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Unit
REGULATION Z
Truth in Lending – Closed-End Credit
 60-Second Compliance Summary
 Establishes comprehensive disclosure requirements for consumer credit products
 Protects consumers against unfair credit billing practices
 Provides consumers with rescission rights
 Imposes limitations on certain closed-end home mortgage loans
 Delineates and prohibits unfair and deceptive mortgage lending practices
 Does not mandate how much interest banks may charge
 Most recent rulemaking addressed comprehensive mortgage reform mandated by the
Dodd-Frank Act
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Chapter
Overview
Truth in Lending legisl ation was enacted on May 29, 1968, (15 U.S.C
1601 et seq.) and was i ntended by Congress to promote consistent and
informed use of Consumer Credit.
T
he Truth in Lending Act is implemented by Regulation Z and became effective July
1, 1969. The regulation requires creditors to disclose the terms and cost of
consumer credit transactions.
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The Regulation promotes disclosing consistent credit information to
consumers: it does not regulate the cost or charge of the credit itself.
State usury laws typically regulate the cost of credit. The Regulation also
provides consumers the right to cancel certain transaction secured by their
principal dwelling, as well as private education loans.
Regulation Z implements several laws or acts. It incorporates rules governing credit card
practices (Fair Credit Billing Act & Fair Credit and Charge Card Disclosure Act), interest rate
ceilings for adjustable rate mortgages (Competitive Equality Banking Act) adverse actions
regarding home equity lines of credit (Home Equity Loan Consumer Protection Act),
disclosure requirements for dwelling secured loans (Mortgage Disclosure Improvement Act
of 2008), open-end consumer credit (Credit Card Accountability and Disclosure Act of
2009), notices when a mortgage loan is sold or transferred (Helping Families Save Their
Homes Act of 2009), and consumer protection reforms (Dodd-Frank Act). The Regulation
also provides a means for resolving credit card billing disputes.
Regulation Z has experienced significant amendments since 2008, beginning with changes
to implement the Mortgage Disclosure Improvement Act and most recently, amendments
related to the Dodd-Frank Act. The flurry of changes have also included several proposals
that were issued and subsequently withdrawn (for example, open-end credit proposal in
2008) compounding the challenge to keep up with the status of the evolving regulation.
With the establishment of the Consumer Financial Protection Bureau and the requirement
for certain RESPA and Regulation Z disclosures to be integrated, the changes will likely
continue for the next several years.
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Regulatory Citation
Take a closer look
A new concept
The regulation is now codified at 12 CFR 1026.
Test your knowledge
 Auditor review
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Pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2012 (Dodd-Frank Act), the Bureau has been
transferred authority of this particular regulation. Formerly, the
Federal Reserve Board carried the responsibility of writing and
amending this regulation.
 Valuable information
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Current events
Format of Regulation Z
The disclosure requirements of Regulation Z are set forth in several distinct subparts within
the regulation. The type of consumer credit product generally determines the subparts
creditors must follow to achieve compliance.
 Subpart A – General Provisions (1026.1-1026.4)
This subpart provides general information that applies to both open-end and closed-end
credit transactions. An important section to consult is the section containing rules for
determining which fees are finance charges.
 Subpart B – Open-End Credit (1026.5-1026.16)
This subpart relates to open-end credit and contains rules on account-opening disclosures
and periodic statement delivery.
 Subpart C – Closed-End Credit (1026.17-1026.24)
This subpart contains provisions applicable to closed-end credit. It addresses disclosure
requirements for account opening, APR calculations, and rescission requirements.
 Subpart D – Miscellaneous Provisions (1026.25-1026.30)
This subpart contains requirements regarding oral disclosures, disclosures in other
languages, record retention, state law impacts, and rate limitations.
 Subpart E – Certain Mortgage Transactions (1026.31-1026.45)
This subpart contains rules addressing certain mortgage transactions, including loans
subject to HOEPA and HPML requirements. Additionally, it contains requirements for
reverse mortgage transactions and rules on valuation independence requirements.
Requirements applicable to home equity plans have also been included in this subpart.
 Subpart F – Private Education Loans (1026.46-1026.48)
This subpart contains requirements for private education loans including disclosure rules,
limitations on changing terms of such loans, the right to cancel this type of loan, and cobranding restrictions.
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 Subpart G – Credit Cards & Other Specific Open-End Credit (1026.51-1026.60)
This subpart outlines the compliance requirements applicable to credit card and charge card
accounts. This subpart was established by directive within the Credit Card Act.
 Appendices & Official Staff Interpretations (Appendix A-N, Supplement)
A critical element to the overall implementing regulation and practical application of the
rules is the establishment of the appendices and official staff interpretations. These
sections provide for comprehensive model forms, calculation methods, and official staff
interpretations.
