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If you are taking on a home mortgage, you can expect a packet of about 50 pages explaining in detail the terms of the loan, its associated fees and other various disclosures that the mortgage company must provide.
While this packet may make for heavy reading, it helps you as the home buyer comprehend the scale of the loan you’ll be paying off over the coming decades.
You can thank Regulation Z for the hefty reading. Regulation Z provides protections for consumers in the form of information that helps them make better financial decisions. If you’re shopping for a mortgage or even credit cards, you’re benefiting from this law in one way or another.
“Regulation Z allows people to fully understand what they’re getting themselves into because it clearly spells it out,” says Michael Piazza, originating branch manager at CrossCountry Mortgage, a mortgage company located in Danbury, Conn. “It clears away the ‘I don’t know what the terms are,’ ‘how much I’m paying,’ etc… [and] clears the question marks when people are applying for credit.
Regulation Z doesn’t just apply to home loans. Read on to see how it affects other types of loans as well.
What Is Regulation Z?
Regulation Z became effective on July 1, 1969. It’s also known as the Truth in Lending Act, which required disclosures whenever consumers obtained certain types of loans. It applies to mortgages, home equity loans, private student loans, home equity lines of credit, and credit cards. The law was first amended in 1970 to prohibit unsolicited credit cards. It has been significantly expanded since then, with more protections added amidst the Great Recession and the subprime mortgage crisis at the end of the 2000s.
“In July 2008, Regulation Z was amended to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices,” according to the FDIC. “The revisions also banned several advertising practices deemed deceptive or misleading.”
Later amendments also added disclosure requirements for credit cards and student loans, and further protections for consumers securing loans against appraisals of their homes. With the The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, rulemaking authority under the Truth in Lending Act fell to the then newly founded Consumer Financial Protection Bureau.
How Does Regulation Z Apply to Mortgages?
Aside from down payments, mortgage borrowers have to pay a multitude of fees to the lender, including for bank wires, the home title, and for processing the application. Regulation Z requires the mortgage company to not only list these fees, but explain them.
Regulation Z requires “a checklist of all the closing and processing costs and expenses of obtaining financing,” says Matthew Solomon, senior business development and underwriting manager at MCS and Intuitive Consulting in New York City. “It allows people to see how the funds are allocated to all the parties in the transaction, and ensures there’s no surprise expenses in underwriting or securing the loan, so the client doesn’t feel misled.”
Previously, some mortgage applications may have been four to five pages, according to Piazza. Now, due to requirements under Regulation Z, applications are more thorough. For example, 10 separate disclosures may have previously been on one page; now, disclosures are broken out individually.
How Does Regulation Z Apply to Credit Cards?
Similar to mortgages, Regulation Z increases the disclosure requirements for credit cards.
“Regulation Z provides guidance and disclosures to consumers regarding rates, penalties, and other fees associated with the card,” says Braden Perry, a governance, regulatory, and enforcement attorney and partner at KennyHertz Perry in Mission Woods, Kan. “These details were previously the ‘fine print’ that has been brought to the forefront to allow the consumer to understand the terms of the product and the ramifications of the use of the product.”
For example, one of the most illuminating, and terrifying, disclosures shows real-world applications of a card’s annual percentage rate (APR). Essentially, it shows how long it would take to pay off a credit card debt with only the minimum payment, along with how much interest you’d end up paying.
Regulation Z also empowers consumers to more effectively shop for credit cards.
“The Truth in Lending Act is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably,” according to the Federal Reserve. “Before its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Now, all creditors must use the same credit terminology and expressions of rates.”
How Does Regulation Z Apply to Other Loans?
The law’s disclosure requirements also extend to other types of consumer loans, such as payday loans. Regulation Z makes it so any advertising around these types of loans is accurate and “only offers the credit terms actually available, and implications of late payments and non-payments,” Perry says.
There are limitations to the types of loans covered under Regulation Z. According to the Federal Reserve, exempt transactions include business and commercial loans, loans to governments, loans over $25,000 not secured by the borrower’s home, and certain student loan programs.
What Is The Benefit of Regulation Z?
Regulation Z empowers and protects consumers as they seek loans, lines of credit, or mortgages by ensuring lenders and other entities disclose all the information they need to make informed decisions.
The requirements of Regulation Z “build trust and transparency and help to build long-term relationships,” Solomon says. “It’s to make sure the client is getting the best deal they can, but doesn’t compromise the position of the company lending the money. Everything is disclosed, and that gives the buyer full autonomy to make decisions for themselves.”
It also gives consumers avenues to seek remediation in cases where they suspect lenders may have violated Regulation Z. They can bring complaints to the CFPB and FDIC, or file lawsuits against bad actors.
In one suit filed in Missouri federal district court in 2014, consumers alleged several companies “engaged in unlawful online payday lending schemes,” according to Consumer Finance Monitor, that included “TILA disclosures that did not reflect the loans’ automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.” The CFPB announced a settlement in 2018 that the companies must pay back more than $69 million to the wronged consumers.
Regulation Z “provides rights to action to consumers who have been wronged in the lending process,” Perry says. “It allows consumers to go after those types of practices that defraud and deceive.”
If you’re seeking any type of loan, opening a new credit card, or obtaining a mortgage, Regulation Z is your friend. It requires your lender to spell out all the terms and conditions you need to know. Ultimately, the law makes sure you understand what you’re getting yourself into, and how much you can expect to pay over the lifetime of the loan or how much interest you’ll end up paying. If this information is not provided, steer clear of the lender or file a formal complaint with the CFPB.