On March 24, 2011 the Federal Reserve Board approved a change to Regulation Z that increases the threshold for transactions exempt from Regulation Z from $25,000 to $50,000. This change was mandated by the Dodd Frank Act. The change is effective on July 21, 2011.
So you may be wondering – What are the details of this change? What does the change mean to my bank?
Currently, the Truth in Lending Act (TILA) exempts credit 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, and other than private education loans, in which the total amount financed exceeds $25,000.
* Effective on July 21, 2011, the Dodd-Frank Act raises TILA’s $25,000 exemption threshold to $50,000.
* Effective on 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, as published by the Bureau of Labor Statistics.
* The Board has also adopted a transition rule to reduce the compliance burden with respect to open-end credit accounts currently exempt based on a firm commitment to extend more than $25,000 in credit. The creditor has until December 31, 2011 to either retain the exemption by increasing the firm commitment to more than $50,000 or begin complying with Regulation Z.
WHAT DOES THE CHANGE MEAN FOR MY BANK?
Previously, loans in an amount greater than $25,000 that were not secured by real property, or by personal property used or expected to be used as the principal dwelling, were exempt from the requirements of Regulation Z. Now similar transactions are covered by Regulation Z unless the amount of credit exceeds $50,000. So the change impacts loans in an amount greater than $25,000 but less than or equal to $50,000 that are not secured by real property, or by personal property used or expected to be used as the principal dwelling. That is a small universe of loans. And the impact is even less considering that most banks don’t take full advantage of the existing exemption.
I find that most banks that make a $30,000 loan secured by a car provide TIL disclosures, even those disclosure are not required under the present rule. Under the new rule the disclosures are required, but if you were already providing disclosures on similar transactions there is no increased burden.
This is a small change, with an even smaller impact on most banks. We expect loan origination software (LOS) will be updated to provide a prompt when Regulation Z disclosures are needed under the new rule. This is a very simple programming change and the LOS providers have four months to complete the work, so you should receive an update to the software in a timely fashion. But LOS providers have had trouble meeting recent deadlines, so you should check with your vendor regarding the update.