What is Regulation Z
Regulation Z is the part of the Truth in Lending Act of 1968 that promulgates rules that protect consumers against misleading practices by the lending industry. Regulation Z requires mortgage issuers, credit card companies and other lenders to provide written disclosure of important credit terms, such as interest rate and other financing charges, abstain from certain unfair practices and to respond to borrower complaints about errors in periodic billings.
BREAKING DOWN Regulation Z
Regulation Z standardizes the disclosure of essential information about the terms and costs of a loan provided to consumers. Regulation Z is jointly enforced by the U.S. Federal Reserve Board and the Consumer Financial Protection Bureau (CFPB), though the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 shifted most of enforcement powers towards the CFPB. The Truth in Lending Act, of which Regulation Z is part of, was enacted and updated several times as a result of deceiving practices by lenders, which provided misleading information to consumers about interest rates, hidden finance fees and other charges.
Key Provisions of Regulation Z
One of the end results of Regulation Z is how a lender must disclose the interest that will be charged on the loan. For example, for both credit card and mortgage loans, the lender, such as the credit card issuer or the mortgage issuing bank, must clearly say how much interest will be incurred by the loan in terms of an annual percentage rate (APR). As such, a lender would not be allowed to quote a lower interest rate and then state in the fine print that the interest rate is expressed in per week terms instead of annual terms. In addition to APR, lenders must disclose any financing charges associated with issuing and servicing loans.
Regulation Z also requires lenders to provide monthly billing statements to consumers, where financial institutions must disclose any changes in interest rates in case of adjustable rate loans. Also, if lending terms change, creditors must mail or deliver written notices to consumers about such changes within a specific time period, which varies depending on the type of loan and changes made. For example, notices must be given 45 days in advance for changes affecting credit card accounts.
Regulation Z also prohibits certain unfair acts in mortgage origination that would result in a conflict of interest between a creditor and a mortgage broker. Specifically, the rule prohibits creditors from paying brokers or any other loan originators compensation based on mortgage terms or conditions, except for the amount of credit provided. This ensures that lenders and brokers do not conspire to steer consumers to loans with unfavorable terms.