[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Rules and Regulations]
[Pages 18354-18365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7376]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

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


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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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 Earners and Clerical Workers. Accordingly, 
the Board is making 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 making 
similar amendments to Regulation M elsewhere in today's Federal 
Register.

DATES: Consistent with Sections 1062 and 1100H of the Dodd-Frank Act, 
this final rule is effective on the transfer date designated by the 
Secretary of the Treasury, which is July 21, 2011.

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 final 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, and other than private education loans (as that term is 
defined in section 140(a)), 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. Effective January 1, 2012, the $50,000 threshold will 
be adjusted annually based on any annual percentage increase in the 
CPI-W.
    In December 2010, the Board proposed to amend Sec.  226.3(b) and 
the accompanying commentary for consistency with the amendments made by 
the Dodd-Frank Act. See 75 FR 78636 (Dec. 16, 2010) (December 2010 
Proposed Regulation Z Rule). 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 simultaneously proposed 
to amend Regulation M, which implements the Consumer Leasing Act (CLA). 
See 75 FR 78632 (Dec. 16, 2010) (December 2010 Proposed Regulation M 
Rule).
    The Board received 10 comments on the December 2010 Regulation Z 
Proposed Rule. As discussed below, the Board is adopting the rule 
largely as proposed with some modifications to facilitate compliance. 
Elsewhere in today's Federal Register, the Board is also adopting a 
final rule amending Regulation M in order to implement the amendments 
to CLA's exemption threshold for consumer leases.

II. Summary of Final Rule

Revisions to Sec.  226.3(b)

    Consistent with the Dodd-Frank Act, the Board's final rule revises 
Sec.  226.3(b) and the accompanying staff commentary to provide that, 
effective July 21, 2011, a consumer credit account is exempt from the 
requirements of Regulation Z if: (1) The initial extension of credit on 
the account exceeds $50,000; or (2) the creditor makes a firm 
commitment at

[[Page 18355]]

account opening to extend credit in excess of $50,000. This final rule 
further provides that, effective January 1, 2012, the $50,000 threshold 
will be adjusted annually by any annual percentage increase in the CPI-
W.
    The Board has also adopted a transition rule in Sec.  226.3(b)(2) 
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.

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 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, this final rule will be effective on that date. However, 
if the Secretary of Treasury designates a later transfer date pursuant 
to Section 1062, this final rule will instead be effective on that 
date.
    Consumer group commenters argued that, because Section 1100E placed 
creditors on notice of the increased threshold amount, creditors should 
be required to begin complying with all aspects of the Board's rule on 
July 21, 2011. In contrast, one industry commenter requested that the 
Board delay compliance by one year (i.e., until July 21, 2012). This 
commenter asserted that--in light of the extensive regulatory changes 
required by the Dodd-Frank Act and other statutes--it would be 
burdensome for small institutions to comply with Regulation Z for 
credit extensions and firm commitments of $50,000 or less by July 21, 
2011. However, the Board understands that institutions that extend 
consumer credit generally already have the systems in place to comply 
with Regulation Z. Thus, as a general matter, it should not be unduly 
burdensome for these institutions to comply with Regulation Z with 
respect to accounts opened after July 21, 2011. Nevertheless, as 
discussed in detail below with respect to the transition rule in Sec.  
226.3(b)(2), the Board believes it is appropriate to provide additional 
time for compliance with respect to certain exempt accounts opened 
prior to July 21, 2011.

III. 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:
    <bullet> 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).
    <bullet> 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.

IV. 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 an extension of credit 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, unless: (1) The extension of credit 
is secured by real property, or by personal property used or expected 
to be used as the principal dwelling of the consumer; or (2) the 
extension of credit is a private education loan (as defined in Sec.  
226.46(b)(5)). 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 
amending Sec.  226.3(b) and the accompanying commentary to implement 
Section 1100E.
3(b)(1) Exemption
    The Board proposed to redesignate current Sec.  226.3(b) as Sec.  
226.3(b)(1)(i) and add a new Sec.  226.3(b)(1)(ii) 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) refers to the 
``applicable threshold amount,'' rather than stating a specific 
amount.\2\ Instead, new Sec.  226.3(b)(1)(ii) provides 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 proposed to amend Sec.  226.3(b) to 
require that, in order for an account to be exempt based on an initial 
extension of credit, the amount of credit extended (rather than the 
amount financed) must exceed the applicable threshold amount.
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    \1\ The Board notes that, consistent with the Dodd-Frank Act, 
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, the Board proposed to remove the references 
to the $25,000 threshold from comments 2(a)(19)-3 and 23(a)(1)-5. 
The Board did not receive any comments on these revisions, which are 
adopted as proposed.
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    One industry commenter requested that the Board only increase the 
exemption threshold amount to $50,000 without making subsequent annual 
adjustments for inflation. The Board believes that such an approach 
would be inconsistent with Section 1100E(b), which requires that the 
exemption threshold amount be adjusted annually based on increases in 
the CPI-W.
    Consumer groups and a member of Congress requested that the Board 
amend Sec.  226.3(b) to eliminate the exemption for accounts with an 
express written commitment (or firm commitment) to extend credit in 
excess of the threshold amount. These commenters noted that TILA 
Section 104(3) does not provide a firm commitment exemption. 
Furthermore, they expressed concern that a credit card account with a 
credit limit that exceeds the threshold amount would be exempt from 
TILA and therefore from the consumer protections in the Credit Card 
Accountability Responsibility and Disclosure Act of 2009 (Credit Card 
Act), which amended TILA.
    For purposes of obtaining an exemption, Regulation Z has treated a

