What is Regulation Z?

Regulation Z is a consumer-protection regulation that compels lenders to disclose the cost of credit in a clear way for consumers.

Whether you’re applying for a mortgage or dealing with a credit card company, Regulation Z —which is part of the Truth in Lending Act — requires credit issuers to make meaningful disclosures of the cost of credit and to enable consumers to make informed choices about the loan terms and interest rates they’re offered.

Let’s look at how Regulation Z applies to different types of credit and how the rules aim to protect consumers.

• What is Regulation Z?
• Important provisions of Regulation Z
• Special rules for mortgage lenders
• How does Regulation Z apply to credit cards?
• What does Regulation Z say about record retention?

What is Regulation Z?

In 1968, Congress passed the Truth in Lending Act. Regulation Z is the regulation that actually implemented the Truth in Lending Act. Regulation Z and the Truth in Lending Act relate to the same consumer-protection rules regarding how lenders issue credit.

Regulation Z helps ensure that lenders give consumers material credit information that’s clear. Thanks to the Truth in Lending Act, lenders now should use similar terminology, so comparing loans is easier than it was before.

Over the years, Regulation Z has changed more than a dozen times. One of the most important changes was made in 2011, when Congress gave the Consumer Financial Protection Bureau rulemaking authority. The CFPB now helps shape how the Truth in Lending Act is enforced.

Important provisions of Regulation Z

Regulation Z doesn’t dictate whether lenders must grant a certain loan. Instead, it requires lenders to clearly disclose certain interest rates and fees, using similar terminology.

Regulation Z also regulates certain credit card practices, establishes a process for resolving credit-billing disputes fairly and in a timely manner, sets rules around certain types of home loans and home equity lines of credit, and addresses certain types of credit card account charges.

Special rules for mortgage lenders

In addition to general regulations aimed at both open-end and closed-end credit issuers, Regulation Z also includes some additional provisions for certain mortgage lenders.

Restrictions on how mortgage originators are paid

Regulation Z generally bars mortgage lenders from compensating loan originators (the people or organizations who originate a loan) for getting borrowers into a particular type of loan.

The originator’s compensation can be based on the total dollar amount of credit extended, but not on terms or conditions of the loans. For example, a financial institution can pay an originator more for closing a total volume of $3 million in credit over time than it would for $1 million, but can’t differentiate its compensation based on a 4.7% APR versus a 3.5% APR.

Prohibits steering

When it comes to taking out a mortgage, you want to apply for the best mortgage for your situation — not the one that will pay your mortgage broker the highest commission. Regulation Z prohibits loan originators from steering you toward a particular loan because it will earn them more money (although this rule doesn’t apply to open-end home equity lines of credit or time shares). But the law does allow an originator to steer borrowers if the final loan deal is “in the consumer’s interest,” so it’s important to understand and consider all aspects of a loan on your own. This does not apply to open-end home equity lines of credit or time shares.

Loan estimates and closing disclosures

Since mortgages have many moving parts, Regulation Z requires mortgage lenders to give borrowers two sets of disclosures when they’re financing a real estate transaction for most closed-end consumer mortgages. These are designed to help you understand the true loan cost of the mortgage.

A Loan Estimate details important information about the loan you’ve applied for, including the loan amount, interest rate, monthly payment, closing fees and more. You can see an example of a loan estimate on the CFPB website. The second set of information is the Closing Disclosure, a five-page form that gives information to help you understand all the costs of the transaction, including the loan terms, how much you can expect to pay per month, fees and closing costs. You should always compare the two statements before closing on a mortgage transaction.  Other disclosure forms may be required for other types of mortgages (e.g., home equity line of credit).

