Reg Z: Purpose and Application

Key Concepts:

Terms in this set (57)

Frank and Molly are consumers searching for a home loan. After visiting several financial institutions in their home town, they have assembled a large collection of advertisements and other documents for the various loan products that these financial institutions offer.

However, without Reg Z, there are no standard disclosures, so while Frank and Molly have many different loans to choose from, there is no simple way to compare them. Each loan has slightly different loan fees, insurance requirements, interest rates, and so on. These differences lead to confusion, and Frank and Molly are unable to determine which loan is the best loan for their specific needs.

In their confusion over what the various numbers and percentages in the various disclosures actually mean, Frank and Molly end up applying for and accepting a loan that seems like a good deal, only to discover that this loan will end up costing them several thousand dollars more throughout the life of the loan than some of the other loans they considered.
Reg Z has gone through many revisions over the years, such as the recent change in oversight from the Federal Reserve to the Consumer Financial Protection Bureau (CFPB), but its basic function remains the same.
A Convenient "Yardstick"
Reg Z requires lenders to disclose information about a loan in a way that allows applicants to compare loan costs at different institutions, all of which must be calculated on the same basis.
For example, in a closed-end transaction, the amount financed and the amount of any payment must be expressed as a dollar amount. In another example, in open-end credit plans, the disclosure given before the first transaction may express a cash advance fee as a percentage of each cash advance. These and other rules allow consumers to make an informed decision before accepting a loan that may not be in their best interest.