General Provisions
A Creditor is: [1026.2(a)(17)]
1. A person (natural person, organization, corporation, partnership, etc.) who
regularly extends consumer credit that is subject to a finance charge.
OR
2. A person that extends consumer credit evidenced by a written agreement which is
payable in four or more installments. ("regularly" = more than 25 times in a
calendar year or more than 5 times if secured by a dwelling.)
AND (#1 or #2, plus #3)
3. The person is the initial person extending consumer credit.
Why do we check disclosures on indirect paper? While we're not the initial creditor
and not subject to criminal violations, we can still "buy" civil liability.
Effective January 5, 1996: Assignees of transactions secured by real property may be
liable for violations if the violation is apparent on the face of the disclosure statement and
assignment was voluntary.
What Obligations Must be Disclosed?
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Coverage [1026.1(c) –
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Credit is extended to consumers
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Credit is primarily for personal or household purposes
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Credit is subject to finance charge or payable in more than four
installments
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Offering or extension of credit is done regularly
What Obligations are Not Disclosed? [1026.3]
 Business, Agricultural, & Organizational Credit
Reg Z does not apply to business, agricultural or organizational credit [1026.3(a)].
Furthermore, business-purpose credit cards issued to employees are not subject to the
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provisions of Reg Z. Liability falls on the card holder even if unauthorized use of a business
credit card is for consumer-purpose transactions.
There are five determining factors to distinguish between personal and business purpose if
unsure. [Commentary 1026.3(a)(2)]
1. The relationship of the borrower's primary occupation to the acquisition. The more
closely related, the more likely it is to be business purpose.
2. The degree to which the borrower will personally manage the acquisition. The
more personal involvement there is, the more likely it is to be business purpose.
3. The ratio of income from the acquisition to the total income of the borrower. The
higher the ratio, the more likely it is to be business purpose.
4. The size of the transaction. The larger the transaction, the more likely it is to be
business purpose.
5. The borrower's statement of purpose for the loan.
Note: See page #1 of the Regulation Z Appendix for the “Coverage Considerations”
diagram.
 Rental Property
Special exemption rules apply to Rental Property. Non-owner occupied rental property is
exempt unless the property is occupied by the owner for more than 14 days. For owner
occupied rental property to be exempt the property must have more than two units. Or the
owner occupied property must
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 Consumer Credit > $53,000
Consumer credit over $53,000 not secured by real property or personal property used as
the consumer’s principal dwelling. *Effective 7/21/2011, the dollar threshold will be adjusted
annually to reflect any increase in the consumer price index. [1026.3(b)] The annual
adjustments may be found in the Reg Z Commentary.
Personal property includes mobile homes. If a loan is to a consumer > $53,000, made for a
consumer purpose and secured by any real property, THE TRANSACTION MUST BE
DISCLOSED.
Private education loans as defined in 1026.46(b)(5) are subject to Reg Z requirements and
THE TRANSACTION MUST BE DISCLOSED.
 Student Loan Programs
Some student loan programs are exempt. These are loans guaranteed by Title IV of the
Higher Education Act of 1965 – GSL’s, PLUS’s & National Direct Student Loans.
 Public Utility Credit & Securities
Public utility credit, securities or commodities accounts and home fuel budget plans are also
exempt from Reg Z requirements.
 Mixed Purpose Loans
Mixed purpose loans require a greater understanding of the transaction. The regulation
states: Figure out the primary purpose of the loan. (i.e. for what purpose does the majority
of loan proceeds go toward?). Best practice is when in doubt, disclose.
Finance Charge [1026.4]
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VIP to understanding and treating new charges properly; but recognize that this will
likely be one of the fundamental changes going forward.
This is the cost, stated as a dollar amount, which the consumer incurs as the result of the
credit. This includes charges imposed by the creditor and payable by the consumer.
Finance charges do not include items incurred by consumers in “comparable cash
transactions”. This means that taxes, license fees and registration fees incurred by
consumers for both cash and credit transactions are not considered finance charges.
Generally, treatment of various costs can be divided into the following three groups, and the
outline is organized in that manner:
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Always considered a finance charge
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Never considered a finance charge
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Treated as a finance charge unless certain conditions met to allow exclusions
Prepaid Finance Charge – More of a function of when the fee is incurred. The importance
of “prepaid” finance charges is that those fees are deducted from the loan contract amount
to determine the “amount financed”, an important number in the determination of the annual
percentage rate (APR).
Any finance charge paid separately in cash or by check before or at consummation of a
transaction, or withheld from the proceeds of the credit at any time. Examples: origination
fee, odd-days interest, first year mortgage guaranty insurance premium, mortgage
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