective July 21, 2011, the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) amends the Truth in Lending 
Act (TILA) by increasing the threshold for exempt consumer credit 
transactions from $25,000 to $50,000. In addition, the Dodd-Frank Act 
provides that, on or after December 31, 2011, this threshold must be 
adjusted annually by any annual percentage increase in the Consumer 
Price Index for Urban Wage

[[Page 78637]]

Earners and Clerical Workers. Accordingly, the Board is proposing to 
make corresponding amendments to Regulation Z, which implements TILA, 
and to the accompanying staff commentary. Because the Dodd-Frank Act 
also increases the Consumer Leasing Act's threshold for exempt consumer 
leases from $25,000 to $50,000, the Board is proposing similar 
amendments to Regulation M elsewhere in today's Federal Register.

DATES: Comments must be received on or before February 1, 2011. 
Comments on the Paperwork Reduction Act analysis set forth in Section V 
of Supplementary Information must be received on or before February 14, 
2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1399 and 
RIN No. 7100-AD59, by any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Facsimile: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Stephen Shin, Attorney, or Benjamin K. 
Olson, Counsel, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412; 
for users of Telecommunications Device for the Deaf (TDD) only, contact 
(202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act

    This proposed rule implements Section 1100E of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), 
which was signed into law on July 21, 2010. Public Law 111-203 Sec.  
1100E, 124 Stat. 1376 (2010). Section 1100E amends Section 104(3) of 
the Truth in Lending Act (TILA) by establishing a new threshold for 
exempt consumer credit transactions. Currently, TILA Section 104(3) 
exempts ``[c]redit transactions, other than those in which a security 
interest is or will be acquired in real property, or in personal 
property used or expected to be used as the principal dwelling of the 
consumer, in which the total amount financed exceeds $25,000.'' 15 
U.S.C. 1603(3). Regulation Z implements this exemption in Sec.  
226.3(b).
    Effective July 21, 2011, the Dodd-Frank Act raises TILA's $25,000 
exemption threshold to $50,000. In addition, the Dodd-Frank Act 
provides that, on or after December 31, 2011, this threshold shall be 
adjusted annually for inflation by the annual percentage increase in 
the Consumer Price Index for Urban Wage Earners and Clerical Workers 
(CPI-W), as published by the Bureau of Labor Statistics. Therefore, 
from July 21, 2011 to December 31, 2011, the threshold dollar amount 
will be $50,000. Beginning on January 1, 2012, the $50,000 threshold 
will be adjusted annually based on any annual percentage increase in 
the CPI-W.
    The Board is proposing to amend Sec.  226.3(b) and the accompanying 
commentary for consistency with the amendments made by the Dodd-Frank 
Act. In addition, because the Dodd-Frank Act makes similar amendments 
to the exemption threshold in the Consumer Leasing Act (which is part 
of TILA), the Board is proposing elsewhere in today's Federal Register 
to amend Regulation M, which implements the Consumer Leasing Act.

Effective Date

    Section 1100H of the Dodd-Frank Act provides that Section 1100E 
will become effective on the designated transfer date, as defined by 
Section 1062 of that Act. Section 1062 of the Dodd-Frank Act requires, 
in relevant part, the Secretary of the Treasury to designate a single 
calendar date for the transfer of certain functions from other agencies 
to the newly established Bureau of Consumer Financial Protection. 
Pursuant to Section 1062(a), the Secretary of the Treasury has 
determined that the designated transfer date shall be July 21, 2011. 
See 75 FR 57252 (Sept. 20, 2010). Accordingly, because Section 1100E 
will become effective on July 21, 2011, the Board intends to make the 
amendments to Regulation Z effective on that date.

Comment Period

    Because the new threshold for exempt consumer credit transactions 
in TILA Section 104(3) goes into effect on July 21, 2011, the Board 
must issue the final rule implementing the new threshold sufficiently 
in advance of that date to permit creditors to make the necessary 
changes to bring their systems and practices into compliance. To ensure 
that the Board has adequate time to analyze the comments received on 
the proposed rule, the Board is requiring that comments be submitted by 
the later of February 1, 2011 or 30 days after publication of the 
proposal in the Federal Register (although comments on the Board's 
Paperwork Reduction Act analysis are not due until 60 days after 
publication). Because the proposal is narrow in scope, the Board 
believes that interested parties will have sufficient time to review 
the proposed rule and prepare their comments.

II. Statutory Authority

    TILA mandates that the Board prescribe regulations to carry out 
TILA's purposes and specifically authorizes the Board, among other 
things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in the 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with that Act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in TILA and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).

For the reasons discussed below, the Board believes that it is 
necessary and appropriate to make amendments to Regulation Z in order 
to effectuate the purposes of TILA, to prevent circumvention, and to 
facilitate compliance.

[[Page 78638]]

III. Section-by-Section Analysis

Section 226.3 Exempt Transactions

3(b) Credit Over Applicable Threshold Amount
    Section 226.3(b) of Regulation Z implements the exemption for 
certain consumer credit transactions in TILA Section 104(3). 
Specifically, Sec.  226.3(b) currently provides that Regulation Z does 
not apply to ``[a]n extension of credit not secured by real property, 
or by personal property used or expected to be used as the principal 
dwelling of the consumer, in which the amount financed exceeds $25,000 
or in which there is an express written commitment to extend credit in 
excess of $25,000.'' Section 1100E(a)(1) of the Dodd-Frank Act 
increases the dollar amount of the exemption threshold in TILA Section 
104(3) from $25,000 to $50,000. Furthermore, Section 1100E(b) requires 
that this amount be adjusted annually for inflation. Accordingly, the 
Board is proposing amendments to Sec.  226.3(b) and the accompanying 
commentary to implement Section 1100E.
3(b)(1) General Exemption
    As an initial matter, current Sec.  226.3(b) would be redesignated 
as Sec.  226.3(b)(1)(i) and a new Sec.  226.3(b)(1)(ii) would be added 
to provide that the threshold amount will be adjusted annually to 
reflect any annual percentage increase in the CPI-W.\1\ Because the 
threshold amount could change from year to year, Sec.  226.3(b)(1)(i) 
would refer to the ``applicable threshold amount,'' rather than stating 
a specific amount. Instead, new Sec.  226.3(b)(1)(ii) would explain 
that the threshold amount applicable to a specific extension of credit 
or express written commitment to extend credit is listed in the 
official staff commentary. The Board also proposes to revise and 
reorganize the commentary to Sec.  226.3(b).\2\
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    \1\ The Board notes that, consistent with the Dodd-Frank Act, 
proposed Sec.  226.3(b)(1)(ii) requires that the annual adjustment 
for inflation reflect the ``annual percentage increase'' in the CPI-
W, as applicable. Therefore, an annual period of deflation or no 
inflation would not require a change in the threshold amount.
    \2\ For consistency with revised Sec.  226.3(b), the Board also 
proposes to make corresponding amendments to comments 2(a)(19)-3 and 
23(a)(1)-5.
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Threshold Amount

