What Is Regulation Z and How Does It Protect You?

If you’re not familiar with Regulation Z, the name might sound ominous (images of a plotting Dr. Evil or Filch tacking magical decrees to the wall), but it’s one of the most successful consumer protection laws in the U.S.

Regulation Z, also referred to as the Truth in Lending Act (TILA), established a series of laws to regulate entities that issue loans or lines of credit. 

Consumer protection laws are most helpful when you, the consumer, are aware of them. Being familiar with these regulations can help you in all manners of financial transactions, now and in the future. This article will look at Regulation Z/TILA (you’ll see both referenced throughout the article), including the compliance requirements it established for lenders and what to do if you believe a lender has violated your rights.

What Is Regulation Z?

The Truth in Lending Act of 1968, also known as Regulation Z, is a federal law passed by Congress to protect consumers from predatory lending practices.^[1] The act establishes compliance requirements for lenders and outlines the rights of consumers who have entered into agreements with those lenders.

Before Regulation Z, lenders weren’t required to disclose the terms of a loan to borrowers, making it difficult for consumers to compare offers or make informed decisions about their borrowing options.

Congress created Regulation Z to promote the informed use of consumer credit. The act achieved this by requiring lenders to disclose credit terms uniformly and prevent creditors from engaging in unfair or deceptive practices.

What Organizations Need To Adhere to Regulation Z?

Regulation Z covers a wide range of consumer credit products, so any entity that issues loans or extends specific types of credit may be subject to the regulation. A few of the lending products covered by Regulation Z include:

• Mortgages
• Credit cards
• Home equity loans and lines of credit
• Auto loans
• Personal loans
• Private student loans

It’s important to note that some types of loans are not covered by Regulation Z, which we’ll touch on later in the article.

What Does Regulation Z Cover?

The law says lenders must give borrowers important information, in writing, about their loans. This includes information such as the interest rate they’ll pay, fees associated with the loan and other financial details. 

At the core of most of the regulations seems to be the spirit of transparency and fairness. The disclosure requirements are just one way in which the law protects consumers. There are other violations of Regulation Z, too, such as:

• Failing to provide monthly billing statements to borrowers
• Intentionally steering a consumer to the wrong loan product
• Failing to notify a borrower when their loan changes hands is referred to as a “servicing transfer disclosure”^[2]
• Failing to give borrowers a grace period before charging a late fee

What Does Regulation Z Not Cover?

Regulation Z is a broad set of regulations, but there are some things that it does not cover. For example, it doesn’t place any restrictions on the terms of a loan, so lenders are free to set their interest rates and fees. Additionally, Regulation Z doesn’t regulate the types of loans lenders can offer or who can apply for the loans.

Instead, Regulation Z aims to make loan terms transparent to borrowers, not dictating what they should charge or how they should collect payments and fees. For the consumer, it’s still important to shop around for the best loan terms, even if all lenders are required to disclose their terms upfront. 

How Does Regulation Z Apply to Mortgages?

Regulation Z applies to mortgages in a few different ways. Among the most prominent, it calls for lenders to give borrowers a few written disclosure statements intended to bring clarity to the terms of the loan.

Disclosure requirements 

Borrowers will typically receive two forms outlining disclosures during the lending process. These are the Loan Estimate and the Closing Disclosure.

• Loan Estimate: The Loan Estimate form is a three-page breakdown of your loan that uses standardized language. This ensures you receive the same information in the same format, making it easy to compare loan offers side by side.
• Closing Disclosure: A few days before closing on the loan, the lender must provide you with a Closing Disclosure. This five-page form provides more detailed information about the loan, including the final interest rate, monthly payments and closing costs. Like the Loan Estimate, the Closing Disclosure must be provided in a clear and conspicuous manner.

These forms will provide you with critical information to help you understand the true cost of your loan and help you make an informed decision about whether or not to proceed with the loan.

