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 synonymous.
- 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 ensure 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 refer 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.
Certain types of loans are not subject to Regulation Z, including federal student loans, loans for business, commercial, agricultural, or organizational use, loans above a certain amount, loans for public utility services, and securities or commodities offered by the Securities and Exchange Commission.
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.
Consumer leasing arrangements, including vehicle leasing and furniture leasing, are governed by federal Regulation M.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act added multiple new provisions to Regulation Z and TILA, including prohibitions of mandatory arbitration and waivers of consumer rights. It also transferred the Federal Reserve Board’s rulemaking authority for TILA to the Consumer Financial Protection Bureau (CFPB) as of July 2011.
Those rules have been added to and modified over time. According to the CFPB website, there have been 45 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. Most recently, in December 2021, the CFPB issued final rules adjusting asset size exemption thresholds for certain first-lien higher-priced mortgage loans.
If a consumer has a complaint involving a lender, the CFPB is the place to lodge it.
Who Enforces Regulation Z?
The authority to enforce Regulation Z and the Truth In Lending Act lies with the Federal Trade Commission. The CFPB has the authority to make final rules related to Regulation Z. Under federal law, the Office of the Comptroller of the Currency has the authority to require lenders to adjust and edit accounts of consumers in situations in which finance charges or the APR for a loan were disclosed inaccurately.
Regulation Z Real Estate Example
Regulation Z prohibits practices in which mortgage brokers and loan originators may receive compensation for referrals or "steering." So, say that you want to buy a home. You connect with a real estate agent, who then refers you to a specific mortgage lender. The agent receives no compensation for this referral.
The mortgage lender, meanwhile, could earn a commission by recommending a particular type of mortgage loan to you. Under Regulation Z, this is considered an unfair practice if that mortgage does not align with your best interests. If the mortgage lender pushes you into the loan while knowing that it doesn't necessarily fit your budget or needs solely for the purpose of collecting compensation, that could be considered a Regulation Z violation.
What Does Regulation Z Cover?
Regulation Z is part of the Truth in Lending Act of 1968. This regulatory measure applies to a variety of lending products, including home mortgages, home equity lines of credit, reverse mortgages, credit cards, installment loans, and certain types of student loans.
What Must Be Disclosed Under Regulation Z?
Federal Regulation Z requires mortgage issuers, credit card companies, and other lenders to provide consumers with written disclosure of important credit terms. The type of information that must be disclosed includes details about interest rates and how financing charges are calculated. Lenders are also prohibited from engaging in unfair practices, and they must respond promptly to customer complaints involving billing error disputes.
What Does Regulation Z Not Cover?
Regulation Z doesn't dictate loan terms, what type of loans lenders offer, or who can apply for loans. The law is designed to help ensure transparency in the lending and credit process by requiring lenders to provide certain disclosures to consumers, observe appropriate practices with regard to credit cards, resolve billing disputes in a timely manner, provide monthly billing statements to borrowers, notify borrowers when lending terms change, and avoid unfair practices in mortgage lending.
How Does Regulation Z Apply to Mortgages?
Regulation Z is designed to help and protect homebuyers by requiring lenders to disclose certain information while avoiding conflicts of interest. For example, mortgage lenders can't base their compensation on the terms of your mortgage loan or direct you to a mortgage product that would allow them to collect compensation unless that loan is in your best interest.
The Bottom Line
The Truth In Lending Act or Regulation Z is designed to protect consumers from unfair practices when taking out certain types of loans and lines of credit. Though you may not give much thought to how these regulations impact you, they can affect you directly if you apply for a mortgage or other types of loans.