    Revised comment 3(b)-1 would list the threshold amount in effect 
for specific periods of time.\3\ In particular, the comment would 
clarify that, prior to July 21, 2011, the threshold amount is $25,000 
and that, from July 21, 2011 through December 31, 2011, the threshold 
amount will be $50,000. This comment would also explain that the 
threshold amount will be adjusted effective January 1 of each year by 
any annual percentage increase in the CPI-W that was in effect on the 
preceding June 1.\4\ The comment will be amended to provide the 
threshold amount for the upcoming year after the annual percentage 
change in the CPI-W that was in effect on the previous June 1 becomes 
available.
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    \3\ For organizational purposes, the guidance in current comment 
3(b)-1 would be moved to other comments, as discussed below.
    \4\ The Dodd-Frank Act specifically requires that the threshold 
amount be adjusted annually by any annual percentage increase in the 
CPI-W, as published by the Bureau of Labor Statistics; however, it 
does not specify which Bureau of Labor Statistics report should be 
used to determine that increase. Consistent with its approach for 
annual adjustments in Sec.  226.32(a)(1)(ii), the Board proposes to 
use the CPI-W reported by the Bureau of Labor Statistics for June 1 
of each year. See 12 CFR 226.32(a)(1)(ii) and its commentary. The 
Board believes this approach would permit the publication of an 
increased threshold amount sufficiently in advance of the January 1 
effective date.
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    Revised comment 3(b)-1 further clarifies that any increase in the 
threshold amount will be rounded to the nearest $100 increment. For 
example, if the annual percentage increase in the CPI-W would result in 
a $950 increase in the threshold amount, the threshold amount will be 
increased by $1,000. However, if the annual percentage increase in the 
CPI-W would result in a $949 increase in the threshold amount, the 
threshold amount will be increased by $900. This approach is consistent 
with Section 1100E(b) of the Dodd-Frank Act, which provides that annual 
CPI-W adjustments should be ``rounded to the nearest multiple of $100, 
or $1,000, as applicable.'' The Board believes that Congress did not 
intend for an annual CPI-W adjustment to be rounded to the nearest $100 
in some circumstances but to the nearest $1,000 in others, which could 
lead to anomalous results. Because $1,000 is itself a multiple of $100, 
the Board believes that the proposed commentary clarifies the statutory 
language in a manner consistent with the intent of Section 1100E.

Open-End Credit

    Revised comment 3(b)-2 would provide guidance on the application of 
Sec.  226.3(b)(1) to open-end credit accounts. Consistent with the 
existing commentary, comment 3(b)-2.i would clarify that an open-end 
account qualifies for exemption under Sec.  226.3(b) (unless secured by 
any real property, or by personal property used or expected to be used 
as the consumer's principal dwelling) if either: (1) The creditor makes 
an initial extension of credit that exceeds the threshold amount in 
effect at the time the account is opened; or (2) the creditor makes a 
firm written commitment to extend a total amount of credit in excess of 
the threshold amount in effect at the time the account is opened with 
no requirement of additional credit information for any advances on the 
account (except as permitted from time to time with respect to open-end 
accounts pursuant to Sec.  226.2(a)(20)).
    In addition, the Board would clarify that the initial extension of 
credit or firm commitment must be made at account opening in order for 
an open-end account to be exempt under Sec.  226.3(b). The Board 
understands that some open-end lines of credit associated with 
brokerage accounts are structured to be exempt under Sec.  226.3(b) 
based on a requirement that the initial extension of credit must exceed 
$25,000, even if that extension does not occur until months or years 
after account opening. The Board is concerned that this approach could 
produce uncertainty as to whether the account is exempt at account 
opening or only becomes exempt when the initial extension in excess of 
$25,000 actually occurs. Currently, Sec.  226.3(b) does not address 
when the initial extension of credit must occur for purposes of the 
exemption. Therefore, in order to provide greater certainty for 
consumers and creditors, the Board believes it is appropriate to 
determine whether an account is exempt under Sec.  226.3(b) at account 
opening. The Board, however, solicits comment on any operational 
difficulties posed by this proposed guidance and whether greater 
flexibility would be appropriate.
    Revised comment 3(b)-2.ii would provide general guidance regarding 
the effect of subsequent changes to an open-end account or the 
threshold amount on the account's exempt status. Specifically, this 
comment would clarify which changes to an open-end account or the 
threshold amount may result in the account no longer qualifying for the 
exemption in Sec.  226.3(b). In these circumstances, the creditor must 
begin to comply with all of the applicable requirements of Regulation Z 
within a reasonable period of time after the account ceases to be 
exempt (except as otherwise provided). For example, if an open-end 
credit account ceases to be exempt, the creditor must within a 
reasonable period of time provide the disclosures required by Sec.  
226.6 reflecting the current terms of the account and begin to provide 
periodic statements consistent with Sec.  226.7. The Board

[[Page 78639]]

