What is Regulation Z or the Truth in Lending Act (TILA)?

Whether you’re shopping for a mortgage, home equity loan, a personal loan, or a credit card, you’re probably benefiting from Regulation Z. Created to protect people from predatory lending practices, Regulation Z, also known as the Truth in Lending Act (TILA), requires that lenders disclose borrowing costs, interest rates and fees upfront and in clear language so consumers can understand all the terms and make informed decisions.

For mortgages, Regulation Z also restricts how loan originators can be paid and prohibits steering borrowers to loans that would result in more compensation for the lender. The provisions of Regulation Z also protect those taking on a home equity line of credit (HELOC) or home equity loan by mandating a cooling-off period after an agreement is signed, allowing the borrower to reconsider their decision.

Understanding this law can help you know what to look for before borrowing money.

What is Regulation Z and what does it cover?

Regulation Z is part of the Truth in Lending Act (TILA), which Congress passed in 1968 (people often use the two terms interchangeably). It’s designed to protect consumers against misleading and predatory lending practices and to promote transparency.

Since 2011, TILA has been overseen, updated and enforced by the Consumer Financial Protection Bureau.

TILA has evolved and been amended numerous times in the decades since Congress first passed it. Currently, the regulation covers details, like annual percentage rates, credit card and mortgage closing disclosures, mortgage loan appraisal and servicing rules. Regulation Z also sets expectations regarding recurring statements and the type of information that a financial institution or company must clearly communicate to consumers.

One of the TILA’s key provisions is the “right of rescission,” which applies to home equity lines of credit, HELOCs, private student loans and mortgage refinances. When a consumer takes out one of these loans, they have a three-day cooling-off period to reconsider their decision. If the borrower calls off the loan within this time frame, they won’t lose money. This part of the law not only protects borrowers who change their minds but also borrowers who felt pressured by the lender.

What does TILA cover?

Regulation Z or TILA applies to mortgages, home equity loans, HELOCs, credit cards, installment loans and private student loans. It provides a variety of protections for consumers when it comes to lending practices, including:

• Helping to ensure that lenders provide meaningful disclosures to borrowers, using terminology that consumers can understand. This includes requiring lenders to provide written information about interest rates, and all fees and finance charges associated with a loan or credit card.
• Requiring lenders to disclose the maximum interest rate upfront on variable-interest loans backed by the borrower’s home.
• Prohibiting credit card issuers from opening a credit card account for a consumer, or even increasing a credit card’s limit, without first evaluating the consumer’s ability to make required payments under the terms of the account.
• Protecting consumers from unfair billing practices, including requiring that there be procedures in place to address billing errors on credit cards such as mathematical mistakes or incorrect or unauthorized charges.
• Requiring lenders to provide monthly billing statements to borrowers and notices if the loan’s terms have changed.
• Prohibiting unfair lending practices between lenders and mortgage brokers. This provision bars creditors or anyone else from compensating mortgage brokers or loan originators based on a mortgage transaction’s terms or conditions or for signing you up for a specific type of loan.

What does Regulation Z not cover?

Though Regulation Z affords protections for consumers across a wide range of financial and credit products, there are some notable exceptions to what it covers.

The act does not govern actual loan terms, dictate who can apply for credit, or direct lenders to offer certain types of loans. All of these factors are for individual lenders to decide. Regulation Z doesn’t require lenders to offer loans to people with low credit scores, for example.

In addition, certain types of loans are not subject to Regulation Z. These include:

• Federal student loans.
• Credit for business, commercial, agricultural or organizational use.
• Personal loans/credit above a threshold amount ($69,500 in 2024).
• Loans for public utility services that are regulated by a government entity.
• Securities, stocks or commodities offered by the Securities and Exchange Commission or the Commodity Futures Trading Commission broker.

Some specific mortgage loans might be eligible for a partial exemption if the circumstance meets a series of rigid requirements. These include loans for down payments, closing costs, or property rehabilitation, and loans that don’t charge interest or defer it.

How does Regulation Z apply to mortgages?