[[Page 18356]]

creditor's firm commitment to extend credit in excess of the threshold 
amount as the functional equivalent of an extension of credit in excess 
of that amount since the 1980s. As a result, creditors ranging from 
large financial institutions to small community banks and credit unions 
have been relying on this exemption for more than twenty years. Section 
1100E did not repeal the firm commitment exemption, and the Board's 
December 2010 Regulation Z Proposed Rule did not request comment on 
whether the exemption should be eliminated. Thus, if the Board were to 
eliminate this exemption, it would do so without the benefit of public 
comment regarding the operational burden on creditors and the effect on 
the cost and availability of credit for consumers. For these reasons, 
this final rule retains the firm commitment exemption.\3\
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    \3\ As an alternative to eliminating the firm commitment 
exemption, consumer group commenters requested that, in order to 
prevent evasion, the Board prohibit creditors from reducing a firm 
commitment for at least six months after account opening. However, 
this requirement would involve a substantial limitation to the firm 
commitment exemption that was not set forth in the proposed rule and 
therefore was not the subject of public comment.
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    The Board also notes that a credit card account is not exempt from 
TILA and the Credit Card Act simply because the credit card issuer sets 
the credit limit on the account above the threshold amount. Instead, as 
discussed in detail below, an open-end account does not qualify for an 
exemption based on a firm commitment unless the creditor makes an 
express commitment in writing to extend a total amount of credit that 
exceeds the threshold amount. Furthermore, the creditor must honor 
transactions up to the committed amount without requiring additional 
credit information (although creditors are permitted to, for example, 
verify the value of collateral before making an extension and perform 
periodic reviews of the consumer's creditworthiness).\4\ Thus, unless a 
credit card issuer can satisfy these requirements, a credit card 
account with a credit limit above the threshold amount does not qualify 
for a firm commitment exemption and is subject to TILA and the Credit 
Card Act.
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    \4\ Because a creditor that makes a firm commitment must honor 
transactions up to the committed amount without requiring additional 
credit information, the Board understands that some creditors do not 
utilize the firm commitment exemption because of the cost associated 
with maintaining capital to honor advances for available credit on a 
committed line.
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    The member of Congress also suggested that, for accounts that are 
exempt based on an initial extension of credit, the Board require a 
creditor to begin to comply with Regulation Z if, at any point in time 
during the life of the account, the outstanding balance does not exceed 
the threshold amount. He argued this approach would be consistent with 
TILA Section 104(3), which refers to ``the total amount financed.'' 
Because, however, the balance on an account will almost always fall 
below the threshold amount as it is repaid, the Board is concerned that 
this approach would be contrary to the purpose of TILA Section 104(3) 
because it would effectively prevent any account from remaining exempt 
based on an initial extension of credit above the threshold. 
Furthermore, the Board believes that conditioning the exemption on the 
amount of credit extended--and not the amount financed--promotes 
consumer understanding.\5\
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    \5\ For a discussion of the results of the Board's consumer 
testing regarding the ``amount financed,'' see 74 FR 43232, 43308 
(Aug. 26, 2009).
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    Therefore, in order to effectuate the purposes of TILA and to 
facilitate compliance, the Board uses its authority under TILA Section 
105(a) to adopt Sec.  226.3(b)(1) as proposed, with non-substantive 
revisions to its headings. 15 U.S.C. 1604(a). As discussed below, the 
Board is also revising and reorganizing the commentary to Sec.  
226.3(b).

Threshold Amount

    The Board proposed a new comment 3(b)-1 listing the threshold 
amounts in effect for specific periods of time.\6\ In particular, the 
proposed comment clarified 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. The proposed comment also 
clarified 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.\7\ 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. For example, after the annual percentage change in 
the CPI-W in effect on June 1, 2011 becomes available, comment 3(b)-1 
will be amended to provide the threshold amount in effect beginning on 
January 1, 2012. The Board received only one comment regarding this 
approach, which stated that the proposed timeframe would provide 
adequate time for creditors to comply with any inflation adjustment in 
the threshold amount.
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    \6\ For organizational purposes, the guidance in current comment 
3(b)-1 has been moved to other comments, as discussed below.
    \7\ 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 will 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 permits the publication of an increased 
threshold amount sufficiently in advance of the January 1 effective 
date.
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    Proposed comment 3(b)-1 further clarified 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 this commentary clarifies the statutory 
language in a manner consistent with the intent of Section 1100E. The 
only comment the Board received on this aspect of the proposal 
supported the proposed clarification with respect to rounding. 
Accordingly, for the reasons discussed above, the Board is adopting 
comment 3(b)-1 as proposed.

