Am I correct in thinking that a zero percent interest loan is exempt from Reg. Z? (Employee clothing loans)

If payable in more than 4 installments it is not exempt. See 226.2 for the definition of closed-end credit.

Thanks Dan, We were thinking of setting this up as an open end line of credit. However, considering your response it sounds as though since there is no finance charge imposed which is one of the required criteria for opened end credit, this will not fall under the definition of open end credit and therefore falls under the requirements of closed end credit?

What if the employee terminates their employment? Do you have a clause that you may then impose a finance charge?

Again read the definition for open-end credit in 226.2 and its Commentary. The account must meet all 3 criteria to qualify as open-end credit.

2(a)(20) Open-end credit.

1. General. This definition describes the characteristics of open-end credit (for which the applicable disclosure and other rules are contained in Subpart B), as distinct from closed-end credit. Open-end credit is consumer credit that is extended under a plan and meets all 3 criteria set forth in the definition.

and

2(a)(10) Closed-end credit.

1. General. The coverage of this term is defined by exclusion. That is, it includes any credit arrangement that does not fall within the definition of open-end credit. Subpart C contains the disclosure rules for closed-end credit when the obligation is subject to a finance charge or is payable by written agreement in more than 4 installments.

Therefore if the account does not meet the definition of open-end credit, then by exclusion it would be closed-end credit.

Dan,,,We were not going to impose a fee if the employee leaves. I agree with you that since it does not qualify as opened end credit by default it falls under closed end credit. Thanks for your help.

While Reg. Z still applies, you are not required to disclose an APR (unless you have other finance charges).

226.18(e) footnote 42

"For any transaction involving a finance charge of $5 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the annual percentage rate"