Restrictions on higher-priced mortgage loans

Because higher-priced mortgages tend to be more expensive for borrowers than a mortgage with average terms, Regulation Z adds a few extra requirements for high-priced mortgage loan lenders. For example, the home may have to be appraised by a licensed or certified appraiser, and your lender must pay for a second appraisal if the home is a “flipped” house (meaning the seller purchased the house less than six months ago and you pay a certain amount more than the seller paid, depending on how long ago the seller bought it). In many cases, the lender also must maintain an escrow account for insurance and taxes for at least five years.

How does Regulation Z apply to credit cards?

One of the most significant changes to Regulation Z was the passage of the 2009 CARD Act. The new rules implementing this change aimed to protect cardholders from unfair practices associated with certain lenders in the credit card industry. Here are a few of the important changes that came out of the CARD Act. There are many more not covered here. And besides the rules implementing the CARD Act, there are many other sections of Regulation Z that relate to credit cards.

Disclosures of rates and fees

Before you open a new credit card, the credit card issuer must have pricing information (like interest rates and fees) readily available in a single document called an addendum. Additionally, the issuer must promptly provide a copy of the cardholder agreement to the cardholder if the cardholder requests a copy. There are some exceptions for card companies having to comply with these requirements.

Limits on upfront fees

Some credit cards have annual fees or other costs just to open the credit card. The total amount of these fees can’t be more than 25% of the initial credit limit when you opened the card account. For example, if a credit card has a limit of $300, the total upfront fees can’t exceed $75 in the first year. This rule can help people who are building credit, and who may have limited income that makes it difficult to absorb high up-front fees.

Priority goes to highest-interest debt first

Sometimes credit card lenders charge different interest rates for different types of debt. For example, a cash advance may have a higher rate than a purchase, while a transferred balance might have a lower rate. If you have a credit card account with different rates applied to different types of debts within the same account, and you pay more than the minimum monthly payment, the excess amount must be first applied to the balance with the highest APR. Then any remaining portion should be applied to the other balances in order from highest to lowest APR.

Limits liability for unauthorized credit transactions

The Fair Credit Billing Act, an amendment to TILA (which Regulation Z implements), can provide some help if someone steals your credit card (or your credit card number). Under the Fair Credit Billing Act, credit card holders can’t be held liable for more than $50 in unauthorized credit card transactions. Just remember, this only holds for unauthorized transactions. If you or an authorized credit card user makes some regrettable purchases, you still have to pay for those.

Timely billing

Credit card issuers must ensure statements are delivered to the consumer at least 21 days in advance of the payment due date shown on the statement.

Help understanding repayment

Regulation Z rules govern how credit card issuers may calculate minimum monthly payments, unless the card is secured by a home. There are additional requirements for three-year repayments. On every monthly credit card statement, the card issuer must …

• Include the following statement: Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.
• Provide an estimate of how long it would take you to repay the debt if you made only minimum payments. If the estimated repayment time is less than two years, the estimate must be expressed in months.
• Estimate the total cost over the life of the debt (including interest and principal) if you paid only the minimum each month
• A toll-free number where consumers can get information about credit counseling services

Restrictions on advertising to college students

Prior to the 2009 CARD act, credit card issuers were able to market on-campus to college students with fewer restrictions. Now, credit card issuers face stricter rules regarding marketing and issuing credit cards to college students.

What does Regulation Z say about record retention?

When it comes to keeping records, lenders are on the hook for keeping loan contracts. In general, lenders have to keep records for two to five years after the date the disclosures need to be made or action is required. How long they have to keep them depends a number of things, including the type of loan. Although lenders have to keep their records, it makes sense for you to keep copies of closing disclosures and signed agreements too. Then if you have a dispute, you can present your documents as evidence.

Bottom line

Regulation Z rules aim to put power into the hands of borrowers by requiring lenders to provide clear and consistent information about their credit products. However, it’s on consumers to take the time to read the disclosures and all the key terms of the credit you’re applying for.

Reading through all of the information provided may be a pain, but it exists to help you. Take advantage of Regulation Z and arm yourself with information before you apply for a loan or credit card that falls under Regulation Z.