What is Regulation Z?

Regulation Z, better known as the Truth in Lending Act, is a federal law designed to ensure that you, the borrower, have access to clear information about the fees you will pay when taking out a loan. Can your interest rate go up? Will you be penalized if you pay off your loan early? What is the annual percentage rate associated with your loan? These are just a few questions you’ll have the answers to when you apply for a loan, thanks to Regulation Z.

Regulation Z is a set of legal requirements that lenders must follow when offering to consumers such financial products as mortgages, credit cards, car loans and home equity loans. If you’re thinking about how to pay for a big-ticket item -- be it buying a home, upgrading your current home or adding a new premium travel rewards credit card to your wallet -- you’re probably not thinking about how the government is working to protect you. However, Regulation Z plays a behind-the-scenes role in all those scenarios, mandating a lot of the information you’ll receive when comparing different loans.

How does Regulation Z work?

Regulation Z is designed to help you understand the costs associated with loans without having to open a dictionary or call a financial expert to help you decipher confusing language. So, rather than looking at one set of loan costs from Lender A and another set of costs that look entirely different from Lender B, Regulation Z makes sure that you can compare apples to apples. You’ll be able to see the APR, which represents the complete costs of borrowing. 

In addition to requiring certain disclosures, Regulation Z restricts certain types of marketing activities. Credit card issuers, for example, aren’t allowed to set up a booth on or near a college campus and give a college student any tangible item in exchange for applying for a new card. Outside of marketing and advertising, the law also imposes a range of restrictions such as maximum interest rate limits on certain types of home loans. 

What types of loans does Regulation Z cover?

Regulation Z applies to any company that offers the following types of loans:

• Mortgage
• Home equity loan
• Home equity line of credit, or HELOC
• Credit card
• Installment loans, such as automobile, boat, RV and personal
• Reverse mortgage
• Private student loan

If you have one of these loans, you’re protected by Regulation Z.

Who enforces Regulation Z?

The Federal Trade Commission is responsible for enforcing Regulation Z. In addition to the FTC’s role, the Consumer Financial Protection Bureau can make new rules and pursue legal action against lenders who violate the requirements of the Truth in Lending Act.

How does Regulation Z pertain to mortgages?

Unless you’re in the lucky position of making an all-cash offer on a home, you’re likely going to need to borrow a sizable chunk of money to become a homeowner. While the mortgage application process can seem daunting given the mountain of paperwork and contracts to review and sign, Regulation Z offers a range of protections when reviewing mortgage options such as:

• Requiring upfront disclosures: When you apply for a mortgage, Regulation Z requires the lender to issue a three-page loan estimate -- which includes a breakdown of all estimated costs and your monthly payments -- and a closing disclosure that includes all your final costs and payment schedule. 
• Mandating advance warning on adjustable-rate mortgages: If you have an adjustable-rate mortgage, your lender needs to give you a heads-up as to when your rate, and your monthly payment, will change.
• Prohibiting kickback payment structures: If you’re working with a mortgage broker, you can rest assured that they won’t make more money for getting you to take a loan that will wind up costing you more money due to a back-end arrangement. For example, the broker’s commission isn’t allowed to increase if you accept a loan with an 8% interest rate over a loan with a 7% interest rate.

This is by no means an exhaustive list of how Regulation Z applies to mortgages. The law includes a wide range of standards for residential home lending, limitations that apply to high-cost mortgages and requirements for lenders to make sure that borrowers can indeed afford to pay back the loans they are offering.

How does Regulation Z pertain to credit cards?

When it comes to the plastic in your wallet or the account you’re considering opening, Regulation Z works to protect you in such ways as:

• Limiting fees: Your credit card company isn’t allowed to charge any amount it wants if you make a late payment.
• Requiring timely resolutions for billing issues: If you report a billing error to your credit card company, it’s required under law to address the complaint in a timely manner.
• Limiting your liability if your card is stolen: As data breaches and identity thefts create challenges for everyone in the digital age, Regulation Z offers a valuable piece of reassurance: You won’t be liable for anything more than $50 if someone uses your credit card without your authorization.

How does Regulation Z pertain to other types of loans?

Mortgages and credit cards aren’t the only types of loans that are guided by Regulation Z. If you want to pay for college with a private student loan, for example, the law is designed to protect you with full disclosures that help you understand your borrowing costs.

Regulation Z plays an essential role in borrowing against what is likely your most valuable asset: Your home. The law offers the right to rescission for anyone who decides to refinance their current mortgage or take out a home equity loan or a HELOC based on their equity. That means you can decide to cancel your application for a new loan, within three business days, based on Regulation Z. So, if you open a home equity loan on a Tuesday and have serious concerns about your second thoughts on the decision, you can decide to pull back on that loan by Friday.

What type of loans are exempt from Regulation Z?

While Regulation Z covers the vast majority of loans available, there are a few exceptions:

• Business, commercial and agricultural loans
• Loans over a certain threshold amount
• Federal student loans

How you can benefit from Regulation Z

When applying for a home mortgage, you can put the loan estimate every lender must send you to work in an easy, side-by-side comparison to determine which offer has the best fees and overall costs. Then, when you’re ready to close on your loan, you can compare the closing disclosure with that initial loan estimate to make sure that your final terms are accurate.

Additionally, Regulation Z can be very helpful if you question one of your financial decisions. The right of rescission that applies to certain loans – refinances, home equity loans, HELOCs and reverse mortgages -- gives you the flexibility to back out of a contract. 

What’s more, with the help of your knowledge of Regulation Z, it’s possible to detect if a lender is violating the law. If you feel your rights are being violated with unfair lending practices, you can submit a formal complaint to the CFPB.

A brief history about Regulation Z

Regulation Z has been around since The Truth in Lending Act was signed into law in 1968. Since then, the law has evolved with a range of amendments that have helped protect people, such as prohibit unsolicited credit cards from arriving in peoples’ mailboxes, eliminate “steering” consumers toward mortgages that aren’t in their best interest and update disclosure requirements for private student loans. Recently, there were numerous amendments to Regulation Z in the aftermath of the subprime mortgage crisis of 2008 that served as evidence of the law’s shortcomings.