Regulation Z (the Truth in Lending Act): Defined and explained

When you apply for a mortgage, how do you know your lender is being transparent about the fees and interest rate? How much can your loan change after you take it out, and how will you find out about the changes? Enter Regulation Z, the pro-borrower legislation that has improved lending conditions for borrowers for over 50 years. Here’s how Regulation Z protects you while you shop for a mortgage or credit card and how to make the most of the information you receive from your lender.

Understanding Regulation Z (the Truth In Lending Act)

Regulation Z is how the government applies the Truth In Lending Act (TILA) to lending practices to protect borrowers. The law prohibits shady lending practices and promotes informed decision-making for borrowers.

Regulation Z requires that lenders and credit card companies provide consumers with certain disclosures – including the actual cost of the loan and all its terms and conditions. As a result, borrowers have the right to understand the terms (including the interest rate and repayment period) when they apply for a loan. This information allows them to evaluate the loan's affordability and compare it to offers from other lenders.

This law also means lenders must consider the borrower’s ability to repay the loan before approving it. For this reason, lenders follow a robust underwriting process that includes reviewing the borrower’s financial profile. Specifically, borrowers submit their income, monthly debt payments, credit reports, and bank statements to demonstrate their creditworthiness. This way, lenders avoid making loans to borrowers who don’t have the resources to repay them.

How does Regulation Z work?

Regulation Z applies to various types of credit transactions, including credit cards, mortgages, and certain types of installment loans. It requires creditors to provide consumers with certain disclosures – including the actual cost of the loan and all its terms and conditions. The goal of this Regulation Z is to stifle dishonest, exorbitant lending practices and encourage responsible borrowing. It accomplishes this goal by setting the standard for the information lenders must share with borrowers who apply for and receive loans, the specifics of which you’ll see in later sections.

The history of Regulation Z

Up through the 1960s, lenders were under no obligation to give borrowers a thorough understanding of loans available. Lenders could refuse to disclose loan terms, rates, and fees. There was no standardized format or rubric for loan disclosures, so borrowers couldn't compare loans when shopping for a mortgage or other debt. Additionally, lenders could take a portion of a borrower's paychecks if they were late on their loan payments. 

The Truth in Lending Act was enacted in 1968 as part of the Consumer Credit Protection Act, which the government passed to help borrowers understand the loans on the market and protect them from predatory lending practices. This legislation forces lenders to be upfront about a loan's cost and term length.

When you shop around for loans, you'll notice that lenders include an APR in addition to the interest rate. APR stands for annual percentage rate, which includes the interest rate charged on the loan balance, origination fee, discount points, mortgage insurance premium (MIP) payments, and other costs. As a result, APR is a more accurate way to measure how expensive your loan will be, and lenders disclose this information thanks to TILA/ Reg Z. 

How is Regulation Z enforced?

The Federal Trade Commission (FTC) enforces Regulation Z. So, borrowers can contact the FTC if they believe a lender has violated their rights under TILA. The FTC also works with the Office of the Comptroller of the Currency to adjust your account if the lender didn’t disclose your loan information correctly.

Additionally, the Consumer Financial Protection Bureau (CFPB) can modify aspects of TILA to ensure fairness in lending. As a result, their legislative influence affects how Reg Z plays out in everyday lending practices.

What Regulation Z covers

Regulation Z covers a host of loan types that borrowers and consumers use every year. Here are the debt types you receive protection for under Reg Z:

• Home mortgages
• Home equity loans
• Home equity lines of credit (HELOCs)
• Reverse mortgages
• Credit cards
• Installment loans
• Private student loans

What Regulation Z doesn’t cover

While Regulation Z’s reach is extensive, it doesn’t cover every part of the lending world. For example, the law doesn’t guarantee that you’ll qualify for a loan when you apply. In addition, it doesn’t force lenders to offer specific loan types or prohibit credit-challenged borrowers from applying for loans. The following sections will help you understand how this legislation impacts your circumstances.

How does Regulation Z protect you with a mortgage? 

If you’re getting a mortgage loan, you’ll benefit from Regulation Z’s protections. You have a right to understand how your loan will impact your finances and receive services from lenders that don’t override your interests for more profits. Here are the specifics:

Disclosure requirements

As a borrower, 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 is 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.

Then, at least 3 business days before closing, your lender will provide your Closing Disclosure. You can take 3 three days before signing to compare your Closing Disclosure to your Loan Estimate and ask your lender any questions, including questions about any disparities between these two documents.

