Regulation Z - Explained
What is Regulation Z?
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What is Regulation Z?
Regulation Z is a Federal Reserve Regulation and a part of the Truth in Lending Act of 1968. The regulation requires the lenders to disclose all the terms and conditions of a loan to the borrowers. The regulation protects the interest of the borrowers against unfair practices by lenders. The terms of loans include but not limited to the interest rates, fees and length of the loan. Credit card companies, mortgage lenders and other creditors are obligated to disclose all the important credit terms in writing to its borrowers. They are also required to update the borrowers at regular intervals if the situation demands. The regulation also makes it mandatory for the lenders to respond to the complaints of the borrowers truthfully and responsibly on the occasions of error in periodic billing.
How Does Regulation Z Work?
U.S. Federal Reserve Board and the Consumer Financial Protection Bureau are responsible for enforcing this rule. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 shifted most of the responsibilities of enforcement to the Consumer Financial Protection Bureau. The Truth in Lending Act was enacted to prohibit lenders from providing misleading information to the borrowers regarding the loan terms. The act was amended and updates several times to protect the consumers against ever-changing deceiving methods of the lending firms. Regulation Z standardizes the format of disclosing the information in order to ensure the borrower knows all the terms correctly while signing up for a loan. According to the regulation, a credit card issuer or a mortgage loan provider must clearly state the interest rate of the loan in terms of an annual percentage rate. It prohibits the lender to initially quote a lower interest rate to entice a borrower and then in the fine print increase the rate stating the earlier stated rate was the monthly percentage. The lenders are also required to provide all information regarding the service and other charges associated with the loan. The lenders are also obligated to send monthly billing statements to the borrower detailing all the charges and mentioning any changes in the interest rate in case of adjustable rate loans. If there is any change in the loan terms the lender must communicate it in advance within a prescribed time period. The prescribed time depends on the type of loan and the changes made. Credit card issuers need to notify any such changes to it consumers 45 days in advance. All these communications must be done in written format. The regulation also regulates the compensation provided by the creditor to the mortgage brokers or any other mortgage originator. It states a mortgage broker is only entitled to receive a compensation based on the credit amount. The loan terms and conditions should not affect the compensation amount.