solicits comment on whether additional specificity is needed regarding 
the amount of time necessary to begin to comply with Regulation Z.
    Revised comment 3(b)-2.iii would address the effect of subsequent 
changes when an open-end account is exempt under Sec.  226.3(b) based 
on an initial extension of credit. The comment would clarify that, if a 
creditor makes an initial extension of credit at account opening that 
exceeds the threshold amount in effect at that time, the account 
remains exempt under Sec.  226.3(b) regardless of a subsequent increase 
in the threshold amount as a result of an increase in the CPI-W. 
Furthermore, in these circumstances, the account remains exempt even if 
there are no further extensions of credit, subsequent extensions of 
credit do not exceed the threshold amount, the account balance is 
subsequently reduced below the threshold amount (such as through 
repayment of the extension), or the credit limit for the account is 
subsequently reduced below the threshold amount. Comment 3(b)-2.iii 
would also clarify that, if the initial extension of credit on an 
account does not exceed the threshold amount in effect at the time of 
the extension, the account will not become exempt under Sec.  226.3(b) 
even if the account balance later exceeds the threshold amount (for 
example, due to the subsequent accrual of interest).
    Revised comment 3(b)-2.iv would address the effect of subsequent 
changes when an open-end account is exempt under Sec.  226.3(b) based 
on a firm commitment to extend credit, rather than an initial extension 
of credit. In particular, the comment would clarify that if the firm 
commitment does not exceed the threshold amount, the account is not 
exempt under Sec.  226.3(b) even if the account balance later exceeds 
the threshold amount (for example, due to the subsequent accrual of 
interest). In addition, the comment would clarify that, in order for an 
open-end account to remain exempt under Sec.  226.3(b) based on a firm 
commitment, the amount of the firm commitment must continue to exceed 
the threshold amount currently in effect, as adjusted annually. Thus, 
in order for an account to remain exempt, a creditor could not reduce 
its firm commitment below the threshold amount currently in effect and 
may be required to increase its firm commitment when the threshold 
amount is increased as a result of an increase in the CPI-W. 
Illustrative examples are provided in the commentary.
    The Board believes that if creditors were not required to exceed 
the applicable threshold amount on an ongoing basis for open-end 
accounts, it could produce anomalous results and, in some cases, raise 
concerns about circumvention of Regulation Z. For example, if an open-
end account remained exempt permanently based on a firm commitment at 
account opening to extend credit in excess of the threshold amount, an 
account opened in December might qualify for an exemption based on a 
firm commitment while an identical account with the same firm 
commitment opened in January would not because the applicable threshold 
amount had increased. Furthermore, the proposed rule would prevent 
accounts from being established with firm commitments that qualify for 
the exemption at account opening but then have the commitment reduced 
below the threshold. Under the proposed rule, the account would lose 
its exempt status in these circumstances. The Board believes that, 
because Section 1100E was intended to broaden the scope of TILA, it is 
consistent with Congress's intent to construe the exemption in Sec.  
226.3(b) narrowly.
    However, proposed comment 3(b)-2.iv would provide creditors with 
flexibility when an open-end account no longer qualifies for an 
exemption under Sec.  226.3(b) based on a firm commitment. 
Specifically, the comment would clarify that the creditor may either 
begin to comply with Regulation Z or, if permitted by the account 
agreement and applicable state law, permit the consumer to repay any 
outstanding balance on the account consistent with the account terms 
without providing additional extensions of credit. The Board believes 
that additional flexibility is necessary in these circumstances, so 
that creditors that do not have the systems in place to comply with 
Regulation Z do not close the account and require the consumer to 
immediately repay the outstanding balance. However, the Board solicits 
comment on whether the proposed guidance poses any operational 
difficulties and whether additional flexibility is warranted in these 
circumstances.
    Finally, revised comment 3(b)-2.iv addresses circumstances in which 
an account qualifies for a Sec.  226.3(b) exemption at account opening 
based on a firm commitment and the creditor subsequently makes an 
initial extension of credit that exceeds the applicable threshold 
amount. The comment would clarify that, in these circumstances, the 
account may qualify for a Sec.  226.3(b) exemption based on the initial 
extension of credit if that extension is a single advance exceeding the 
threshold amount at the time of the extension. As a result, the account 
would remain exempt under Sec.  226.3(b) even if the credit limit is 
subsequently reduced below the threshold amount or if the threshold 
amount is subsequently increased to reflect an increase in the CPI-W.
    For example, assume that, at account opening on January 1 of year 
one, the threshold amount under Sec.  226.3(b) is $50,000 and an open-
end account qualifies for an exemption because the creditor has made a 
firm commitment to extend $52,000 in credit. On July 1 of year one, the 
consumer uses the account for a single advance of $52,000, which is the 
initial extension of credit on the account. As a result of this 
extension of credit, the account will remain exempt under Sec.  
226.3(b) even if, after July 1 of year one, the creditor reduces the 
firm commitment to less than $50,000 or if, on January 1 of year two, 
the threshold amount increases to $52,500 to reflect an increase in the 
CPI-W.
    As discussed above, the Board believes that, as a general matter, 
whether an account is exempt under Sec.  226.3(b) should be determined 
at account opening. However, when an account qualifies for an exemption 
at account opening based on a firm commitment, the Board believes that 
it may be appropriate to permit the account to retain that exemption 
based on an initial extension of credit that occurs after account 
opening. However, the Board solicits comment on this approach.

Closed-End Credit

    Revised comment 3(b)-3 would provide guidance on the application of 
Sec.  226.3(b)(1) to closed-end loans. Specifically, comment 3(b)-3.i 
would clarify that a closed-end loan is exempt under Sec.  226.3(b) in 
either of two circumstances (unless the extension of credit is secured 
by any real property, or by personal property used or expected to be 
used as the consumer's principal dwelling; or is a private education 
loan as defined in Sec.  226.46(b)(5)).
    First, the comment clarifies that a closed-end loan would be exempt 
if the creditor makes an extension of credit at consummation that 
exceeds the threshold amount in effect at the time of consummation. In 
these circumstances, the loan remains exempt under Sec.  226.3(b) even 
if the account balance is subsequently reduced below the threshold 
amount, such as through repayment.
    Second, the comment clarifies that a closed-end loan would be 
exempt if the

[[Page 78640]]

creditor makes a loan commitment at consummation to extend a total 
amount of credit in excess of the threshold amount in effect at the 
time of consummation. The comment would further clarify that, in these 
circumstances, the loan remains exempt under Sec.  226.3(b) even if the 
total amount of credit actually extended does not exceed the threshold 
amount.\5\ This guidance addresses loan commitments (such as certain 
construction loans) with terms that provide for scheduled advances or 
advances at the consumer's option, where the total amount of credit 
ultimately drawn may be less than the original loan commitment on which 
the exemption was based. The Board, however, solicits comment on 
whether this guidance sufficiently addresses other types of closed-end 
loan products.
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    \5\ This guidance is currently set forth in comment 3(b)-1.
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    Revised comment 3(b)-3.ii would also provide guidance on the effect 
of subsequent changes to a closed-end loan or loan commitment or to the 
threshold amount. Specifically, the comment would clarify that, if a 
creditor makes an extension of credit or loan commitment to extend 
credit that exceeds the threshold amount in effect at the time of 
consummation, the closed-end loan remains exempt under Sec.  226.3(b) 
regardless of a subsequent increase in the threshold amount as a result 
of an increase in the CPI-W. In addition, the revised comment 
incorporates existing guidance regarding the refinancing of an exempt 
closed-end loan.