A mortgage could be the largest, most complex loan you’ll ever take out — so it’s critical that you understand the terminology before signing for the loan. Regulation Z helps protect homebuyers by requiring lenders to make certain disclosures and eliminating conflicts of interest. Specifically, the law:

• Restricts how loan originators are paid. Generally, lenders can’t be compensated for getting you to sign up for a particular type of loan. Employees’ pay also can’t be based on the terms and conditions of the mortgage. For example, a bank loan officer can’t get a bonus for steering you to a jumbo mortgage, or get more money if you take out an adjustable-rate mortgage instead of a fixed-rate one.
• Prohibits self-interested steering. Loan originators can’t push or “steer” you into a mortgage that results in more compensation for them, unless it’s in your best interest. For example, if a mortgage lender recommends a mortgage that will be more profitable for them, but worse for you, they are in violation of Regulation Z.
• Requires disclosures. Lenders must give the borrower at least two sets of written disclosures that explain the total, real costs of their mortgage (not just a nominal interest rate). As part of a mortgage offer, applicants receive a loan estimate, a three-page document detailing the loan principal amount, interest rate, closing costs and monthly payment. Then, at least three days before their home purchase closes, they must receive a closing disclosure or statement with all the final terms and costs; they should compare it to the loan estimate to ensure that the major figures and rates haven’t changed. If a lender doesn’t send you these documents, they are in violation of the act.

How does Regulation Z apply to home equity loans?

Home equity loans and HELOCs let you tap into your home’s equity to fund a renovation project or another major expense. However, you’ll need to put up your house as collateral – meaning that if you have trouble repaying your loan, you could lose your home.

As set out in Regulation Z, these are some of the laws that home equity and HELOC lenders must follow:

• Outline payment terms. Lenders need to detail the payment terms of the loan, including the length of the draw period and repayment period for HELOCs. They’ll also need to explain how minimum payments are calculated and how they’re timed.
• List fees. The lender must outline any fees charged for opening, using or maintaining the loan, either as a dollar amount or a percentage. They must also explain when these fees are due. An estimate of any applicable third-party fees should be included as well.
• Explain rate structure. For home equity loans, which have fixed interest rates, lenders will need to provide a recent annual percentage rate. For HELOCs, which have variable rates, lenders must provide much more information, including explaining that the rate may change, how it will be determined, and how often it may change.
• List credit limits. Lenders should disclose any limits on how much money a borrower can take out and inform the borrower of any minimum withdrawal requirements.
• Provide disclosures. When a loan application is given to a borrower, lenders must provide a written list of disclosures that apply to the home equity loan. This includes notifying them that the lender will acquire an interest in their home and the actions that the lender may take if the loan isn’t repaid. This also applies to third parties who provide borrowers with loan applications.

How does Regulation Z apply to other loans?

Regulation Z also applies to installment loans, such as personal loans and auto loans. With these types of loans, lenders must provide monthly billing statements, fair and timely responses to billing disputes and clear details about the loan terms.

Regulation Z also requires lenders to make certain disclosures to borrowers who take out private student loans:

• Provide disclosures and general loan information. When you apply for a private student loan, you should receive a Loan Application and Solicitation Disclosure that includes general information about loan rates, fees and terms.
• Explain specific loan details. If approved, you should receive the Loan Approval Disclosure, which provides information about the specific loan’s rate, fees and terms, plus an estimate of how much you’ll repay over time.
• Disclose cancellation policy. If you accept the loan, you should receive the Loan Consummation Disclosure, which contains a notice about your right to cancel the loan within three days.

Who enforces Regulation Z?

The CFPB can make final guidelines concerning Regulation Z. While Regulation Z provides consumer protections, it’s up to you to learn about any loan you’re taking out, ask questions and consider how you’ll repay the debt. You should also make sure that you receive any disclosures that you’re entitled to. Reading through this information will help you compare loans and understand the terms and conditions.

If you take out a loan and you believe that the lender isn’t following the rules, start by calling its customer service and discussing the issue. Sometimes, mistakes or misunderstandings happen.

If the lender doesn’t take steps to resolve the case, you can file a complaint with the Consumer Financial Protection Bureau.

To do this, you’ll need to register for an account by providing your name and email address and setting up a password. After verifying your email, you can start the complaint process. You’ll start by selecting the type of credit account and then selecting the kind of problems you’re experiencing, such as misleading promotions, mysterious or “junk” fees, unclear interest rate or APR, etc.

Next, it’ll ask what information you requested from the company and if they complied with your request. From there, you’ll have the option to explain in further detail what caused your complaint, what you believe is a fair resolution, and you can include any documents supporting your claim. To finish the claim, you’ll follow the rest of the prompts on the CFPB’s website.

The Office of the Comptroller of the Currency has the authority to reach out to lenders to have them correct APRs that were stated to the customer inaccurately. That’s why it’s imperative to check your rates at the time of the loan closing and when you receive your statements, to ensure they’re following the stated guidelines and figures originally quoted to you.

Final word on Regulation Z (the Truth in Lending Act)

Whether you’re opening a credit card or taking out a home equity loan, you should know your rights under Regulation Z. Borrowing money always comes with risks, so it’s important to do your research first and ensure that your finances are protected.