Open-End Credit

    Proposed comment 3(b)-2 provided guidance on the application of 
Sec.  226.3(b)(1) to open-end credit accounts. Consistent with the 
existing commentary, proposed comment 3(b)-2.i clarified 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; or (2) the creditor makes a firm written commitment 
to extend a total amount of credit in excess of the threshold amount 
with no requirement of additional credit information for any advances 
on the account (except as permitted from time

[[Page 18357]]

to time with respect to open-end accounts pursuant to Sec.  
226.2(a)(20)).
    In addition, in order to provide certainty regarding the exemption 
status of an account, the Board proposed to clarify in comment 3(b)-2.i 
that the initial extension of credit or firm commitment must be made at 
account opening for purposes of determining whether an open-end account 
is exempt under Sec.  226.3(b). Some industry commenters supported the 
requirement that a firm commitment to extend credit in excess of the 
threshold amount occur at account opening; however, other industry 
commenters specifically opposed this requirement with respect to 
initial extensions of credit. In particular, they argued that many 
consumers open an account in order to have access to credit at a future 
time and do not want an extension at account opening. In addition, some 
industry commenters argued that the proposed requirement would impose a 
significant compliance burden on creditors who offer open-end lines of 
credit associated with brokerage accounts, which are serviced on 
systems that cannot presently provide Regulation Z disclosures. They 
stated that these lines of credit are structured to be exempt under 
Sec.  226.3(b) based on a contractual requirement that the initial 
extension of credit must exceed the applicable threshold amount, even 
if that extension does not occur at account opening.
    Based on the comments and further consideration, the Board believes 
that it is not necessary to require that the initial extension of 
credit be made at account opening for purposes of Sec.  226.3(b). 
Instead, the Board has revised comment 3(b)-2.i to clarify that an 
account is exempt under Sec.  226.3(b) based on an initial extension of 
credit at or after account opening, provided that extension exceeds the 
threshold amount in effect at the time the extension is made. In 
addition to providing flexibility, this approach is consistent with 
Section 1100E of the Dodd-Frank Act because, regardless of when the 
account is opened, the initial extension of credit must exceed the 
threshold amount (as adjusted based on the CPI-W) that is in effect at 
the time the extension is made. Neither the Dodd-Frank Act nor TILA 
requires that the initial extension occur at account opening.
    However, in order to ensure that consumers are fully protected, the 
final rule clarifies that, if a creditor makes an initial extension of 
credit after account opening that does not exceed the threshold amount 
in effect at the time the extension is made, the creditor must have 
satisfied all of the applicable requirements of Regulation Z from the 
date the account was opened (or earlier, if applicable). For example, 
assume that the threshold amount is $50,000 and that, after account 
opening, the creditor makes an initial extension of credit of $50,000 
or less. In this circumstance, the account is not exempt and the 
creditor must have satisfied all of the applicable requirements of 
Regulation Z from the date the account was opened (or earlier, if 
applicable), including but not limited to the requirements of Sec.  
226.6 (account-opening disclosures), Sec.  226.7 (periodic statements), 
Sec.  226.52 (limitations on fees), and Sec.  226.55 (limitations on 
increasing annual percentages rates, fees, and charges). Illustrative 
examples are provided. Comment 3(b)-2.i is otherwise adopted as 
proposed.
    Proposed comment 3(b)-2.ii provided general guidance regarding 
circumstances in which an account that was exempt under Sec.  226.3(b) 
no longer qualifies for an exemption. An account would cease to be 
exempt, for example, if a security interest is taken at a later time in 
any real property, or in the consumer's principal dwelling. 
Specifically, the comment clarified that a creditor must begin to 
comply with all of the applicable requirements of Regulation Z within a 
reasonable period of time after an account ceases to be exempt. For 
example, if an open-end 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.
    Industry commenters, including trade associations representing 
credit unions and community banks, argued that the proposed guidance 
would impose significant operational difficulties and requested further 
clarification regarding creditors' responsibilities when an account no 
longer qualifies for an exemption under Sec.  226.3(b). Consumer group 
commenters generally supported the proposed guidance, but requested 
that, to the extent that a creditor imposed charges that were 
inconsistent with Regulation Z while the account was exempt, the 
creditor be required to refund those charges once the exemption is 
lost.
    In order to clarify the proposed guidance, the Board is revising 
comment 3(b)-2.ii to state that, once an exempt account ceases to be 
exempt, the applicable requirements of Regulation Z apply prospectively 
to any balances on the account. For example, if a credit card account 
under an open-end (not home-secured) consumer credit plan ceases to be 
exempt, the protections in Sec.  226.55 generally prevent the card 
issuer from increasing the rate that applies to the account's existing 
balance, even if that balance consists of transactions that occurred 
while the account was exempt. The Board further clarifies, however, 
that the creditor is not required to comply with the requirements of 
Regulation Z retroactively for the period of time during which the 
account was exempt. Thus, for example, a creditor is not required to 
refund amounts charged during the period the account was exempt or to 
provide disclosures regarding transactions or changes in account terms 
that occurred during that period. Finally, because the Board 
understands that many creditors voluntarily comply with Regulation Z 
for exempt accounts, the final rule clarifies that, if a creditor 
provided disclosures consistent with the requirements of Regulation Z 
while the account was exempt (including account-opening disclosures 
consistent with Sec.  226.6 and change-in-terms notices consistent with 
Sec.  226.9), the creditor is not required to provide the disclosures 
required by Sec.  226.6 reflecting the current terms of the account if 
the account ceases to be exempt.
    Proposed comment 3(b)-2.iii addressed 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 clarified that, if a 
creditor makes an initial extension of credit 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 also clarified 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).
    Industry commenters generally supported the Board's proposal. 
Although one industry commenter requested that an account become

