Background and Summary of Regulation Z

FORMAT OF REGULATION Z
OPEN-END CREDIT
CLOSED-END CREDIT

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The Truth in Lending Act (15 USC 1601) is part of the Consumer Credit Protection Act, enacted in 1968. The Truth in Lending Act deals primarily with the disclosure of credit costs and is implemented by Regulation Z (12 CFR 226). Since 1968, the Congress has made a number of amendments to the act to address specific concerns such as billing disputes on credit card accounts (Fair Credit Billing Act in 1974) and home-equity loans (Home Equity Loan Consumer Protection Act in 1988). In 1980, the Congress also enacted the Truth in Lending Simplification and Reform Act in an effort to reduce the complexity of the disclosures provided to consumers and eliminate unnecessary burdens for creditors. The citations and dates of enactment for amendments to the act since 1968 are provided in the statutory provisions, beginning at 6-1030.

The purpose of the Truth in Lending Act is to ensure that credit terms are disclosed in a meaningful way so that consumers can compare credit terms more readily and knowledgeably. Before enactment of the act, 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 regulates certain practices of creditors.

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FORMAT OF REGULATION Z

The disclosure rules creditors must follow differ depending upon 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 both open-end and closed-end credit transactions. It sets forth definitions as well as which transactions are covered and which are exempt from the regulation. It also contains the rules for determining what fees are finance charges.

Subpart B (sections 226.5 through 226.16) of the regulation contains the rules for open-end credit accounts. It covers disclosures in connection with home-equity loans and credit and charge card accounts—those that must be provided at the time of application, when an account is opened, and when activity occurs or terms are changed thereafter. It also covers rules for resolving billing errors, for calculating annual percentage rates, and for advertising open-end credit.

Subpart C (sections 226.17 through 226.24) sets forth the provisions for closed-end credit. This subpart contains the rules for variable-rate mortgage disclosures that must be provided at the time of application, when a loan is entered into, and when the mortgage rate changes subsequently. It also contains rules relating to refinancing and assuming loans, 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, and clarifies the relationship between the regulation and state law. This subpart also contains the rule requiring creditors to set a cap for variable-rate transactions secured by a consumer’s dwelling.

The appendixes to the regulation set forth model forms and clauses that creditors may use when providing open-end and closed-end disclosures. The appendixes also contain detailed rules for calculating the annual percentage rate (APR).

Official staff interpretations of the regulation are published in a commentary that is updated annually in March. Good faith compliance with the commentary protects creditors from civil liability under the act.

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OPEN-END CREDIT

Section 226.5 sets forth the general format and timing rules for giving open-end credit disclosures. Section 226.5a contains rules that apply only to credit and charge card applications and solicitations. Section 226.5b contains the requirements that apply only to home-equity lines of credit (those secured by the consumer’s dwelling). This section sets out disclosure requirements and limits how such programs may be structured.

Section 226.6 contains the disclosures that must be provided for all open-end credit plans when the account is opened. This section is entitled “Initial Disclosure Statement” because, prior to 1988, the disclosures were the first information required to be given to the consumer. However, sections 226.5a and 226.5b now require “early” disclosures to be provided for credit card and home-equity credit, respectively.

Sections 226.7 and 226.8 set forth the rules for providing information on periodic statements sent to open-end account holders. Section 226.9 sets forth the information that must be given after an open-end account is opened. Special rules apply to credit card plans, as well as to home-equity plans.

Sections 226.10 and 226.11 discuss the duty to promptly credit payments to a consumer’s account and the duty to refund any credit balance to an account, respectively.

Section 226.12 contains the special rules for issuing a credit card and imposing liability on a cardholder. It also discusses a cardholder’s right to assert claims or defenses against the card issuer in connection with a dispute about property or services purchased with a credit card. Section 226.13 sets forth the consumer’s rights and the creditor’s duties in resolving errors in an open-end account.

Section 226.14 sets forth the rules for calculating the APR. Rules relating to a consumer’s right to rescind credit extensions secured by his or her principal dwelling are discussed in section 226.15. Finally, section 226.16 sets forth the rules applicable to advertisements for open-end credit, including special additional rules for home-equity plans.

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CLOSED-END CREDIT

Section 226.17 sets forth general disclosure requirements for closed-end credit, including format and timing rules, and special rules for multiple-advance and student credit transactions.

Section 226.18 provides the specific disclosures that must be given in all closed-end credit transactions. For example, the APR, finance charge, and payment schedule must be provided. Section 226.19 describes the special disclosures required for variable-rate transactions secured by the consumer’s principal dwelling. These disclosures must be provided early in the loan process to facilitate consumer shopping and understanding of variable-rate loans.

Subsequent disclosure requirements are set forth in section 226.20. Transactions such as refinancings and assumptions are discussed in this section. Section 226.21 discusses refunds of credit balances, and section 226.22 discusses calculation of APRs. The right of a consumer to rescind a credit extension secured by her or his principal dwelling is contained in section 226.23. Rules for advertising are discussed in section 226.24.