What Is Regulation Z Or The Truth In Lending Act?

Also known as the Truth in Lending Act (TILA), Regulation Z was created to protect people from predatory lending practices. It requires lenders to disclose borrowing costs, interest rates and fees upfront and in clear language so consumers can understand all the terms and make informed decisions.

For mortgages, Regulation Z also restricts how loan originators can be paid and prohibits steering borrowers to loans that would result in more compensation for the lender. The provisions of Regulation Z also protect those taking on a home equity line of credit (HELOC) or home equity loan by mandating a cooling-off period after an agreement is signed, allowing the borrower to reconsider their decision.

Understanding this law can help you know what to look for before borrowing money.

What is Regulation Z, and what does it cover?

Regulation Z is part of the Truth in Lending Act (TILA), which Congress passed in 1968 (the two terms are often used interchangeably). It’s designed to protect consumers against misleading and predatory lending practices and to promote transparency.

TILA has been expanded over the years to include enhanced protections in specific areas of lending. It now includes:

• The Fair Credit Billing Act
• The Fair Credit and Charge Card Disclosure Act
• The Home Equity Loan Consumer Protection Act
• The Home Ownership and Equity Protection Act

TILA has evolved and been amended numerous times since Congress first enacted it. Currently, the regulation covers details such as annual percentage rates, credit card and mortgage closing disclosures, mortgage loan appraisal and servicing rules. Reg Z also sets expectations for recurring statements and the information a financial institution or company must clearly communicate to consumers.

One of the TILA’s key provisions is the “right of rescission,” which applies to home equity loans, HELOCs, mortgage refinances and private student loans. When a consumer borrows one of these loans, they have a three-day cooling-off period to reconsider their decision. If the borrower calls off the loan within this time frame, they won’t incur any financial losses. This part of the law not only protects borrowers who change their minds, but also those who felt pressured by the lender.

What does TILA cover?

Regulation Z applies to mortgages, home equity loans, HELOCs, credit cards, installment loans and private student loans. It provides a variety of protections for consumers when it comes to lending practices, including:

• Helping to ensure that lenders provide meaningful disclosures to borrowers, using terminology that consumers can understand. This includes requiring lenders to provide written information about interest rates, and all fees and finance charges associated with a loan or credit card.
• Requiring lenders to disclose the maximum interest rate upfront on variable-interest loans backed by the borrower’s home.
• Prohibiting credit card issuers from opening a credit card account for a consumer, or even increasing a credit card’s limit, without first evaluating the consumer’s ability to make required payments under the terms of the account.
• Protecting consumers from unfair billing practices, including requiring procedures to address billing errors on credit cards, such as mathematical mistakes or incorrect or unauthorized charges.
• Requiring lenders to provide monthly billing statements to borrowers and notices if the loan’s terms have changed.
• Prohibiting unfair lending practices between lenders and mortgage brokers. This provision bars creditors or anyone else from compensating mortgage brokers or loan originators based on a mortgage transaction’s terms or conditions or for signing you up for a specific type of loan.

What does Regulation Z not cover?

Although Regulation Z provides consumer protection across a wide range of financial and credit products, there are notable exceptions to its coverage.

The act does not govern actual loan terms, dictate who can apply for credit or direct lenders to offer certain types of loans. These factors are left to individual lenders to decide. Reg Z doesn’t require lenders to offer loans to people with low credit scores, for example.

In addition, certain types of loans are not subject to Regulation Z. These include:

• Federal student loans
• Credit for business, commercial, agricultural or organizational use
• Personal loans/credit above a threshold amount (currently $71,900)
• Loans for public utility services that are regulated by a government entity
• Securities, stocks or commodities offered by the Securities and Exchange Commission or the Commodity Futures Trading Commission broker

Some specific mortgage loans may be eligible for a partial exemption if the circumstances meet a series of strict requirements. These include loans for down payments, closing costs or property rehabilitation, and loans that don’t charge interest or defer it.

How does Regulation Z apply to mortgages?

A mortgage could be the largest, most complex loan you’ll ever take out — so it’s critical that you understand the terminology before signing for the loan. Regulation Z protects homebuyers by requiring lenders to make certain disclosures and eliminating conflicts of interest.

• Restricts how loan originators are paid: Generally, lenders can’t be compensated for getting you to sign up for a particular type of loan. Employees’ pay also can’t be based on the terms and conditions of the mortgage. For example, a bank loan officer can’t get a bonus for steering you to a jumbo mortgage, or get more money if you take out an adjustable-rate mortgage instead of a fixed-rate one.
• Prohibits self-interested steering: Loan originators can’t push or “steer” you into a mortgage that results in more compensation for them, unless it’s in your best interest. For example, if a mortgage lender recommends a mortgage that is more profitable for them but worse for you, they are in violation of Reg Z.
• Requires disclosures: Lenders must give the borrower at least two sets of written disclosures that explain the total, real costs of their mortgage (not just a nominal interest rate). As part of a mortgage offer, you’ll receive a loan estimate, a three-page document detailing the loan principal amount, interest rate, closing costs and monthly payment. Then, at least three days before their home purchase closes, you must receive a closing disclosure or statement that includes all final terms and costs. Compare this document to the loan estimate to ensure that the major figures and rates haven’t changed. If a lender doesn’t send you these documents, they are in violation of the act.

