What Is Regulation Z?
Regulation Z is the Federal Reserve Board regulation that implemented the Truth in Lending Act of 1968, which was part of the Consumer Credit Protection Act of that same year. The act’s major goals were to provide consumers with better information about the true costs of credit and to protect them from certain misleading practices by the lending industry. Under these rules, lenders must disclose interest rates in writing, give borrowers the chance to cancel certain types of loans within a specified period, use clear language about loan and credit terms, and respond to complaints, among other provisions. The terms Regulation Z and Truth in Lending Act (TILA) are often used synonymously.
- Regulation Z protects consumers from misleading practices by the credit industry and provides them with reliable information about the costs of credit.
- It applies to home mortgages, home equity lines of credit, reverse mortgages, credit cards, installment loans, and certain kinds of student loans.
- It was established as part of the Consumer Credit Protection Act of 1968.
How Regulation Z Works
Regulation Z applies to many types of consumer credit. That includes home mortgages, home equity lines of credit, reverse mortgages, credit cards, installment loans, and certain kinds of student loans.
According to the Federal Reserve Board, the basic purpose of Regulation Z and TILA was “to ensue that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably. Before its enactment, consumers were faced with a bewildering array of credit terms and rates.”
Regulation Z is also known as the Truth in Lending Act.
To fix that problem, the law mandated standardized rules for calculating and disclosing loan costs that all lenders would be required to follow. For example, lenders must provide consumers with both the nominal interest rate on a loan or credit card and the annual percentage rate (APR), which takes into account both the nominal rate and any fees the borrower must pay. The APR represents a more realistic picture of the cost of borrowing and one that is directly comparable from lender to lender. The exact rules differ depending on what type of credit the lender is offering: open-end credit, as in the case of credit cards and home-equity lines, or closed-end credit, such as auto loans or home mortgages.
In addition to standardizing how lenders were required to present their information, the law also put in place a set of financial reforms that, the Federal Reserve says, aimed to:
- “Protect consumers against inaccurate and unfair credit billing and credit card practices;
- “Provide consumers with rescission rights;
- “Provide for rate caps on certain dwelling-secured loans; and
- “Impose limitations on home equity lines of credit and certain closed-end home mortgages.”
Rescission rights refers to the legal right of a borrower to cancel certain types of loans within a specified period after the loan has closed. In the case of Regulation Z and TILA, the period is three days.
History of Regulation Z
Regulation Z has been amended and expanded repeatedly since it came into existence, starting in 1970, when it was amended to prohibit credit issuers from mailing out unsolicited cards. In more recent years it has added new rules regarding credit cards, adjustable-rate mortgages, mortgage servicing, and other aspects of consumer lending. However, it lost its authority over consumer leasing, such as automobile and furniture leases, which are now covered by Regulation M.
The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 added multiple new provisions to Regulation Z and TILA, including prohibitions on mandatory arbitration and waivers of consumer rights. It also transferred the Federal Reserve Board’s rule-making authority for TILA to the Consumer Financial Protection Bureau (CFPB) as of July 2011. And according to the CFPB website, there have been 35 modifications since that transfer of authority affecting topics that include exemption thresholds for asset sizes and higher-priced mortgage loans, mortgage servicing rules, and mortgage disclosure requirements, to name just a few. If a consumer has a complaint involving a lender, the CFPB is the place to lodge it.