Additional Commentary

    New comment 3(b)-4 would provide guidance where a security interest 
in any real property, or in personal property used or expected to be 
used as a consumer's principal dwelling, is added to an existing 
account or loan that is exempt under Sec.  226.3(b). The proposed 
comment would incorporate guidance from current comments 3(b)-2.ii and 
3(b)-3 with respect to open-end credit and closed-end credit, 
respectively.
    Finally, new comment 3(b)-5 would incorporate the guidance 
currently provided in comment 3(b)-1 regarding credit extensions 
secured by mobile homes. Specifically, this comment would clarify that 
the exemption in Sec.  226.3(b) does not apply to a credit extension 
secured by a mobile home used or expected to be used as the principal 
dwelling of the consumer.
3(b)(2) Special Exemption; Open-End Accounts Exempt Prior to July 21, 
2011
    The Board proposes to add a new Sec.  226.3(b)(2) in order to 
address transition issues related to open-end accounts that are exempt 
under current Sec.  226.3(b) but may not be exempt under revised Sec.  
226.3(b)(1). Specifically, new Sec.  226.3(b)(2) would provide that an 
open-end account that is exempt under Sec.  226.3(b) on July 20, 2011 
based on an extension of credit in excess of $25,000 or an express 
written commitment to extend credit in excess of $25,000 remains exempt 
until July 21, 2012. However, the account would cease to be exempt 
under Sec.  226.3(b)(2) if the creditor takes a security interest in 
any real property, or in personal property used or expected to be used 
as the consumer's principal dwelling; or if the creditor reduces any 
express written commitment to extend credit to $25,000 or less. New 
Sec.  226.3(b)(2) is proposed pursuant to the Board's authority under 
TILA Section 105(a) to make adjustments that are necessary to 
effectuate the purposes of, and to facilitate compliance with, TILA. 15 
U.S.C. 1604(a).
    The Board understands that many creditors currently choose to 
comply with Regulation Z in circumstances where the initial extension 
or firm commitment exceeds $25,000. For example, the Board understands 
that creditors offering closed-end automobile loans typically provide 
Regulation Z disclosures regardless of the amount of the loan. However, 
because some currently exempt open-end credit accounts may be serviced 
on platforms that cannot presently provide Regulation Z disclosures, 
the Board believes that a transition period providing additional 
flexibility may be needed in order to facilitate compliance with the 
revisions to Sec.  226.3(b).
    In particular, the Board understands that this concern arises with 
respect to certain open-end lines of credit associated with brokerage 
accounts that are serviced on platforms that cannot currently provide 
Regulation Z disclosures.\6\ In some cases, the creditor may provide in 
the account terms that the initial extension of credit must exceed 
$25,000. However, credit is not necessarily extended at account 
opening, and may be extended only upon request by the consumer at a 
later date, which may be months or years after account opening. Thus, 
if an extension in excess of $25,000 has not occurred prior to July 21, 
2011, the account would cease to qualify for an exemption under Sec.  
226.3(b), consistent with proposed comment 3(b)-2.
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    \6\ Because the creditors who provide these accounts are not 
broker-dealers, the accounts are not exempt under Sec.  226.3(d).
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    In these circumstances, it appears that additional time may be 
required to enable creditors to either develop the systems necessary to 
comply with Regulation Z or to take steps necessary to retain exempt 
status for the account (such as by making a firm commitment in excess 
of the threshold amount). If additional time were not provided, the 
Board believes some creditors might choose to close unused accounts 
shortly before July 21, 2011, which could harm consumers who rely on 
their ability to access those accounts. Accordingly, in this narrow set 
of circumstances, the Board proposes to provide creditors with an 
additional 12 months (in other words, until July 21, 2012) to make the 
necessary adjustments. However, the Board solicits comment on whether 
any transition period is necessary and, if so, whether a different time 
period (shorter or longer) would be more appropriate.
    In other cases, a creditor may provide a firm commitment to extend 
credit in an amount equal to the value of the securities in the 
associated brokerage account. Thus, a line of credit secured by 
collateral valued at $30,000 would cease to be exempt on July 21, 2011. 
While creditors relying on an exemption under Sec.  226.3(b) based on a 
firm commitment will have to account for regular increases in the 
exemption threshold as a result of increases in the CPI-W, the Board 
believes that, for the reasons discussed above, it may be appropriate 
to provide creditors with additional time to adjust to the increase in 
the threshold amount from $25,000 to $50,000. As above, the Board 
solicits comment on whether any transition period is necessary and, if 
so, whether a different time period (shorter or longer) would be more 
appropriate.
    New comment 3(b)-6 would provide guidance and illustrative examples 
regarding the application of Sec.  226.3(b)(2). In particular, it would 
clarify that Sec.  226.3(b)(2) applies only to open-end accounts opened 
prior to July 21, 2011 and does not apply if a security interest is 
taken in any real property, or in personal property used or expected to 
be used as the consumer's principal dwelling.

IV. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an initial and final regulatory 
flexibility analysis on the impact a rule is expected to have on small 
entities. However, under section 605(b) of the RFA, the regulatory 
flexibility analysis otherwise required

[[Page 78641]]

