Regulation Z

Key Takeaways

• Regulation Z is the federal rule at 12 CFR Part 1026 that carries out the Truth in Lending Act.
• The Loan Estimate and Closing Disclosure requirements live in Regulation Z, at 12 CFR 1026.19(e) and (f).
• Regulation Z grants a right of rescission on credit secured by the borrower's principal dwelling, but a loan used to buy or build that dwelling is exempt.
• The rescission period runs until midnight of the third business day following the last of these to occur: consummation, delivery of the rescission notice, or delivery of all material disclosures.

What It Means

Regulation Z is the federal rule, codified at 12 CFR Part 1026, that puts the Truth in Lending Act into working form. Congress wrote the statute in broad terms and Regulation Z supplies the detail: what a lender must disclose, how the Annual Percentage Rate Apr is presented, what an advertisement may say about credit terms, and how many days a borrower gets to review or unwind a loan. The Consumer Financial Protection Bureau writes and administers it.

Three pieces of it reach residential brokerage directly. First, Regulation Z is the source of the Loan Estimate and the Closing Disclosure and of their delivery deadlines. Second, it governs credit advertising: state a triggering term such as the amount of a payment, the number of payments, the amount of a down payment, or the amount of a finance charge, and the ad must also state the down payment, the repayment terms, and the annual percentage rate using that phrase. Third, it grants a Right Of Rescission on loans that take a security interest in the borrower's principal dwelling.

That last piece is where students slip. A refinance or a home equity loan carries the right. A purchase loan does not.

How It Works in Washington

Regulation Z is federal and applies in Washington, Oregon, and Georgia alike. Washington does not replace it. Washington layers licensing law on top and then defers to the federal form.

In Washington, the Mortgage Broker Practices Act governs mortgage brokers and loan originators. RCW 19.146.030 requires a full written disclosure itemizing and explaining all fees and costs within three business days following receipt of a loan application. RCW 19.146.030(2) then provides that disclosure made in compliance with the Truth in Lending Act and Regulation Z, 12 CFR Part 1026, is in compliance with that state requirement, with a parallel provision for RESPA and Regulation X. One federal form does double duty.

Two consequences follow for Washington practice. Regulation Z sets the rules for how financing may be advertised in a listing, a flyer, or a social post, so a broker who quotes a monthly payment has triggered the additional disclosures. And RCW 19.146.0201(11) makes it a prohibited practice for a licensee to fail to comply with state and federal laws applicable to the activities the chapter governs, which means a Regulation Z failure is also a matter the Department of Financial Institutions can act on under chapter 19.146 RCW.

Example

Dana owns a home in Vancouver, Washington worth about $480,000, with $310,000 still owed on her first mortgage. She refinances into a new $340,000 loan and signs the note on Tuesday, March 3. Because the new loan takes a security interest in the home she already lives in, and is not a loan to buy or build it, Regulation Z gives her a right to cancel.

Her window runs from the last of three events: consummation on Tuesday, delivery of the notice of the right to rescind, and delivery of all material disclosures. She received the notice and the disclosures at signing, so Tuesday is the latest of the three. Business days here include Saturday, so the window covers Wednesday, Thursday, and Friday and closes at midnight Friday, March 6. The lender may not disburse the $30,000 Dana is taking out until that window shuts. Had she been buying the house with a purchase loan instead, no rescission right would exist and the money could move at closing.

Common Mistakes and Exam Traps

• Regulation Z implements the Truth in Lending Act and Regulation X implements the Real Estate Settlement Procedures Act. Exam questions swap the two on purpose.
• The right of rescission does not apply to a loan used to buy or build the borrower's principal dwelling, which is the transaction most students picture first.
• The rescission clock starts at the last of three events, not automatically at signing, so a missing material disclosure extends the period.
• Regulation Z does not cap interest rates or fees. It requires that credit terms be disclosed and, in some transactions, that the borrower get time to back out.