Finding a lender for your home loan can be a time-consuming process. Luckily for home buyers, there are federal laws that require lenders to disclose certain information in a standardized manner to borrowers. These laws are enacted through what’s known as Regulation Z.
It’s important for home buyers to know what provisions are available to them through Regulation Z. Doing so can help them choose the right mortgage and ensure their lender is disclosing all the information they are required to.
What is Regulation Z?
The Federal Reserve Board created Regulation Z (sometimes called the Truth in Lending Act) to protect consumers from the unfair practices that used to be common in the lending industry. Regulation Z is part of the Consumer Credit Protection Act of 1968 which was enacted to achieve that goal.
Regulation Z by itself is not limited to real estate; it aims to protect borrowers who apply for all kinds of credit. That includes auto loans, education loans, and credit cards. Within real estate, it applies to standard home loans and also other forms of real estate credit like reverse mortgages and home equity lines of credit.
What kinds of loans does Regulation Z cover?
Regulation Z applies to consumer-purpose loans; it applies only to loans that are obtained by an individual or family. That includes car loans, credit card loans, home mortgages, and so on.
Any loan extended to a business does not fall within the scope of this regulation. So you cannot expect the same rules to apply if you’re working as a real estate investment company as opposed to purchasing a house for yourself.
How does Regulation Z protect borrowers?
Before Regulation Z came about, there were no rules about what information a lender needed to provide a borrower applying for a loan. Every lender provided different information using different terminology. As a result, borrowers often didn’t know what they were signing up for and didn’t have a meaningful way to compare the loans provided by different banks.
Once Regulation Z kicked into action, there was a standardized way creditors were required to state credit terms and the associated costs. The exact set of rules that the lender must adhere to depends on the nature of the loan they are providing.
What are lenders required to do to comply with Regulation Z?
Regulation Z requires real estate lenders to make several different disclosures. These disclosures help borrowers calculate exactly what their mortgage expenses are and how it compares to offerings made by other lenders.
An important type of disclosure that real estate lenders need to make as part of Regulation Z is finance charges. This covers all of the payments the buyer need to pay for the credit to be extended by the lender. That includes origination fees, interest, discount points, and credit report fees.
Another disclosure that real estate lenders need to make as part of Regulation Z is the annual percentage rate (APR). APR is a metric that takes into account the nominal rate of a mortgage along with the additional fees levied on a borrower. As a result, it gives borrowers a more complete picture of their expenses and a way to compare different lenders using a single metric.
Regulation Z also dictates what counts as a fair relationship between the mortgage lender and the mortgage broker. Lenders can only pay brokers based on the loan amount and not any other terms associated with it. Lenders can’t adjust the broker’s pay if, for example, the borrower is able to get a lower rate of interest through negotiations.
These measures protect consumers from agreeing to loans with unfavorable terms.
What is the difference between Regulation Z and the Real Estate Settlement Procedures Act (RESPA)?
The Real Estate Settlement Procedures Act came into effect in 1975. The main goal of this act is to prevent abusive practices that could occur during the settlement process of a real estate transaction.
RESPA provides home buyers with the information they need about the settlement of the purchase to prevent things like unearned fees and kickbacks. These can have the effect of buyer’s expenses during closing.
To prevent those inflated costs, RESPA requires mortgage brokers to make disclosures about the borrower’s costs during the settlement process. The broker needs to disclose if any of the parties involved in the settlement process are related in any way.
Regulation Z and RESPA both exist to protect home buyers, but apply to different stages of the purchase. Regulation Z has to do with the early stage of trying to obtain a mortgage for the purchase. RESPA kicks in when the deal is about to be closed and the settlement procedures are on.
There are various laws that aim to protect buyers in a real estate transaction. While it can be hard for buyers to be fully aware of all the laws at their disposal, they can make sure everything is on the up and up by hiring a real estate agent. The best real estate agents know local real estate laws and their clients’ rights.
Contact Clever to connect with a top Partner Agent who can guide you through the home buying process. Buyers who complete a purchase with a Clever Partner Agent can qualify for a $1,000 rebate on their commission in 40 states.