under section 604 of the RFA is not required if an agency certifies, 
along with a statement providing the factual basis for such 
certification, that the rule will not have a significant economic 
impact on a substantial number of small entities. The Board has 
prepared the following initial regulatory flexibility analysis pursuant 
to section 603 of the RFA.
    Based on its analysis and for the reasons stated below, the Board 
believes that this proposed rule would not have a significant economic 
impact on a substantial number of small entities.
    1. Statement of the need for, and objectives of, the proposed rule. 
The proposed rule would implement Section 1100E of the Dodd-Frank Act, 
which increases the threshold for consumer credit transactions exempt 
under TILA from $25,000 to $50,000. Section 1100E also provides that 
this amount shall be increased annually to reflect any annual 
percentage increase in the Consumer Price Index for Urban Wage Earners 
and Clerical Workers (CPI-W). The supplementary information above 
describes in detail the reasons, objectives, and legal basis for each 
component of the proposed rule.
    2. Small entities affected by the proposed rule. All creditors that 
offer closed-end or open-end consumer credit extensions that exceed 
$25,000 but do not exceed $50,000, as adjusted annually to reflect 
increases in the CPI-W, would be affected by the proposed rule. Based 
on June 2010 call report data, the Board estimates that there are 
approximately 4,360 banks with assets of $175 million or less and 6,655 
credit unions with assets of $175 million or less, that would be 
required to comply with the Board's proposed rule. The Board 
acknowledges, however, that the total number of small entities likely 
to be affected by the proposed rule is unknown, in part because 
Regulation Z has broad applicability to individuals and businesses that 
extend even small amounts of consumer credit. In addition, it is 
unclear how many of these small entities currently do not have systems 
in place to comply with Regulation Z because they only extend credit in 
excess of $25,000. It is also unclear how many of those entities will 
choose to engage in consumer credit transactions between $25,000 and 
$50,000, as opposed to only making loans above the new threshold. The 
Board invites comment on the effect of the proposed rule on small 
entities.
    3. Recordkeeping, reporting, and compliance requirements. The 
proposed rule would impose new recordkeeping, reporting, and compliance 
requirements under Regulation Z on creditors that extend consumer 
credit in amounts that exceed $25,000 but do not exceed $50,000, as 
adjusted annually to reflect increases in the CPI-W. The Board 
understands that small entities that offer consumer credit generally 
have systems in place to comply with Regulation Z for extensions of 
credit of $25,000 or less. The Board notes that the precise costs to 
small entities to provide Regulation Z disclosures to accounts with 
consumer credit extensions of more than $25,000 but not more than 
$50,000, and the costs of updating their systems to comply with the 
proposed rule, are difficult to predict. These costs would depend on a 
number of factors that are unknown to the Board, including, among other 
things, the specifications of the current systems used by such entities 
to prepare and provide disclosures and administer accounts, the 
complexity of the terms of the products that they offer, and the range 
of such product offerings. The Board seeks information and comment on 
any costs, compliance requirements, or changes in operating procedures 
arising from the application of the proposed rule to small entities.

Proposed Amendments

    This subsection summarizes several of the proposed amendments to 
Regulation Z and their likely impact on small entities. More 
information regarding these and other proposed changes can be found in 
III. Section-by-Section Analysis.
    On July 21, 2011, the amendments to proposed Sec.  226.3(b)(1)(i) 
and its accompanying commentary would raise the threshold for exempt 
consumer credit transactions from $25,000 to $50,000. For accounts 
which do not qualify for the exemption under the new threshold, 
creditors that are small entities would be required to comply with all 
applicable Regulation Z requirements. The Board anticipates that 
creditors that are small entities, with some additional burden, would 
service accounts which do not meet the increased threshold for 
exemption on the same systems in place for non-exempt accounts. 
Furthermore, the Board understands that some creditors that are small 
entities generally do not rely on the exemption in Sec.  226.3(b) and 
provide Regulation Z disclosures regardless of the amount of the credit 
extension. Therefore, the Board does not anticipate significant 
additional burden on small entities by raising the exemption threshold 
dollar amount.
    Under proposed Sec.  226.3(b)(1)(ii), the threshold amount must be 
adjusted annually by any annual percentage increase in the CPI-W. To 
the extent creditors that are small entities rely on the exemption 
under Sec.  226.3(b), proposed Sec.  226.3(b)(1)(ii) would require 
those creditors to establish processes and alter their systems in order 
to comply with the provision. The cost of such changes would depend on 
the size of the institution and the composition of its portfolio. The 
Board anticipates that creditors that are small entities, with some 
additional burden, would service accounts which do not or may not meet 
the applicable threshold for exemption on the same systems in place for 
non-exempt accounts. In addition, as noted above, the Board understands 
that many creditors that are small entities generally provide 
Regulation Z disclosures regardless of the amount of the credit 
extension. As a result, the Board does not anticipate significant 
additional burden on small entities by adjusting the exemption 
threshold dollar amount annually for inflation.
    Proposed Sec.  226.3(b)(2) would address circumstances where 
certain previously exempt open-end accounts would cease to qualify for 
an exemption on July 21, 2011 under the revised threshold amount. Under 
proposed Sec.  226.3(b)(2), these accounts would have until July 21, 
2012 (one year after the effective date) to comply with the revised 
threshold amount in effect at that time. The Board would reduce the 
burden on small entities by providing transition guidance for these 
accounts in order to ease compliance with the proposed rule.
    Accordingly, the Board believes that, in the aggregate, the 
provisions of its proposed rule would not have a significant economic 
impact on a substantial number of small entities.
    4. Other Federal rules. The Board has not identified any Federal 
rules that duplicate, overlap, or conflict with the proposed revisions 
to Regulation Z.
    5. Significant alternatives to the proposed revisions. The 
provisions of the proposed rule would implement the statutory 
requirements of the Dodd-Frank Act, which establish new threshold 
requirements for exempt consumer credit transactions. As discussed in 
the supplementary information, the Board has sought to provide small 
entities with additional time to come into compliance where necessary, 
while effectuating the statute in a manner that is beneficial to 
consumers. In addition, the proposed rule would clarify that, if an 
initial extension of credit in excess of the existing threshold 
($25,000) is made prior to July 21, 2011, the account remains exempt, 
notwithstanding subsequent increases in the threshold amount. The Board 
welcomes comment on any significant alternatives, consistent with 
Section 1100E of the

[[Page 78642]]

Dodd-Frank Act, which would minimize the impact of the proposed rule on 
small entities.

V. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). In addition, as permitted by the PRA, 
the Board proposes to extend for three years the current recordkeeping 
and disclosure requirements in connection with Regulation Z. The 
collection of information that is required by this proposed rule is 
found in 12 CFR Part 226. The Board may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless the information collection displays a currently valid OMB 
control number. The OMB control number is 7100-0199.
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z, 
including for-profit financial institutions, small businesses, and 
institutions of higher education. TILA and Regulation Z are intended to 
ensure effective disclosure of the costs and terms of credit to 
consumers. For open-end credit, creditors are required to, among other 
things, disclose information about the initial costs and terms and to 
provide periodic statements of account activity, notices of changes in 
terms, and statements of rights concerning billing error procedures. 
Regulation Z requires specific types of disclosures for credit and 
charge card accounts and for home-equity plans. For closed-end loans, 
such as mortgage and installment loans, cost disclosures are required 
to be provided prior to consummation. Special disclosures are required 
in connection with certain products, such as reverse mortgages, certain 
variable-rate loans, and certain mortgages with rates and fees above 
specified thresholds. TILA and Regulation Z also contain rules 
concerning credit advertising. Creditors are required to retain 
evidence of compliance for twenty-four months (Sec.  226.25), but 
Regulation Z does not specify the types of records that must be 
retained.
    Under the PRA, the Board accounts for the paperwork burden 
associated with Regulation Z for the state member banks and other 
creditors supervised by the Board that engage in lending covered by 
Regulation Z and, therefore, are respondents under the PRA. Appendix I 
of Regulation Z defines the Board-regulated institutions as: state 
member banks, branches and agencies of foreign banks (other than 
Federal branches, Federal agencies, and insured state branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A of 
the Federal Reserve Act. Other Federal agencies account for the 
paperwork burden on other entities subject to Regulation Z. To ease the 
burden and cost of compliance with Regulation Z (particularly for small 
entities), the Board provides model forms, which are appended to the 
regulation.
    The current total annual burden to comply with the provisions of 
Regulation Z is estimated to be 1,497,362 hours for the 1,138 
institutions \7\ supervised by the Board that are deemed to be 
respondents for the purposes of the PRA.
---------------------------------------------------------------------------

