We send out a holiday extension offer to our installment loan customers in November of each year. Currently we do not mention anything in the letter regarding the extension fee not being applied to principal or interest. Is this required to be disclosed in the letter or on the extension form? Also, what reg does this fall under?

It falls under no regulations, unless addressed at the State level. I would think that without the disclosure you may be risking an unfair and deceptive charge by a customer at a later date.

This is governeed by state law - this was great income for my previous employer but, in Tx the only charge allowed is the accrued interest.

IMO - if your letter describes the fact that this is a fee for a service (extending the pmt / skip-a-pmt) then more detail stating the amount is not going to Prin or Int is not necessary.
Also, this is an event that is occuring later (like a late fee) & not anticipated at loan origination, so don't let someone tell you that you need to disclose a revised APR or you can't do it because of Reg Z.