How does Regulation Z apply to home equity loans?

Home equity loans and HELOCs let you tap into your home’s equity to fund a renovation project or another major expense. However, you’ll need to put up your house as collateral — meaning that if you have trouble repaying your loan, you could lose your home.

As set out in Regulation Z, home equity and HELOC lenders must do the following:

• Outline payment terms: Lenders must detail the loan’s payment terms, including the draw and repayment periods for HELOCs. They’ll also need to explain how minimum payments are calculated and how they’re timed.
• List fees: The lender must outline any fees charged for opening, using or maintaining the loan, either as a dollar amount or a percentage. They must also explain when these fees are due. An estimate of any applicable third-party fees should also be included.
• Explain rate structure: For home equity loans, which have fixed interest rates, lenders must provide a recent annual percentage rate. For HELOCs, which have variable rates, lenders must provide much more information, including explaining that the rate may change, how it will be determined, and how often it may change.
• List credit limits: Lenders should disclose any limits on how much money a borrower can take out and inform the borrower of any minimum withdrawal requirements.
• Provide disclosures: Lenders must provide a written list of disclosures that apply to the home equity loan or HELOC. This includes notifying them that the lender will acquire an interest in their home and the actions that the lender may take if the loan isn’t repaid. This also applies to third parties who provide borrowers with loan applications.

How does Regulation Z apply to other loans?

Regulation Z also applies to installment loans, including personal loans and auto loans. With these types of loans, lenders must provide monthly billing statements, fair and timely responses to billing disputes and clear details about the loan terms.

Reg Z also requires lenders to make certain disclosures to borrowers who take out private student loans.

• Provide disclosures and general loan information: When you apply for a private student loan, you should receive a Loan Application and Solicitation Disclosure that includes general information about loan rates, fees and terms.
• Explain specific loan details: If approved, you should receive the Loan Approval Disclosure, which provides information about the specific loan’s rate, fees and terms, plus an estimate of how much you’ll repay over time.
• Disclose cancellation policy: If you accept the loan, you should receive the Loan Consummation Disclosure, which contains a notice about your right to cancel the loan within three days.

Who enforces Regulation Z?

The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) enforce Regulation Z. However, with the CFPB’s operations drastically curtailed of late, it’s unclear how enforcement will work going forward.

While Regulation Z provides consumer protection, it’s up to you to learn about any loan you’re taking out, ask questions and consider how you’ll repay the debt. You should also make sure that you receive any disclosures that you’re entitled to. Reviewing this information will help you compare loans and understand their terms and conditions.

How to file a complaint against your lender

If you take out a loan and you believe that the lender isn’t following the rules, start by calling the lender’s customer service department to discuss the issue. Sometimes, mistakes or misunderstandings happen.

If the lender doesn’t take steps to resolve the case, you can file a complaint with the Consumer Financial Protection Bureau. Despite the turmoil at the bureau, its consumer complaint site remains open.

• Register for an account by providing your name and email address, then set a password. After verifying your email, you can start the complaint process.
• Select the type of credit account and the kind of problems you’re experiencing, such as misleading promotions, mysterious or “junk” fees, unclear interest rate or APR, etc.
• Next, provide details about any information you requested from the company and whether they complied with your request. From there, you’ll have the option to explain in further detail what caused your complaint, what you believe is a fair resolution, and include any documents supporting your claim.

You can also submit a complaint to the Federal Trade Commission. The Office of the Comptroller of the Currency has the authority to contact lenders to correct APRs that were inaccurately disclosed to customers. That’s why it’s imperative to check your rates at the time of the loan closing and when you receive your statements, to ensure they’re following the stated guidelines and figures originally quoted to you.

As a last resort, you may also consult an attorney, who can help you settle the matter directly with the creditor or in a court of law.

Frequently asked questions

• What are the Reg Z disclosure requirements?
  

  Caret Down Icon
  

  Regulation Z requires lenders to disclose a variety of information related to consumer borrowing, such as providing written information about interest rates and all fees and finance charges that are to be paid in association with a loan or credit card. It also requires that lenders disclose upfront the maximum interest rate on variable-interest loans that are backed by a borrower’s home, like HELOCs. In addition, Regulation Z establishes expectations surrounding recurring statements provided to consumers by financial institutions and the type of information that such companies must clearly communicate.

• What are common Regulation Z violations?
  

  Caret Down Icon
  

  Some common Reg Z or TILA violations include understating finance charges, as well as not properly disclosing the amount to be financed or the expected payment schedule and number of required payments. Not properly disclosing the annual percentage rate associated with a loan is another common violation.

• What is the result if banks fail to comply with Regulation Z?
  

  Caret Down Icon
  

  Financial institutions that fail to comply with Regulation Z may face fines from the federal government. Reg Z fines are typically $1,000 per violation, not to exceed 1% of an institution’s total assets.

Additional reporting by Mia Taylor