[[Page 18358]]

exempt once the total amount of the transactions on the account exceeds 
the threshold, the Board does not believe that this approach would be 
consistent with the intent of TILA Section 104(3). Accordingly, the 
Board is adopting comment 3(b)-2.iii as proposed with revisions for 
clarity and consistency.
    Proposed comment 3(b)-2.iv addressed 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, proposed comment 3(b)-2.iv.A clarified 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 proposed comment stated 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 under 
the proposed rule, a creditor could not reduce its firm commitment 
below the threshold amount currently in effect and would have been 
required to increase its firm commitment when it no longer exceeded the 
threshold amount due to increases in the threshold as a result of 
increases in the CPI-W.
    Trade associations representing credit unions and community banks 
opposed the proposed requirement that, in order for an account to 
remain exempt based on a firm commitment, the amount of the commitment 
must continue to exceed the threshold amount currently in effect. These 
commenters argued that the continuous monitoring of such accounts would 
impose significant operational costs and compliance burdens, 
particularly on small institutions. Several industry commenters 
requested the Board clarify that if an account is exempt based on a 
firm commitment in excess of the threshold amount at account opening, 
the account will remain exempt regardless of subsequent increases in 
the threshold amount as a result of inflation. In addition, some 
industry commenters argued that the account should remain exempt even 
if the creditor reduces the firm commitment below the applicable 
threshold amount. One industry commenter, however, noted that creditors 
frequently renew lines of credit and that the amount of firm commitment 
is rarely reduced before renewal. This commenter requested that the 
Board provide additional flexibility to creditors when the consumer 
requests a reduction in the firm commitment amount.
    As discussed above, consumer groups and a member of Congress 
requested that the Board eliminate the firm commitment exemption. In 
the alternative, consumer group commenters urged the Board to adopt the 
proposed requirement that the firm commitment continue to exceed the 
threshold amount.
    Based on the comments and further analysis, the Board is revising 
proposed comment 3(b)-2.iv.A in order to ease some of the compliance 
burden for creditors, while retaining protections against 
circumvention. As discussed below with respect to the transition rule 
in Sec.  226.3(b)(2), all creditors that currently rely on the firm 
commitment exemption must review their accounts and either increase 
their firm commitments to more than $50,000 by December 31, 2011 or 
begin to comply with Regulation Z. Although this requirement will 
impose a one-time burden on creditors, the Board believes that, because 
Section 1100E of the Dodd-Frank Act was intended to expand TILA's 
coverage to transactions involving higher dollar amounts, it would be 
inconsistent with that intent to allow existing accounts to remain 
exempt based on firm commitments of less than $50,000. In contrast, 
however, the Board does not believe it would be appropriate to require 
creditors to continually review and adjust accounts that are exempt 
based on a firm commitment due to any incremental CPI-W increases in 
the threshold amount. In particular, the Board notes that, for smaller 
institutions with limited resources, the burden of monitoring the firm 
commitment amount in accordance with annual increases in the threshold 
amount is likely to be significant. In some cases, the Board 
understands that small institutions would have to conduct this review 
manually. Accordingly, the Board has revised comment 3(b)-2.iv.A to 
clarify that if a creditor makes a firm commitment at account opening 
to extend a total amount of credit 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. For example, if the applicable 
threshold amount is $50,000 and an account is exempt at account opening 
based on a firm commitment of $55,000, the account remains exempt even 
if the threshold amount subsequently increases to $56,000 as a result 
of increases in the CPI-W.
    However, in order to prevent circumvention, the Board is adopting 
the proposed guidance in comment 3(b)-2.iv.A with respect to a 
reduction in a firm commitment. Accordingly, the revised comment 
clarifies that if a creditor reduces a firm commitment, the account 
ceases to be exempt unless the reduced firm commitment exceeds the 
threshold amount in effect at the time of the reduction. For example, 
if the applicable threshold amount is $56,000 and a $60,000 firm 
commitment on an exempt account is reduced to $52,000, the account no 
longer qualifies for an exemption based on the firm commitment. 
However, if the firm commitment on the exempt account is reduced to 
$58,000, the account remains exempt because the firm commitment still 
exceeds the threshold amount in effect at the time of the reduction. 
This guidance applies to any reduction in the firm commitment, whether 
upon the creditor's initiative or the borrower's request. The Board 
believes that the final rule does not impose any unwarranted monitoring 
burden in these circumstances because the creditor presumably would 
review the account in order to determine whether to reduce the firm 
commitment.
    Proposed comment 3(b)-2.iv.B clarified that when an open-end 
account no longer qualifies for an exemption under Sec.  226.3(b) based 
on a firm commitment, the creditor would not be required to begin 
complying with Regulation Z if it permitted the consumer to repay any 
outstanding balance on the account consistent with the account terms 
without providing additional extensions of credit. This guidance was 
based on the Board's concern that, if an account ceased to be exempt, 
the creditor would close the account and require the consumer to repay 
the outstanding balance rather than begin to comply with Regulation Z. 
Consumer group commenters opposed adoption of this guidance, arguing 
that creditors should be required to comply with Regulation Z in these 
circumstances. In addition, an industry trade association stated that 
creditors generally comply with Regulation Z even if an account 
qualifies for an exemption under Sec.  226.3(b). Based on these 
comments and further analysis, the Board believes that this guidance is 
not necessary. Furthermore, as discussed above, the Board has revised 
comment 3(b)-2.ii to provide additional guidance and flexibility for 
accounts that no longer qualify for an exemption under Sec.  226.3(b). 
Accordingly, the final