Your Closing Disclosure should have the same information as your Loan Estimate, including your rate, estimated monthly payment, and other loan details (unless you are aware that they changed, and you fully understand why). If it doesn't, ask your lender about the changes. Remember, you can negotiate the terms or find another lender if you're not satisfied. 

Restrictions on the “steering” tactic and compensation

Regulation Z also prevents mortgage originators and brokers from making more money by directing you to a loan that doesn’t make sense for your situation. Specifically, a mortgage broker can’t be compensated based on the loan’s terms or conditions. For example, a broker can earn a commission based on the loan amount. In other words, larger loan amounts mean higher commissions. However, a broker can’t earn more for originating loans with higher interest rates. Mortgage brokers and originators also can’t use a tactic called “steering.” This means they can’t nudge you toward a loan that doesn’t benefit you but makes more money for them. Reg Z protects you from this and other common mortgage scams.

Advertising rules

Lenders must follow specific rules when advertising credit terms to avoid misleading consumers. For example, if a lender advertises a fixed interest rate, it must state the period the fixed rate will last and contain a guarantee that the rate won't change. 

High-cost mortgage loans 

Reg Z also prevents lenders from taking advantage of borrowers seeking high-cost loans. The increased cost usually comes from higher interest rates, a characteristic of subprime mortgage loans. When lenders send borrowers paperwork regarding these loans, they must spell out the interest, fees, rate fluctuations, and loan length. Additionally, the borrower must receive assurance that they aren't obligated to sign the loan documents.

Ability to repay 

After Reg Z went into effect, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended TILA to include a requirement for creditors to make a reasonable and good-faith determination of a borrower's ability to repay a mortgage loan. As a result, lenders ask borrowers for the following information during the underwriting process: 

• Assets and expected annual income
• Employment status
• Other monthly debt obligations
• Monthly debt-to-income ratio
• Credit history

How does Regulation Z protect you with other loans?

Regulation Z protects borrowers with various loan types. Here are the details about how you benefit from the law if you have a specific loan:

Home equity loans

Borrowers who take out home equity loans are entitled to a disclosure of the interest rate, fees, number of payments, and other vital loan details. In addition, they have the right to rescission if they don’t like the loan terms.

Auto loans

Auto loans enjoy protection similar to mortgages. As a result, auto lenders must include the loan amount, fees, interest, and payment schedule. The law also prohibits them from disguising high rates and fees with promotional offers.

Personal loans

Regulation Z’s protection also applies to personal loans. As a result, lenders must provide information about the cost and terms of a personal loan.

Student loans

Private student loans are governed by Regulation Z as well. As a result, borrowers who approach private lenders for student loans have a right to understand the loan’s cost and how it works. However, federal student loans aren’t affected by Regulation Z.

How does Regulation Z protect you with credit cards? 

Regulation Z provides borrower-friendly standards for credit cards that mirror the rules for mortgages and other covered loan types. For this reason, your credit card company must show you the card’s interest rate (including the promotional rate and when it expires) and any other fees for using the card (such as an annual fee or late payment fee). In addition, the credit card company must disclose any changes it makes to your account after you open the card, such as an adjustment to the fee amounts.

What loans are not protected by Regulation Z?

While Regulation Z (Truth in Lending Act or TILA) covers a broad range of consumer credit transactions, its provisions don’t affect some types of loans. Protections don’t extend to the following:

• Federal student loans
• Credit used for business, commercial, agricultural or organizational purposes
• Loans above a certain threshold amount
• Loans for public utility services
• Financing associated with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC)
• Bridge loans

What should you do if your Regulation Z rights are violated?

If you believe a lender or credit issuer violated your Regulation Z rights, you submit a complaint to the Consumer Financial Protection Bureau. The CFPB will investigate your claim and usually gets a response from the lender within 15 days. Typically, the lender’s response will align with the law, and the violations will be corrected. If you’re not satisfied with the results from the CFPB or believe the issue is severe, you can also contact an attorney.

The bottom line

Regulation Z, an extension of the Truth in Lending Act (TILA), is a crucial safeguard for consumers in lending. By requiring lenders to disclose fees, rates, loan amounts, and more, Reg Z empowers borrowers with essential information on credit terms and conditions, promoting informed decision-making. The legislation covers a range of loans, from mortgages to credit cards, ensuring fair practices across the lending industry. If you're ready to take the next step in your home buying journey, apply for a mortgage with Rocket Mortgage^® knowing that you’re protected by Regulation Z.