How Regulation Z Protects Borrowers
Molly Grace4-minute read
February 28, 2022
Whether your realize it or not, if you’ve ever taken out any kind of credit, whether it be a mortgage loan or a credit card, you’ve probably benefitted from Regulation Z.
Regulation Z protects consumers as they navigate the world of credit. It’s the reason that, when you shop for a loan, your lender has to tell you the full cost of borrowing – including fees and other charges – not just your interest rate.
Read on to learn more about Regulation Z and how the Truth in Lending Act protects you as a mortgage borrower.
What Is Regulation Z?
Regulation Z is a part of the Truth In Lending Act, a federal law that protects consumers from shady lending practices and promotes informed decision-making for borrowers.
Regulation Z requires that creditors provide consumers with certain disclosures – including the actual cost of the loan and all its terms and conditions – and provides protections for consumers as they shop around for loans or lines of credit.
The Truth in Lending Act and Regulation Z are often used interchangeably – basically, Regulation Z is the regulation that implements the Truth in Lending Act.
The Truth In Lending Act And Regulation Z, A History
The Truth in Lending Act (which includes Regulation Z) was enacted in 1968 as part of the Consumer Credit Protection Act.
Prior to the Truth in Lending Act, it was hard for consumers to shop around and compare credit offers.
This is in part due to the fact that there was no standardized format or disclosures that lenders had to use when presenting offers, meaning that it was often difficult to understand exactly how much a given loan would cost overall.
Consider this scenario: A lender advertises low interest rates to entice customers and make it seem like they’re more affordable than other lenders. But then, once a borrower is already in the process of getting a loan, they reveal the true cost of the loan, which includes a variety of costly fees that they hadn’t previously disclosed.
Regulation Z prevents things like this from happening by requiring lenders to disclose the full cost of their loans from the get-go.
When you shop around for loans now, you’ll notice that lenders have to include an APR in addition to the interest rate. APR stands for annual percentage rate and includes not just the interest rate you’ll be charged on your loan balance but also many of the costs you’ll incur to take out the loan, including things like your origination fee, discount points or a mortgage insurance premium.
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What Regulation Z Means For Mortgage Borrowers
A lot of the provisions of Regulation Z protect all types of credit borrowers, whether you’re getting a mortgage, an auto loan, a credit card or another type of consumer credit.
There are also a few rules that specifically protect mortgage borrowers. Let’s take a look at how mortgage borrowers benefit from Regulation Z protections.
Regulation Z requires that lenders make certain disclosures about your loan. When you get a mortgage, you’ll get two separate Truth in Lending disclosure statements – one when you apply for your loan and another 3 days prior to closing on the loan.
The first disclosure you’ll receive will be included as part of your Loan Estimate document. This disclosure will list all the details of your proposed loan, including the loan amount, your interest rate, closing costs, estimated monthly payment – including your estimated tax and insurance costs – and whether any of your costs can change after closing.
You can see an example of what a Loan Estimate looks like at ConsumerFinance.gov.
Then, at least 3 business days before your closing, your lender will give you your Closing Disclosure. You can take these 3 days to compare your Closing Disclosure to your Loan Estimate and ask your lender any questions you have, including questions about any disparities between these two documents.
Your Closing Disclosure will include the same information as your Loan Estimate, including your rate, your estimated monthly payment and other loan details.
You can see an example of what a Closing Disclosure looks like at ConsumerFinance.gov.
Right Of Rescission
Mortgage refinance loans come with a right of rescission. When you refinance your mortgage, you have until midnight of the third business day after the closing of your loan to change your mind and cancel the loan.
This right doesn’t apply to purchase mortgages, just refinance transactions. You also have a right to rescind on home equity loans, home equity lines of credit and reverse mortgages.
This protection discourages lenders from engaging in high-pressure sales tactics and gives you a chance to reconsider whether you want to put additional debt on your home.
Restrictions On Originator Compensation And Steering
Regulation Z also prevents mortgage originators or brokers from making more money by directing you to a loan that doesn’t make sense for your situation.
There are two parts to this. First, a mortgage broker can’t be compensated based on the loan’s terms or conditions beyond the loan amount.
For example, a broker can earn a commission based on the loan amount – so larger loan amounts mean higher commission. However, a broker can’t be paid more for originating loans with higher interest rates.
Mortgage brokers and originators also can’t use a tactic called “steering.” This means that they can’t nudge you in the direction of a loan that doesn’t benefit you, but makes more money for them.
The Bottom Line: Regulation Z Protects Consumers, But Be Sure To Do Your Due Diligence
Proper regulation of the credit industry has proved throughout history to be vital to a healthy economy where consumers are given the information they need to make informed financial decisions and avoid falling victim to shady lending practices. Regulation Z is just one example of that.
However, that doesn’t mean you’re 100% safe from predatory lenders or scams. As you evaluate credit offers, be sure to do your homework and take the time to fully read and understand the terms and conditions of these offers.
Want to read more about mortgages, home buying and homeownership? You can find more articles like this one on the Rocket Mortgage® Learning Center.
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