[[Page 18359]]

rule does not adopt proposed comment 3(b)-2.iv.B.
    Finally, proposed comment 3(b)-2.iv.C addressed 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 clarified that, in these circumstances, the account 
qualifies 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 firm commitment is 
subsequently reduced below the threshold amount. For example, assume 
that, at account opening on January 1 of 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 $53,000 in credit. On 
July 1 of year one, the consumer uses the account for an initial 
extension of $52,000, which is taken in a single advance. As a result 
of this extension of credit, the account remains exempt under Sec.  
226.3(b) even if, after July 1, the creditor reduces the firm 
commitment to $50,000 or less.
    One industry commenter suggested that the Board permit accounts to 
qualify for an exemption in these circumstances based on multiple 
advances that, in total, exceed the applicable threshold amount, 
instead of a single, initial advance. For consistency with the guidance 
in revised comment 3(b)-2.i, the Board declines to adopt this 
suggestion. Therefore, comment 3(b)-2.iv.C is renumbered as comment 
3(b)(2)-2.iv.B for organizational purposes and otherwise adopted as 
proposed, with non-substantive revisions for clarity and consistency.

Closed-End Credit

    Proposed comment 3(b)-3 provided guidance on the application of 
Sec.  226.3(b)(1) to closed-end loans. Specifically, comment 3(b)-3.i 
clarified 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 clarified 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 amount owed is subsequently reduced below the threshold amount, 
such as through repayment.
    Second, the comment clarified that a closed-end loan would be 
exempt if the 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 further clarified 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.\8\ This guidance addressed loan commitments for 
closed-end credit 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.
---------------------------------------------------------------------------

    \8\ This guidance is currently set forth in comment 3(b)-1.
---------------------------------------------------------------------------

    Proposed comment 3(b)-3.ii provided guidance on the effect of 
subsequent changes to a closed-end loan or loan commitment or to the 
threshold amount. Specifically, the comment clarified 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, such as an 
increase as a result of Section 1100E or an increase in the CPI-W. In 
addition, the proposed comment incorporated existing guidance regarding 
the refinancing of an exempt closed-end loan. Consumer groups and one 
industry commenter generally supported the proposed comment. 
Accordingly, the Board is adopting comment 3(b)-3 as proposed with non-
substantive revisions for clarity.

Additional Commentary

    Proposed comment 3(b)-4 provided guidance when a security interest 
in any real property, or in personal property used or expected to be 
used as the consumer's principal dwelling, is added to an existing 
account or loan that is exempt under Sec.  226.3(b). The proposed 
comment incorporated guidance from current comments 3(b)-2.ii and 3(b)-
3 with respect to open-end credit and closed-end credit, respectively. 
The Board did not receive substantive comments on proposed comment 
3(b)-4, which is adopted as proposed with non-substantive revisions for 
clarity.
    Proposed comment 3(b)-5 incorporated the guidance currently 
provided in comment 3(b)-1 regarding credit extensions secured by 
mobile homes. Specifically, this comment clarified 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. The only comment to address this guidance supported 
adoption of the proposal. Accordingly, the Board is adopting comment 
3(b)-5 as proposed.
3(b)(2) Transition Rule for Open-End Accounts Exempt Prior to July 21, 
2011
    The Board proposed 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 the revised 
threshold. Specifically, proposed Sec.  226.3(b)(2) provided 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. Section 
226.3(b)(2) was 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 systems that cannot presently provide Regulation Z disclosures, the 
Board proposed a transition period in order to provide additional 
flexibility and facilitate compliance with the revisions to Sec.  
226.3(b).
    In particular, the Board noted that this concern exists with 
respect to certain open-end lines of credit associated with brokerage 
accounts that are serviced on systems that cannot currently provide

[[Page 18360]]

Regulation Z disclosures.\9\ Industry commenters indicated that 
creditors offering this type of product would generally be able to 
comply with the increased threshold amount on July 21, 2011 by 
requiring that any initial extensions of credit on or after that date 
exceed $50,000; however, they requested that the Board delay the 
mandatory compliance date for the proposed requirement that an initial 
extension of credit occur at account opening. As discussed above, the 
Board is revising its commentary to clarify that the initial extension 
of credit on an open-end account is not required to occur at account 
opening for purposes of Sec.  226.3(b). Therefore, with respect to 
accounts that are exempt based on an initial extension of credit, the 
Board believes additional compliance time is not required. Accordingly, 
the Board is not adopting the proposed transition rule for these 
accounts.
---------------------------------------------------------------------------

    \9\ To the extent the creditors who provide these accounts are 
not broker-dealers, the accounts are not exempt under Sec.  
226.3(d).
---------------------------------------------------------------------------