    \7\ The number of Federal Reserve-supervised creditors was 
obtained from numbers published in the Board of Governors of the 
Federal Reserve System Annual Report: 878 State member banks, 258 
Branches & agencies of foreign banks, and 2 Commercial lending 
companies.
---------------------------------------------------------------------------

    On July 21, 2011, the amendments to proposed Sec.  226.3(b)(1)(i) 
and its accompanying commentary would raise the threshold for exempt 
consumer credit transactions from $25,000 to $50,000. In addition, 
proposed Sec.  226.3(b)(1)(ii) would require that the threshold dollar 
amount be adjusted annually for inflation to reflect any annual 
percentage increase in the CPI-W. Creditors would be required to begin 
complying with Regulation Z requirements for certain accounts with 
extensions of consumer credit of more than $25,000 but not more than 
$50,000, as adjusted annually to reflect increases in the CPI-W.
    The Board estimates that the proposed rule would impose a one-time 
increase in the total annual burden under Regulation Z. The 1,138 
respondents would take, on average, 40 hours (one business week) to 
update their systems to begin to comply with the requirements of 
Regulation Z for loans that are no longer exempt. This one-time 
revision would increase the burden by 45,520 hours. On a continuing 
basis, the Board estimates that 1,138 respondents would take, on 
average, 8 hours (one business day) annually to comply with the 
requirements of Regulation Z for loans that are no longer exempt and 
would increase the ongoing burden by 9,104 hours. Thus, the total 
annual burden is estimated to increase by 54,624 hours (from 1,497,362 
to 1,551,986 hours) during the first year after a final rule is 
adopted. Thereafter, the ongoing total annual burden would be 
1,506,466.\8\
---------------------------------------------------------------------------

    \8\ The burden estimate for this rulemaking does not include the 
burden addressing changes to implement the following provisions 
announced in separate rulemakings:
    Closed-End Mortgages (Docket No. R-1366) (74 FR 43232)(75 FR 
58470), Home-Equity Lines of Credit (Docket No. R-1367) (74 FR 
43428),
    Reverse Mortgages (Docket No. R-1390) (75 FR 58539), or
    Appraisal Independence (Docket No. R-1394) (75 FR 66554).
---------------------------------------------------------------------------

    The total burden increase represents averages for all respondents 
regulated by the Board. The Board expects that the amount of time 
required to implement each of the proposed changes for a given 
financial institution or entity may vary based on the size and 
complexity of the respondent.
    The other Federal financial institution supervisory agencies (the 
Office of the Comptroller of the Currency (OCC), the Office of Thrift 
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), 
and the National Credit Union Administration (NCUA)) are responsible 
for estimating and reporting to OMB the total paperwork burden for the 
domestically chartered commercial banks, thrifts, and Federal credit 
unions and U.S. branches and agencies of foreign banks for which they 
have primary administrative enforcement jurisdiction under TILA Section 
108(a), 15 U.S.C. 1607(a). These agencies may, but are not required to, 
use the Board's methodology for estimating burden. Using the Board's 
method, the total current estimated annual burden for the approximately 
16,200 domestically chartered commercial banks, thrifts, and Federal 
credit unions and U.S. branches and agencies of foreign banks 
supervised by the Board, OCC, OTS, FDIC, and NCUA under TILA would be 
approximately 21,813,445 hours. The proposed rule would impose a one-
time increase in the estimated annual burden by 648,000. On a 
continuing basis, the proposed rule would impose an increase in the 
estimated annual burden by 129,600. Thus, the total annual burden is 
estimated to increase by 777,600 hours to 22,591,045 hours during the 
first year after a final rule is adopted. Thereafter, the ongoing total 
annual burden would be 21,943,045. The above estimates represent an 
average across all respondents and reflect variations between 
institutions based on their size, complexity, and practices.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance

[[Page 78643]]

of the Board's functions, including whether the information has 
practical utility; (2) the accuracy of the Board's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments on the collection of information should be sent to 
Cynthia Ayouch, Acting Federal Reserve Board Clearance Officer, 
Division of Research and Statistics, Mail Stop 95-A, Board of Governors 
of the Federal Reserve System, Washington, DC 20551, with copies of 
such comments sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0199), Washington, DC 20503.

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, Reporting 
and recordkeeping requirements, Truth in Lending.

Text of Proposed Revisions

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 is revised to read as 
follows:

    Authority:  12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and 
1639(l); Pub. L. 111-24 Sec.  2, 123 Stat. 1734 [rtrif]; Pub. L. 
111-203, 124 Stat. 1376[ltrif].

Subpart B--Open-End Credit

    2. Section 226.3(b) is revised to read as follows:


Sec.  226.3  Exempt transactions.

