Truth and Lending Act – Regulation Z

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Regulation Z
Truth in Lending
Background and Summary
The Truth in Lending Act (TILA), 15 USC 1601 et seq., was enacted on May 29, 1968, as
title I of the Consumer Credit Protection Act (Pub. L. 90-321). The TILA, implemented by
Regulation Z (12 CFR 226), became effective July 1, 1969.
The TILA was first amended in 1970 to prohibit unsolicited credit cards. Additional major
amendments to the TILA and Regulation Z were made by the Fair Credit Billing Act of
1974, the Consumer Leasing Act of 1976, the Truth in Lending Simplification and Reform
Act of 1980, the Fair Credit and Charge Card Disclosure Act of 1988, the Home Equity
Loan Consumer Protection Act of 1988.
Regulation Z also was amended to implement section 1204 of the Competitive Equality
Banking Act of 1987, and in 1988, to include adjustable rate mortgage loan disclosure
requirements. All consumer leasing provisions were deleted from Regulation Z in 1981 and
transferred to Regulation M (12 CFR 213).
The Home Ownership and Equity Protection Act of 1994 amended TILA. The law imposed
new disclosure requirements and substantive limitations on certain closed-end mortgage
loans bearing rates or fees above a certain percentage or amount. The law also included new
disclosure requirements to assist consumers in comparing the costs and other material
considerations involved in a reverse mortgage transaction and authorized the Federal
Reserve Board to prohibit specific acts and practices in connection with mortgage
transactions. Regulation Z was amended
to implement these legislative changes to TILA.
The TILA amendments of 1995 dealt primarily with tolerances for real estate secured
credit. Regulation Z was amended on September 14, 1996 to incorporate changes to the
TILA. Specifically, the revisions limit lenders’ liability for disclosure errors in real estate
secured loans consummated after September 30, 1995. The Economic Growth and
Regulatory Paperwork Reduction Act of 1996 further amended TILA. The amendments
were made to simplify and improve disclosures related to credit transactions.
The Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15
U.S.C. 7001 et seq., was enacted in 2000 and did not require implementing regulations. On
November 9, 2007, the amendments to Regulation Z and the official staff commentary were
60 FR 15463, March 24, 1995 and 66 FR 65604, December 20, 2001.
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issued to simplify the regulation and provide guidance on the electronic delivery of
disclosures consistent with the E-Sign Act.
Format of Regulation Z
The disclosure rules creditors must follow differ depending on whether the creditor is
offering open-end credit, such as credit cards or home-equity lines, or closed-end credit,
such as car loans or mortgages.
Subpart A (sections 226.1 through 226.4) of the regulation provides general information
that applies to open-end and closed-end credit transactions. It sets forth definitions and
stipulates which transactions are covered and which are exempt from the regulation. It also
contains the rules for determining which fees are finance charges.
Subpart B (sections 226.5 through 226.16) of the regulation contains rules for disclosures
for home-equity loans, credit and charge card accounts, and other open-end credit.
Subpart B also covers rules for resolving billing errors, calculating annual percentage rates,
credit balances, and advertising open-end credit. Special rules apply to credit card
transactions only, such as certain prohibitions on the issuance of credit cards and
restrictions on the right to offset a cardholder’s indebtedness. Additional special rules apply
to home-equity lines of credit, such as certain prohibitions against closing accounts or
changing account terms.
Subpart C (sections 226.17 through 226.24) includes provisions for closed-end credit.
Residential mortgage transactions, demand loans, and installment credit contracts, including
direct loans by banks and purchased dealer paper, are included in the closed-end credit
category. Subpart C also contains disclosure rules for regular and variable rate loans,
refinancings and assumptions, credit balances, calculating annual percentage rates, and
advertising closed-end credit.
Subpart D (sections 226.25 through 226.30), which applies to both open-end and closed-end
credit, sets forth the duty of creditors to retain evidence of compliance with the regulation.
It also clarifies the relationship between the regulation and state law, and requires creditors
to set a cap for variable rate transactions secured by a consumer’s dwelling.
Subpart E (sections 226.31 through 226.34) applies to certain home mortgage transactions
including high-cost, closed-end mortgages and reverse mortgages. It requires additional
disclosures and provides limitations for certain home mortgage transactions having rates or
72 FR 63462, November 9, 2007. These amendments took effect December 10, 2007, with a mandatory compliance
date of October 1, 2008. Further technical amendments were issued December 14, 2007, with a January 14, 2008
effective date and an October 1, 2008 mandatory compliance date: 72 FR 71058.
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fees above a certain percentage or amount, and prohibits specific acts and practices in
connection with those loans. Subpart E also includes disclosure requirements for reverse
mortgage transactions (open-end and closed-end credit).
The appendices to the regulation set forth model forms and clauses that creditors may use
when providing open-end and closed-end disclosures. The appendices contain detailed rules
for calculating the APR for open-end credit (appendix F) and closed-end credit (appendixes
D and J). The last two appendixes (appendixes K and L) provide total annual loan cost rate
computations and assumed loan periods for reverse mortgage transactions.
Official staff interpretations of the regulation are published in a commentary that is
normally updated annually in March. Good faith compliance with the commentary protects
creditors from civil liability under the act. In addition, the commentary includes mandates,
which are not necessarily explicit in Regulation Z, on disclosures or other actions required
of creditors. It is virtually impossible to comply with Regulation Z without reference to and
reliance on the commentary.
NOTE: The following narrative does not encompass all the sections of Regulation Z,
but rather highlights areas that have caused the most problems with the calculation of
the finance charge and the calculation of the annual percentage rate.
Subpart A – General
Purpose of the TILA and Regulation Z
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.
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. In
addition to providing a uniform system for disclosures, the act is designed to:
? Protect consumers against inaccurate and unfair credit billing and credit card practices;
? Provide consumers with rescission rights;
? Provide for rate caps on certain dwelling-secured loans; and
? Impose limitations on home equity lines of credit and certain closed-end home
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The TILA and Regulation Z do not, however, tell financial institutions how much interest
they may charge or whether they must grant a consumer a loan.
Summary of Coverage Considerations

The Law Offices of Michael D. Stewart

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