Today's Trends in Credit Regulation

Fed Adopts Rules to Expand Coverage of TILA and CLA
By Nicole Frush Munro

Since it was enacted in 1968, the Truth in Lending Act (TILA) has applied to personal-property secured and unsecured consumer purpose credit transactions with an amount financed of $25,000 or less. Since it was enacted in 1976, the Consumer Leasing Act (CLA) has applied to consumer purpose leases with a total lease obligation of $25,000 or less.

Not anymore.

With the Dodd-Frank Act’s “designated transfer date” looming, the consumer financial services industry is recognizing big changes on the horizon. One of the changes has not been met with much fanfare. It’s a subtle change in a set of disclosure laws that significantly increases the scope of those laws. This threshold change is the first of its kind in over 40 years (for TILA) and over 30 years (for the CLA). Don’t think this will be the only change for the near future, however, since Dodd-Frank calls for annual threshold changes beginning in 2012.

Effective July 21, 2011, Dodd-Frank mandates that the protections of TILA and the CLA apply to consumer credit transactions and consumer leases up to $50,000. This amount will be adjusted annually to reflect any increase in the consumer price index. Annual adjustments begin December 31, 2011, and occur December 31 each year thereafter.

In the April 4 Federal Register , the Federal Reserve Board announced two rules implementing Dodd-Frank by expanding the coverage of consumer protection regulations applicable to consumer purpose credit and consumer purpose leases of higher dollar amounts. Effective on the transfer date, the rules raise the threshold of exempt transactions from TILA and the CLA from $25,000 to $50,000.

On the front end of a credit transaction or lease, and for those currently extending credit subject to TILA and leases subject to the CLA, the increase from $25,000 to $50,000 does not present significant costs or lending process changes. In the auto finance and leasing industry, many dealers have long complied with TILA and CLA on all transactions regardless of the amount of credit extended.

Whether it was because it was financially infeasible or logistically infeasible, it just didn’t make sense for dealers to use two different contracts – one for TILA and CLA transactions and one for exempt transactions. So, for these creditors, the TILA and CLA threshold changes may not impact front end originations.

On the back–end, though, these creditors will lose a defense to a TILA or CLA based cause of action for transactions under $50,000. That $25,000 increase makes a difference. Most cars on the market these days will result in an amount financed of less than $50,000, and although we don’t have the exact numbers, we suspect that a majority of contracts will be subject to TILA and the CLA. Therefore, a majority of contracts will be open to federal “statutory damages” claims and TILA/CLA based class actions.

With respect to installment loans (other than payday and title loans), many lenders have avoided application of TILA through self-imposed minimum loan requirements. These lenders will have to increase their minimum thresholds or comply with the TILA disclosure requirements.

One other place where we’ll see the effects of the threshold increase is state law preemption. Both TILA and the CLA contain provisions governing the relation of those laws to state laws. State laws that are inconsistent with the provisions of TILA and the CLA are preempted. Preemption, however, only exists with respect to the transactions governed by TILA and the CLA.

So, for example, the Arizona Motor Vehicle time Sales Disclosure Act requires disclosure of the “final cash price balance,” the “finance charge” and the “time balance”. For the purposes of transactions governed by TILA, those disclosures are preempted. The TILA threshold increase expands the scope of preemption.

For open-end credit, the Board adopted a transition rule to reduce the compliance burden with respect to certain accounts that are currently exempt under the $25,000 threshold. Specifically, this transition rule provides that, if an open-end credit account is exempt on July 20, 2011 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.

Note that private education loans and loans secured by real property (such as mortgages) are not subject to dollar limitations and remain unaffected by these rule changes. These loans must comply with TILA disclosure and substantive requirements regardless of the amount of the loan.

Nicole F. Munro is a partner in the Maryland office of Hudson Cook, LLP. Nikki can be reached at (410) 865-5430 or by e-mail at

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