Right of rescission

The right of rescission is a legal right allowing borrowers to cancel certain types of loans within three days of signing the loan documents. This right applies to loans secured by a borrower’s primary residence. A document outlining your right of rescission should accompany your Closing Disclosure. 

This is extended so borrowers have a cooling-off period to reassess the purchase and documents. If a borrower has buyer’s remorse or feels like the lender has misled them, or if rates suddenly drop and the borrower wants to take advantage of the lower rate, this is their final “out.”

Loans that have a right of rescission under TILA are:

• Home refinances
• Home equity lines of credit (HELOCs)
• Home equity loans
• Some reverse mortgages

To exercise your right of rescission, you must notify the lender in writing that you are canceling the loan. Your 3-day period generally begins when the loan has closed and ends at midnight of the third business day thereafter. If you send a notice, it doesn’t need to be received by them by the third day, but it needs to be postmarked before the deadline. 

After this, the lender must return any money you’ve paid toward the loan within 20 days of their receipt of your letter.

There can be some stipulations and limitations to your right to rescind. For example, when it comes to home equity loans and lines of credit, the right of rescission may not apply if the funds from the loan are used to purchase a home or improve your primary residence. The right to rescind notice within your Closing Documents should outline any stipulations you need to know.

Restrictions on originators or brokers 

Regulation Z restricts the type of relationships and dynamics between the different professionals involved in the lending process. Thanks to Regulation Z, a lender can’t pay a loan originator more for a higher rate loan. The goal is to ensure the loan originator’s motivation is in the best interest of the borrower.

Mortgage brokers and other loan originators can’t receive compensation based on:

• The terms of the transaction, such as the interest rate or other loan terms
• The number of points or fees charged to the borrower
• Whether the borrower buys mortgage insurance
• The type of loan product, such as an adjustable-rate mortgage (ARM) or a fixed-rate mortgage

To put it simply, a loan originator shouldn’t be incentivized to sell you a more expensive or complicated loan, a practice known as steering. Steering is when a loan originator tries to convince a borrower to take out a specific loan product because it benefits the loan originator in some way rather than what’s best for the borrower. 

For example, convincing a borrower to take out an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage so the loan originator can get a higher commission.

Lastly, Regulation Z prohibits kickbacks and referral fees between loan originators, mortgage brokers and real estate agents. Again, this is to prevent any conflict of interest that could lead to a loan not being in the borrower’s best interest.

Truth in Lending Act in Action

If you’ve ever financed a home, you probably saw Regulation Z in action without realizing it. If not, here’s what it might have looked like.

After applying for a mortgage, you (the borrower) would receive a Loan Estimate from your lender within three days as required under Regulation Z. 

You’re glad to see that your 774 credit score earned you an excellent par rate on your loan. Thanks to Regulation Z, you can compare Loan Estimates from one lender to the next, so as a savvy borrower, you decide to shop around for the best deal. 

After looking over three options, you feel the most comfortable with the original lender. Their rate was a hair higher, but their easy online application showed you their interface was on point, plus you were familiar with the company. So you let them know you’re ready to proceed with the loan!

As your closing date approaches, the lender will provide you with a Closing Disclosure. 

If there are any changes to the fees or payments from what was originally disclosed on the Loan Estimate, the lender must explain those changes. If there are changes you don’t agree with or don’t understand, you can ask the lender to explain them. If you still don’t feel comfortable with the changes, you can cancel the loan up to 3 days after closing. This, too, is allowable under Regulation Z.

After reviewing the Closing Disclosure, you’re confident you understand the loan terms and proceed with closing. Then, a few weeks later you receive your first mortgage statement in the mail and everything is as you expected. This is because Regulation Z ensured you were informed of the loan details every step of the way. 

How Does Regulation Z Apply to Credit Cards?

The Credit CARD Act of 2009 added a few additional requirements to those already in place by Regulation Z.^[3] New rules around due dates, over-the-limit fees and universal default were among these.

Due dates 

One of the act’s biggest changes was that credit card companies could no longer change the due date of credit card payments. This gave borrowers more stability and predictability when making their monthly payments.