    However, the Board believes that it is appropriate to provide 
creditors that are currently relying on a firm commitment exemption 
with additional time to adjust to the increase in the threshold amount 
from $25,000 to $50,000 pursuant to Section 1100E. As noted above, the 
Board believes that it would be inconsistent with the intent of Section 
1100E to permit accounts to remain exempt based on firm commitments to 
extend more than $25,000 (but less than $50,000) in credit. Thus, in 
order to comply with the final rule, creditors must review all accounts 
that are currently exempt based on a firm commitment and, to the extent 
the commitment does not exceed $50,000, either increase the commitment 
or begin to comply with Regulation Z. Industry commenters argued that 
this task would be burdensome (particularly for small institutions) and 
requested additional time to comply. However, as noted above, consumer 
group commenters opposed providing any additional time for compliance.
    Based on the comments and further analysis, the Board believes it 
is appropriate to provide additional time for creditors who currently 
rely on the firm commitment exemption to make the necessary adjustments 
to comply with the one-time increase from $25,000 to $50,000; however, 
the Board does not believe that the proposed one-year transition period 
is necessary because the Board understands that these creditors 
generally have the systems and procedures in place to comply with 
Regulation Z. Accordingly, as adopted in the final rule, Sec.  
226.3(b)(2) provides that an open-end account that is exempt on July 
20, 2011 based on an express written commitment to extend credit in 
excess of $25,000 generally remains exempt until December 31, 2011. The 
Board believes that this will provide creditors with sufficient time to 
review their accounts and make the necessary adjustments.
    The Board is revising proposed comment 3(b)-6 to provide guidance 
regarding the application of revised Sec.  226.3(b)(2). In particular, 
the comment clarifies that if, on July 20, 2011, an open-end account is 
exempt under Sec.  226.3(b) based on a firm commitment to extend credit 
in excess of $25,000, the account generally remains exempt under Sec.  
226.3(b)(2) until December 31, 2011 (unless the firm commitment is 
reduced to $25,000 or less). If the firm commitment is increased on or 
before December 31, 2011 to an amount in excess of $50,000, the account 
remains exempt under Sec.  226.3(b)(1) regardless of subsequent 
increases in the threshold amount as a result of increases in the CPI-
W. If the firm commitment is not increased on or before December 31, 
2011 to an amount in excess of $50,000, the account ceases to be exempt 
under the Sec.  226.3(b) based on a firm commitment. Furthermore, 
comment 3(b)-6 clarifies 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.

V. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an initial and a 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 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 final regulatory 
flexibility analysis pursuant to section 604 of the RFA.
    Based on its initial and final analyses and for the reasons stated 
below, the Board believes that this final rule will not have a 
significant economic impact on a substantial number of small entities.
    1. Statement of the need for, and objectives of, the final rule. 
The final rule implements 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 
threshold shall be adjusted 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 final rule.
    2. Summary of the significant issues raised by public comment on 
Board's initial analysis, the Board's assessment of such issues, and a 
statement of any changes made as a result of such comments. An industry 
group representing credit unions requested that, in order to reduce 
regulatory burden, the Board provide additional guidance regarding the 
types of records that institutions are required to retain in order to 
demonstrate compliance with Regulation Z. Section 226.25 states that 
creditors must retain ``evidence of compliance with this regulation 
(other than advertising requirements under sections 226.16 and 226.24) 
for two years after the date disclosures are required to be made or 
action is required to be taken.'' Comment 25-2 clarifies that 
``[a]dequate evidence of compliance does not necessarily mean actual 
paper copies of disclosure statements or other business records.'' 
Instead, ``[t]he evidence may be retained on microfilm, microfiche, or 
by any other method that reproduces records accurately (including 
computer programs).'' Furthermore, ``[t]he creditor need retain only 
enough information to reconstruct the required disclosures or other 
records. Thus, for example, the creditor need not retain each open-end 
periodic statement, so long as the specific information on each 
statement can be retrieved.''
    Because the current regulation and commentary provide creditors 
with considerable flexibility regarding the retention of records, the 
Board is concerned that adopting a more specific set of requirements 
(such as a list of documents that creditors must retain) could increase 
regulatory burden, rather than reducing it. Furthermore, because the 
Board did not propose any amendments to the record retention 
requirements in Sec.  226.25, any revisions to those requirements would 
not have the benefit of input from the public, including small 
institutions. Accordingly, the final rule does not alter the 
requirements of Sec.  226.25.

[[Page 18361]]

    3. Small entities affected by the final 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 final rule. Based on 
2010 call report data, the Board estimates that there are approximately 
4,360 banks and thrifts 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 final rule. The Board acknowledges, 
however, that the total number of small entities likely to be affected 
by the final 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.
    4. Recordkeeping, reporting, and compliance requirements. The final 
rule imposes 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 final 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. One industry 
commenter noted that the Board's rule could impose operational burden 
on smaller institutions with respect to open-end accounts exempt prior 
to July 21, 2011. The Board, however, has revised the rule to provide 
creditors, particularly smaller institutions, with additional 
flexibility to ease compliance burden.