* * * * *
    (b) Credit over [rtrif]applicable threshold amount[ltrif] [$25,000 
not secured by real property or a dwelling]. [rtrif](1) General 
exemption. (i) Requirements.[ltrif] An extension of credit in which the 
amount [rtrif]of credit extended[ltrif] [financed] exceeds [rtrif]the 
applicable threshold amount[ltrif] [$25,000] or in which there is an 
express written commitment to extend credit in excess of [rtrif]the 
applicable threshold amount[ltrif] [$25,000], unless the extension of 
credit is:
    [rtrif](A)[ltrif] [(1)] Secured by [rtrif]any[ltrif] real property, 
or by personal property used or expected to be used as the principal 
dwelling of the consumer; or
    [rtrif](B)[ltrif] [(2)] A private education loan as defined in 
Sec.  226.46(b)(5).
    [rtrif](ii) Annual adjustments. For purposes of this paragraph, the 
threshold amount is adjusted annually to reflect increases in the 
Consumer Price Index for Urban Wage Earners and Clerical Workers, as 
applicable. See the official staff commentary to this paragraph for the 
threshold amount applicable to a specific extension of credit or 
express written commitment to extend credit.
    (2) Special exemption; open-end accounts exempt prior to July 21, 
2011. An open-end account that is exempt under paragraph (b) of this 
section on July 20, 2011 based on an extension of credit in excess of 
$25,000 or an express written commitment to extend credit in excess of 
$25,000 remains exempt until July 21, 2012. However, an account ceases 
to be exempt under this paragraph if:
    (i) The creditor takes a security interest in any real property, or 
in personal property used or expected to be used as the consumer's 
principal dwelling; or
    (ii) The creditor reduces any express written commitment to extend 
credit to $25,000 or less.[ltrif]
* * * * *
    3. In Supplement I to Part 226:
    A. Under Section 226.2--Definitions and Rules of Construction, 
under 2(a)(19) Dwelling, paragraph 3. is revised.
    B. Under Section 226.3--Exempt Transactions, the heading 3(b) 
Credit over $25,000 not secured by real property or a dwelling and 
paragraphs 1. through 3. are revised and paragraphs 4. through 6. are 
added.
    C. Under Section 226.23--Right of Rescission, under 23(a) 
Consumer's Right to Rescind, under Paragraph 23(a)(1), paragraph 5. is 
revised.
    The additions and revisions read as follows:

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

* * * * *
    2(a)(19) Dwelling.
* * * * *
    3. Relation to exemptions. Any transaction involving a security 
interest in a consumer's principal dwelling (as well as in any real 
property) remains subject to the regulation despite the general 
exemption in Sec.  226.3(b) [for credit extensions over $25,000].
* * * * *

Section 226.3--Exempt Transactions

* * * * *
    3(b) Credit over [rtrif]applicable threshold amount[ltrif] 
[$25,000 not secured by real property or a dwelling].
    [rtrif]1. Threshold amount. For purposes of Sec.  226.3(b), the 
threshold amount in effect during a particular period is the amount 
stated below for that period. The threshold amount is adjusted 
effective January 1 of each year by any annual percentage increase 
in the Consumer Price Index for Urban Wage Earners and Clerical 
Workers (CPI-W) that was in effect on the preceding June 1. This 
comment will be amended to provide the threshold amount for the 
upcoming year after the annual percentage change in the CPI-W that 
was in effect on June 1 becomes available. Any increase in the 
threshold amount will be rounded to the nearest $100 increment. For 
example, if the annual percentage increase in the CPI-W would result 
in a $950 increase in the threshold amount, the threshold amount 
will be increased by $1,000. However, if the annual percentage 
increase in the CPI-W would result in a $949 increase in the 
threshold amount, the threshold amount will be increased by $900.
    i. Prior to July 21, 2011, the threshold amount is $25,000.
    ii. From July 21, 2011 through December 31, 2011, the threshold 
amount is $50,000.
    2. Open-end credit.
    i. Qualifying for exemption. An open-end account is exempt under 
Sec.  226.3(b) (unless secured by any real property, or by personal 
property used or expected to be used as the consumer's principal 
dwelling) if either of the following conditions is met:
    A. The creditor makes an initial extension of credit at account 
opening that exceeds the threshold amount in effect at the time the 
account is opened; or
    B. The creditor makes a firm written commitment at account 
opening to extend a total amount of credit in excess of the 
threshold amount in effect at the time the account is opened with no 
requirement of additional credit information for any advances on the 
account (except as permitted from time to time with respect to open-
end accounts pursuant to Sec.  226.2(a)(20)).
    ii. Subsequent changes generally. Subsequent changes to an open-
end account or the threshold amount may result in the account no 
longer qualifying for the exemption in Sec.  226.3(b). In these 
circumstances, the creditor must begin to comply with all of the 
applicable requirements of this Part within a reasonable period of 
time after the account ceases to be exempt (except as otherwise 
provided). For example, if an open-end credit account ceases to be 
exempt, the creditor must within a reasonable period of time provide 
the disclosures required by Sec.  226.6 reflecting the current terms 
of the account and begin to provide periodic statements consistent 
with Sec.  226.7. See also comment 3(b)-4.
    iii. Subsequent changes when exemption based on initial 
extension of credit. If a

[[Page 78644]]