Over-the-limit fees

Before the Credit CARD Act, credit card companies would often allow borrowers to exceed their credit limit, charging them a fee for this service. The Credit CARD Act stopped this by prohibiting credit card companies from charging over-the-limit fees unless the borrower specifically authorizes it. 

Universal default

Universal default refers to a credit card issuer raising your interest rate because you’ve missed a payment with another lender. While the practice is not entirely illegal, the default rate no longer applies to existing balances, only new charges, and the credit card issuer must give 45 days’ notice before increasing the rate.

Fraud liability

The max amount someone is responsible for in the event of credit card fraud is $50. For example, if someone makes a purchase for $500 with your card and it’s later determined the purchase was fraudulent, you’re only responsible for $50 of that. The other $450 is the responsibility of the credit card issuer.^[4]

Marketing to college students

Up until the 2008 financial crisis, credit card issuers found college campuses to be a prime target for marketing credit cards, leading to a lot of young people taking on debt that they couldn’t afford and eventually defaulting. Then, in 2009, the Credit CARD Act put new restrictions on marketing credit cards to college students, such as marketing on or near campus.

How Does Regulation Z Apply to Other Types of Loans?

We’ve discussed mortgages and credit cards, but Regulation Z applies to many other types of loans. There are different rules for different types of loans to keep things interesting! Let’s look at how Regulation Z applies to other types of loans such as personal loans and private student loans.

Auto loans

Regulation Z does apply to consumer auto loans, with the same aim of bringing clarity and transparency to the lending agreement. Lenders must make the terms of the loan clear, respond to billing disputes in a timely manner and issue monthly statements to keep the borrower informed of the loan’s balance and charges. 

Personal loans

Personal loans are a type of loan used for various purposes, such as debt consolidation, home improvement or even a wedding. Per Regulation Z, the APR, monthly payment amount and total loan cost must be clearly disclosed to the borrower by the lender. The lender must also give the borrower a Truth in Lending Disclosure form, which outlines all of the terms of the loan.

Private student loans

Private student loans are used to finance the cost of attending college, such as tuition, room and board, books and other expenses. Similar to personal loans, Regulation Z requires lenders provide a Truth in Lending Disclosure form outlining the APR, the monthly payment amount and the total cost of the loan. The lender must also give the borrower a repayment schedule for the loan.

What Loans Are Not Covered Under Regulation Z?

There are a few types of loans that aren’t covered under Regulation Z. This is usually because other laws already regulate other loan types. Let’s explore which loans they are and why they aren’t covered.

• Federal student loans: Federal student loans are not covered under Regulation Z because they’re already regulated by other laws, such as the Higher Education Act.^[5]
• Small business loans: Small business loans are not covered under Regulation Z because they’re already regulated by other laws, such as the Small Business Administration’s regulations.^[6]
• Tribal loans: Tribal loans are not covered under Regulation Z because they’re made by sovereign nations that are not subject to U.S. laws.^[7]

What To Do if Your Regulation Z Rights Are Violated

As shared earlier, consumer protection laws are only helpful when consumers are aware of them. This starts with the knowledge we’ve shared today. We know it can be hard to keep your eyes from glazing over as you read over your Loan Estimate, Closing Disclosure and other loan documents, but diligence here is exactly how consumers can keep lenders honest and in compliance with the law.

If you think your Regulation Z rights have been violated, you can file a complaint with the Consumer Financial Protection Bureau or Federal Trade Commission. You may also be able to retain a consumer protection attorney to review your case or sue the lender in federal or state court, although that process can be stressful, time-consuming and potentially expensive.

A Regulation for a Generation 

With Regulation Z, an entire generation has grown and lived their financial lives with consumer protection laws in place to protect their financial interests. Today, there is no buzz around Regulation Z and other consumer protection laws, especially the long-standing ones, because they’re just seen as part of the financial landscape. However, an informed consumer is an empowered consumer, so continue to increase your awareness of this important regulation and your rights as a borrower!