Final Amendments

    This subsection summarizes several of the final amendments to 
Regulation Z and their likely impact on small entities. More 
information regarding these and other changes can be found in IV. 
Section-by-Section Analysis.
    On July 21, 2011, the amendments to Sec.  226.3(b)(1)(i) and its 
accompanying commentary 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 are required to comply with all applicable Regulation Z 
requirements. The Board anticipates that creditors that are small 
entities, with some additional burden, will 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 comply with Regulation Z 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 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), Sec.  226.3(b)(1)(ii) requires 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, 
will 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 comply with Regulation Z 
regardless of the amount of the credit extension. Furthermore, as 
discussed above, the Board has revised the proposed rule to reduce the 
monitoring burden for small entities that rely on the firm commitment 
exemption. As a result, the Board does not anticipate significant 
additional burden on small entities by adjusting the exemption 
threshold dollar amount annually for inflation.
    Section 226.3(b)(2) addresses circumstances where certain 
previously exempt open-end accounts would cease to qualify for an 
exemption based on a firm commitment on July 21, 2011 under the revised 
threshold amount. Under Sec.  226.3(b)(2), these accounts would have 
until December 31, 2011 to comply with the revised threshold amount in 
effect at that time ($50,000). Therefore, the Board has reduced the 
burden on small entities that rely on the firm commitment exemption by 
providing additional time to comply with the final rule.
    Accordingly, the Board believes that, in the aggregate, the 
provisions of its final rule would not have a significant economic 
impact on a substantial number of small entities.
    5. Significant alternatives to the revisions. The provisions of the 
final rule would implement the statutory requirements of the Dodd-Frank 
Act, which establish new threshold requirements for exempt consumer 
credit transactions. As discussed above in the supplementary 
information, the Board has revised the proposed rule to reduce the 
compliance burden for small entities and to provide small entities with 
additional time to come into compliance, while effectuating the statute 
in a manner that is beneficial to consumers.

VI. 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 
final 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 extends for three years the current recordkeeping and disclosure 
requirements in connection with Regulation Z. The collection of 
information that is required by this final 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

[[Page 18362]]

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 24 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 \10\ supervised by the Board that are deemed to be 
respondents for the purposes of the PRA.
---------------------------------------------------------------------------

    \10\ 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 Sec.  226.3(b)(1)(i) and its 
accompanying commentary raise the threshold for exempt consumer credit 
transactions from $25,000 to $50,000. In addition, Sec.  
226.3(b)(1)(ii) requires that the threshold dollar amount be adjusted 
annually for inflation to reflect any annual percentage increase in the 
CPI-W. As a result, creditors will now be required to comply with 
Regulation Z requirements for certain accounts with extensions of 
consumer credit--or express written commitments to extend 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 final 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 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 the final rule is adopted. Thereafter, the ongoing 
total annual burden would be 1,506,466.\11\
---------------------------------------------------------------------------

    \11\ 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 changes for a given financial 
institution or entity may vary based on the size and complexity of the 
respondent. Furthermore, the Board understands that many creditors 
voluntarily comply with Regulation Z for accounts that are currently 
exempt. Therefore, the estimated burden increase likely overstates the 
actual increase in burden for those creditors.
    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 final rule would impose a one-time 
increase in the estimated annual burden by 648,000. On a continuing 
basis, the final 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 the 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. As noted above, the 
estimated burden increase likely overstates the actual increase in 
burden because many creditors voluntarily comply with Regulation Z for 
exempt accounts.
    The Board has a continuing interest in the public's opinion of the 
collection of information. 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 Final Revisions

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

PART 226--TRUTH IN LENDING (REGULATION Z)

0
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; Pub. L. 111-203, 
124 Stat. 1376.

[[Page 18363]]

Subpart B--Open-End Credit

0
2. Section 226.3(b) is revised to read as follows:


Sec.  226.3  Exempt transactions.

* * * * *
    (b) Credit over applicable threshold amount--(1) Exemption--(i) 
Requirements. An extension of credit in which the amount of credit 
extended exceeds the applicable threshold amount or in which there is 
an express written commitment to extend credit in excess of the 
applicable threshold amount, unless the extension of credit is:
    (A) Secured by any real property, or by personal property used or 
expected to be used as the principal dwelling of the consumer; or
    (B) A private education loan as defined in Sec.  226.46(b)(5).
    (ii) Annual adjustments. The threshold amount in paragraph 
(b)(1)(i) of this section 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 (b) 
for the threshold amount applicable to a specific extension of credit 
or express written commitment to extend credit.
    (2) Transition rule for open-end accounts exempt prior to July 21, 
2011. An open-end account that is exempt on July 20, 2011 based on an 
express written commitment to extend credit in excess of $25,000 
remains exempt until December 31, 2011 unless:
    (i) The creditor takes a security interest in any real property, or 
in personal property used or expected to be used as the principal 
dwelling of the consumer; or
    (ii) The creditor reduces the express written commitment to extend 
credit to $25,000 or less.
* * * * *

0
3. In Supplement I to part 226:
0
A. Under Section 226.2--Definitions and Rules of Construction, under 
2(a)(19) Dwelling, paragraph 3. is revised.
0
B. Under Section 226.3--Exempt Transactions, section 3(b) Credit over 
$25,000 not secured by real property or a dwelling is revised.
0
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).
* * * * *

