Regulation Z

Regulation Z is the federal regulation that puts the Truth in Lending Act of 1968 into effect in the United States. It requires creditors to tell consumers what borrowing will cost, in a uniform format, before they become committed, and it gives borrowers a set of rights when dealing with credit card issuers, mortgage lenders and other consumer lenders. It does not set interest rates or, in general, tell lenders what they may charge.

The regulation was originally written by the Federal Reserve Board. Under the Dodd-Frank Act, rulemaking authority for most of it moved in 2011 to the Consumer Financial Protection Bureau, whose version is found at 12 CFR Part 1026. It is the credit counterpart of Regulation E, which covers electronic transfers from deposit accounts.

Regulation Z applies to a person or business that regularly extends credit to consumers for personal, family or household purposes, where the credit carries a finance charge or is repayable in more than four installments under a written agreement. Credit extended mainly for business, commercial or agricultural purposes is exempt. So is most credit above a dollar threshold that is adjusted each year, unless it is secured by real property or a dwelling or is a private education loan.

The rules are organized around two types of lending. Open-end credit is a revolving plan such as a credit card or home equity line. Closed-end credit is a loan for a fixed amount repaid over a set term, such as a car loan or most mortgages.

The core of the regulation is standard disclosure. The two central figures are the finance charge, which is the dollar cost of the credit, and the annual percentage rate, which expresses that cost as a yearly rate and must be calculated by a prescribed method so that offers can be compared.

For open-end plans, creditors must give account-opening disclosures, including a summary table for credit cards, and a periodic statement for each billing cycle showing transactions, fees, interest and the payment due. For closed-end loans the creditor must disclose the amount financed, finance charge, annual percentage rate, total of payments and payment schedule before the loan is made. Advertising is also regulated: an advertisement that states certain terms, such as a monthly payment, must also state the other key terms.

Many of the rules that govern a credit card account in the United States are found in Regulation Z, particularly after the Credit CARD Act of 2009 was added to it.

• Unauthorized use. A cardholder's liability for unauthorized use of a credit card is limited to $50, and issuers commonly waive even that.
• Billing errors. A consumer who reports a billing error in writing within 60 days of the statement is entitled to an investigation, and the issuer may not collect the disputed amount while it is pending. This right is one legal basis for card disputes.
• Ability to pay. An issuer must consider a consumer's ability to make the required payments before opening an account or raising a limit.
• Rate increases and fees. Issuers must generally give 45 days' notice of significant changes, may not raise the rate on existing balances except in defined cases, and face limits on penalty fees.
• Payments. Statements must be sent at least 21 days before the due date, and amounts paid above the minimum payment go first to the balance with the highest rate.

Regulation Z contains extensive rules for loans secured by a home. Borrowers have a right to cancel certain transactions secured by their principal dwelling, such as a refinancing with a new lender, until midnight of the third business day after closing. Following the financial crisis, the regulation was amended to require lenders to make a reasonable, good-faith determination that a borrower can repay a mortgage, with a presumption of compliance for loans that meet the definition of a qualified mortgage.

Other provisions restrict loan originator compensation, impose extra protections on high-cost mortgages, set standards for servicing and periodic statements, and combine the Truth in Lending disclosures with settlement disclosures in the integrated Loan Estimate and Closing Disclosure forms used since 2015.

The regulation is enforced by the Consumer Financial Protection Bureau, the federal banking agencies for the institutions they supervise, and the Federal Trade Commission for many non-bank creditors. Consumers may also sue. A creditor that violates the disclosure rules can be liable for actual damages, statutory damages within set limits, and legal costs, and class actions are permitted. In some mortgage cases a violation extends the borrower's right to cancel for up to three years.

How Regulation Z applies to products that did not exist in 1968 is a recurring question. Buy now, pay later loans repayable in four interest-free installments were designed to fall outside its definitions, and regulators have debated whether card-style protections should apply to them. Earned wage access, overdraft credit and fintech lines offered through bank partners raise similar questions. Positions taken by the Bureau on these products have changed over time, so firms should check current guidance.

• Consumer Financial Protection Bureau: Regulation Z (12 CFR Part 1026)