creditor makes an initial extension of credit at account opening 
that exceeds the threshold amount in effect at that time, the open-
end account remains exempt under Sec.  226.3(b) regardless of a 
subsequent increase in the threshold amount as a result of an 
increase in the CPI-W. Furthermore, in these circumstances, the 
account remains exempt even if there are no further extensions of 
credit, subsequent extensions of credit do not exceed the threshold 
amount, the account balance is subsequently reduced below the 
threshold amount (such as through repayment of the extension), or 
the credit limit for the account is subsequently reduced below the 
threshold amount. However, if the initial extension of credit on an 
account does not exceed the threshold amount in effect at the time 
of the extension, the account is not exempt under Sec.  226.3(b) 
even if the account balance later exceeds the threshold amount (for 
example, due to the subsequent accrual of interest).
    iv. Subsequent changes when exemption based on firm commitment.
    A. General. If an open-end account is exempt under Sec.  
226.3(b) based on a firm commitment to extend credit, the account 
remains exempt even if the amount of credit actually extended does 
not exceed the threshold amount. However, if the firm commitment 
does not exceed the threshold amount, the account is not exempt 
under Sec.  226.3(b) even if the account balance later exceeds the 
threshold amount (for example, due to the subsequent accrual of 
interest). In addition, in order for an open-end account to remain 
exempt under Sec.  226.3(b) based on a firm commitment, the amount 
of the firm commitment must continue to exceed the threshold amount 
currently in effect, as adjusted annually. For example:
    (1) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
226.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. If during year one the creditor reduces its firm 
commitment to $40,000, the account is no longer exempt under Sec.  
226.3(b).
    (2) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
226.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. If the threshold amount increases to $50,900 on January 1 
of year two as a result of an increase in the CPI-W, the account 
remains exempt under Sec.  226.3(b). However, if the threshold 
amount increases to $55,000 on January 1 of year six, the creditor 
would have to increase its firm commitment to an amount above 
$55,000 in order for the account to remain exempt.
    B. Accounts no longer qualifying for exemption. If an open-end 
account that was exempt under Sec.  226.3(b) based on a firm 
commitment no longer qualifies for that exemption, the creditor may 
begin to comply with all of the applicable requirements of this Part 
within a reasonable period of time after the account ceases to be 
exempt. However, in the alternative, the creditor may, at its 
option, permit the consumer to repay any outstanding balance on the 
account consistent with the account terms without providing 
additional extensions of credit, if permitted by the terms of the 
account and applicable state law.
    C. Subsequent initial extension of credit. If an open-end 
account qualifies for a Sec.  226.3(b) exemption at account opening 
based on a firm commitment, that account may also subsequently 
qualify for a Sec.  226.3(b) exemption based on an initial extension 
of credit. However, that initial extension must be a single advance 
in excess of the threshold amount in effect at the time the 
extension is made. Although the initial extension of credit need not 
be made at account opening in these circumstances, the account must 
qualify for an exemption based on the firm commitment at account 
opening and continue to qualify for an exemption on that basis until 
the initial extension of credit is made. For example:
    (1) Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
226.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. The account is not used for an extension of credit during 
year one. On January 1 of year two, the threshold amount increases 
to $51,000 as a result of an increase in the CPI-W. On July 1 of 
year two, the consumer uses the account for an initial extension of 
$52,000. As a result of this extension of credit, the account 
remains exempt under Sec.  226.3(b) even if, after July 1 of year 
two, the creditor reduces the firm commitment to $51,000 or less, or 
if, during year three, the threshold amount increases to $53,000 to 
reflect an increase in the CPI-W.
    (2) Same facts as in paragraph (1) above except that the 
consumer uses the account for an initial extension of $30,000 on 
July 1 of year two and for an extension of $22,000 on July 15 of 
year two. In these circumstances, the account is not exempt under 
Sec.  226.3(b) based on the $30,000 initial extension of credit 
because that extension did not exceed the applicable threshold 
amount ($52,000), although the account remains exempt based on the 
firm commitment to extend $55,000 in credit.
    (3) Same facts as in paragraph (1) above except that, on April 1 
of year two, the creditor reduces the firm commitment to $50,000, 
which is below the $51,000 threshold then in effect. Because the 
account ceases to qualify for a Sec.  226.3(b) exemption on April 1 
of year two, the account does not qualify for a Sec.  226.3(b) 
exemption based on a $52,000 initial extension of credit on July 1 
of year two.
    3. Closed-end credit.
    i. Qualifying for exemption. A closed-end loan is exempt under 
Sec.  226.3(b) (unless the extension of credit is secured by any 
real property, or by personal property used or expected to be used 
as the consumer's principal dwelling; or is a private education loan 
as defined in Sec.  226.46(b)(5)), if either of the following 
conditions is met:
    A. The creditor makes an extension of credit at consummation 
that exceeds the threshold amount in effect at the time of 
consummation. In these circumstances, the loan remains exempt under 
Sec.  226.3(b) even if the amount owed is subsequently reduced below 
the threshold amount.
    B. The creditor makes a commitment at consummation to extend a 
total amount of credit in excess of the threshold amount in effect 
at the time of consummation. In these circumstances, the loan 
remains exempt under Sec.  226.3(b) even if the total amount of 
credit extended does not exceed the threshold amount.
    ii. Subsequent changes. If a creditor makes a closed-end 
extension of credit or commitment to extend closed-end credit that 
exceeds the threshold amount in effect at the time of consummation, 
the closed-end loan remains exempt under Sec.  226.3(b) regardless 
of a subsequent increase in the threshold amount as a result of an 
increase in the CPI-W. Furthermore, in these circumstances, the loan 
remains exempt even if the amount owed is subsequently reduced below 
the threshold amount (such as through repayment of the loan). 
However, a closed-end loan is not exempt under Sec.  226.3(b) merely 
because it is used to satisfy and replace an existing exempt loan, 
unless the new extension of credit is itself exempt under the 
applicable threshold amount. For example, assume a closed-end loan 
that qualified for a Sec.  226.3(b) exemption at consummation in 
year one is refinanced in year ten and that the new loan amount is 
less than the threshold amount in effect in year ten. In these 
circumstances, the creditor must comply with all of the applicable 
requirements of this Part with respect to the year ten transaction 
if the original loan is satisfied and replaced by the new loan, 
which is not exempt under Sec.  226.3(b). See also comment 3(b)-4.
    4. Addition of a security interest in real property or a 
dwelling after account opening or consummation.
    i. Open-end credit. For open-end accounts, if, after account 
opening, a security interest is taken in any real property, or in 
personal property used or expected to be used as the consumer's 
principal dwelling, a previously exempt account ceases to be exempt 
under Sec.  226.3(b) and the creditor must begin to comply with all 
of the applicable requirements of this Part within a reasonable 
period of time. See comment 3(b)-2.ii. If a security interest is 
taken in the consumer's principal dwelling, the creditor must give 
the consumer the right to rescind the security interest consistent 
with Sec.  226.15.
    ii. Closed-end credit. For closed-end loans, if, after 
consummation, a security interest is taken in any real property, or 
in personal property used or expected to be used as the consumer's 
principal dwelling, an exempt loan remains exempt under Sec.  
226.3(b). However, the addition of a security interest in the 
consumer's principal dwelling is a transaction for purposes of Sec.  
226.23 and the creditor must give the consumer the right to rescind 
the security interest consistent with that section. See Sec.  
226.23(a)(1) and the accompanying commentary. In contrast, if a 
closed-end loan that is exempt under Sec.  226.3(b) is satisfied and 
replaced by a loan that is secured by any real property, or by 
personal property used or expected to be used as the consumer's 
principal dwelling, the new loan is not exempt under Sec.  226.3(b) 
and the creditor must being to comply with all the applicable 
requirements of this Part. See comment 3(b)-3.

[[Page 78645]]

    5. Application to extensions secured by mobile homes. Because a 
mobile home can be a dwelling under Sec.  226.2(a)(19), the 
exemption in Sec.  226.3(b) does not apply to a credit extension 
secured by a mobile home that is used or expected to be used as the 
principal dwelling of the consumer. See comment 3(b)-4.
    6. Special exemption for open-end accounts exempt prior to July 
21, 2011. Section 226.3(b)(2) applies only to open-end accounts 
opened prior to July 21, 2011. Section 226.3(b)(2) does not apply if 
a security interest is taken by the credito