Section 226.3--Exempt Transactions

* * * * *
    3(b) Credit over applicable threshold amount.
    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 or after 
account opening that exceeds the threshold amount in effect at the 
time the initial extension is made. If a creditor makes an initial 
extension of credit after account opening that does not exceed the 
threshold amount in effect at the time the extension is made, the 
creditor must have satisfied all of the applicable requirements of 
this Part from the date the account was opened (or earlier, if 
applicable), including but not limited to the requirements of Sec.  
226.6 (account-opening disclosures), Sec.  226.7 (periodic 
statements), Sec.  226.52 (limitations on fees), and Sec.  226.55 
(limitations on increasing annual percentages rates, fees, and 
charges). For example:
    (1) Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does 
not make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $60,000. In this 
circumstance, no requirements of this Part apply to the account.
    (2) Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does 
not make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $50,000 or less. In 
this circumstance, the account is not exempt and the creditor must 
have satisfied all of the applicable requirements of this Part from 
the date the account was opened (or earlier, if applicable).
    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. Once an account ceases 
to be exempt, the requirements of this Part apply to any balances on 
the account. The creditor, however, is not required to comply with 
the requirements of this Part with respect to the period of time 
during which the account was exempt. 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. However, 
the creditor is not required to disclose fees or charges imposed 
while the account was exempt. Furthermore, if the creditor provided 
disclosures consistent with the requirements of this Part while the 
account was exempt, it is not required to provide disclosures 
required by Sec.  226.6 reflecting the current terms of the account. 
See also comment 3(b)-4.
    iii. Subsequent changes when exemption is based on initial 
extension of credit. If a creditor makes an initial extension of 
credit 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, including an increase 
pursuant to Sec.  226.3(b)(1)(ii) 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

[[Page 18364]]

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 a 
subsequent extension exceeds the threshold amount or if the account 
balance later exceeds the threshold amount (for example, due to the 
subsequent accrual of interest).
    iv. Subsequent changes when exemption is based on firm 
commitment.
    A. General. If a creditor makes a firm written commitment at 
account opening to extend a total amount of credit 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 pursuant to Sec.  226.3(b)(1)(ii) 
as a result of an increase in the CPI-W. However, see comment 3(b)-6 
with respect to the increase in the threshold amount from $25,000 to 
$50,000. 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. In contrast, if the firm commitment does not 
exceed the threshold amount at account opening, the account is not 
exempt under Sec.  226.3(b) even if the account balance later 
exceeds the threshold amount. In addition, if a creditor reduces a 
firm commitment, the account ceases to be exempt unless the reduced 
firm commitment exceeds the threshold amount in effect at the time 
of the reduction. 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 $53,000, the account remains exempt under Sec.  
226.3(b). However, 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 is $56,000 on January 1 of year 
six as a result of increases in the CPI-W, the account remains 
exempt. However, if the creditor reduces its firm commitment to 
$54,000 on July 1 of year six, the account ceases to be exempt under 
Sec.  226.3(b).
    B. 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. In 
addition, the account must continue to qualify for an exemption 
based on the firm commitment 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 is 
increased to $51,000 pursuant to Sec.  226.3(b)(1)(ii) 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.
    (2) Same facts as in paragraph iv.B(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 ($51,000), although the account remains exempt based on the 
firm commitment to extend $55,000 in credit.
    (3) Same facts as in paragraph iv.B(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 (such as through repayment of the loan).
    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. 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 also 
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 comply with all of the applicable requirements 
of this Part. See comment 3(b)-3.
    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. Transition rule 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 creditor in any real property, 
or in personal property used or expected to be used as the 
consumer's principal dwelling. If, on July 20, 2011, an open-end 
account is exempt under Sec.  226.3(b) based on a firm commitment to 
extend credit in excess of $25,000, the account remains exempt under 
Sec.  226.3(b)(2) until December 31, 2011 (unless the firm 
commitment is reduced to $25,000 or less). If the firm commitment is 
increased on or before December 31, 2011 to an amount in excess of 
$50,000, the account remains exempt under Sec.  226.3(b)(1) 
regardless of subsequent increases in the threshold amount as a 
result of increases in the CPI-W. If the firm commitment is not 
increased on or before December 31, 2011 to an amount in excess of 
$50,000, the account ceases to be exempt

[[Page 18365]]

under Sec.  226.3(b) based on a firm commitment to extend credit. 
For example:
    i. Assume that, on July 20, 2011, the account is exempt under 
Sec.  226.3(b) based on the creditor's firm commitment to extend 
$30,000 in credit. On November 1, 2011, the creditor increases the 
firm commitment on the account to $55,000. In these circumstances, 
the account remains exempt under Sec.  226.3(b)(1) regardless of 
subsequent increases in the threshold amount as a result of 
increases in the CPI-W.
    ii. Same facts as paragraph i. above except, on November 1, 
2011, the creditor increases the firm commitment on the account to 
$40,000. In these circumstances, the account ceases to be exempt 
under Sec.  226.3(b)(2) after December 31, 2011, and the creditor 
must begin to comply with the applicable requirements of this Part.
* * * * *

Section 226.23--Right of Rescission

* * * * *
    23(a) Consumer's right to rescind Paragraph 23(a)(1).
* * * * *
    5. Addition of a security interest. Under footnote 47, the 
addition of a security interest in a consumer's principal dwelling 
to an existing obligation is rescindable even if the existing 
obligation is not satisfied and replaced by a new obligation, and 
even if the existing obligation was previously exempt under Sec.  
226.3(b). The right of rescission applies only to the added security 
interest, however, and not to the original obligation. In those 
situations, only the Sec.  226.23(b) notice need be delivered, not 
new material disclosures; the rescission period will begin to run 
from the delivery of the notice.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, March 24, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-7376 Filed 4-1-11; 8:45 am]
BILLING CODE 6210-01-P