Regulation Z

Regulation Z is the Federal Reserve Board regulation that implements the Truth in Lending Act of 1968. The legislation is designed to protect consumers against misleading lending practices. Under Regulation Z, mortgage issuers, credit card companies and other lenders must provide written disclosure of interest rates and finance charges, provide borrowers with explanations of important credit terms, respond to borrowers’ complaints about billing, and refrain from engaging in certain unfair lending practices. You should get TILA disclosures before you sign your loan contract.

Purpose of Regulation Z

The purpose of Regulation Z is to promote informed use of consumer credit, letting consumers understand the terms and cost of finance they sign up for and to compare the terms of different loans easily. Lenders must explain credit terms and finance charges using the same terminology so that consumers can compare loans offered by various lenders. It also ensures that consumers receive appropriate and timely information related to their credit transactions.

Regulation Z gives borrowers the right to cancel certain credit transactions, including a lien on a borrower’s dwelling; regulates some credit card practices; and provides consumers with access to fair and timely credit billing disputes. It generally does not rule on charges for consumer credit, except for some input on rules relating to charges on credit card accounts in an open-end consumer credit offering. The legislation also specifies that variable interest rates on loans secured by a borrower’s residence should be capped (specify a maximum rate).

Who enforces Regulation Z?

Regulation Z is enforced by the U.S. Federal Reserve Board and the Consumer Financial Protection Bureau. However, the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010 transferred most responsibility to the CFPB.

How does Regulation Z protect borrowers?

Under Regulation Z, lenders are required to provide monthly billing statements to borrowers and financial institutions must notify borrowers of changes in interest rates in adjustable-rate loans. Lenders must mail or deliver written notices to borrowers regarding any changes in lending terms within a specified time period. The time period varies based on the type of loan and the types of changes.

Regulation Z prohibits mortgage lenders from engaging in unfair practices that result in a conflict of interest for the mortgage broker. For example, Regulation Z prohibits lenders from paying brokers or other loan originators based on the mortgage terms or conditions other than the amount of money borrowed. The lender cannot increase or decrease the broker’s fee based on the terms of the loan.

If the borrower negotiates a lower interest rate on a mortgage, the lender cannot alter the mortgage broker’s commission to reflect this change in interest rate. Likewise, if the borrower negotiates a reduction in origination points, the mortgage broker’s commission cannot be adjusted to reflect these terms.

This regulation protects consumers from being steered into loans with unfavorable terms. These prohibitions apply only to closed-end consumer loans secured by a dwelling or property that includes a dwelling. Open-ended home-equity lines of credit and timeshare transactions are not protected by this rule.

Regulation Z also prevents banks from applying the “right to offset” to credit card debts.

Regulation Z example

Regulation Z protects consumers with rules on the resolution of billing errors. When a creditor receives a notice of a billing error from a consumer, the creditor is required to deliver a written acknowledgment of the dispute to the consumer within 30 billing days, unless the creditor has resolved the billing dispute before the 30 days. If the creditor finds a billing error did occur, the creditor is required to:

  • Correct the billing error
  • Credit the consumer’s account to reflect the disputed amount
  • Amend any fees or finance charges associated with the billing error
  • Deliver a correction notice to the consumer
  • The creditor must comply with the resolution regulations within two billing cycles or no more than 90 days

If a billing error did not occur, the creditor must:

  • Deliver an explanation to the consumer that explains the creditor’s reason for believing the error alleged by the consumer is incorrect
  • Provide documented evidence of the consumer’s debt upon the consumer’s request

If a different billing error occurred than the error the consumer alleged, the creditor must:

  • Correct the error and credit the consumer’s account to reflect the error
  • Amend any fees or finance charges associated with the error

Difference between RESPA and Regulation Z

The Real Estate Settlement Procedures Act (RESPA) applies to “federally related mortgage loans,” that are backed by a first or second lien on residential real property. Such loans include those made by a federal agency or other lenders or loans that the lender plans to sell to an agency such as Fannie Mae or Freddie Mac.

It does not apply to other forms of consumer credit, such as credit card loans. RESPA aims to prevent high settlement costs related to real estate transactions by providing adequate disclosures to buyers and sellers.

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