What it means
The main purpose is comparison. If every lender describes the cost of a loan in a different way, a borrower cannot tell which offer is cheaper.
Regulation Z requires a set of standard figures, so that a $20,000 car loan from one lender can be compared fairly with one from another. The headline figure is the annual percentage rate, or APR, which expresses the yearly cost of credit including certain fees.
Other required items are the finance charge, which is the total dollar cost of the credit, the amount financed and the total of payments. For closed-end loans these figures must be provided before the loan is completed.
The rule covers many types of credit. For credit cards, it limits fees and sets standards for statements and for changes to interest rates, and for home loans, it includes the ability-to-repay rule, which requires lenders to make a reasonable, good-faith determination that the borrower can afford the mortgage.
It also gives borrowers three business days to cancel certain loans secured by their main home, such as a refinance. Advertising is also covered.
If an advert mentions a specific rate or payment, it must include other key terms so that a low headline figure is not misleading. This is similar to the approach for consumer leases.
For businesses, the main concern arises for lenders and retailers who offer financing to consumers. A shop that provides instalment plans may be subject to the rule, and the same goes for auto dealers and online lenders.
Business loans are generally outside the rule, though some small-business products have separate disclosure laws. A practical tip for non-lenders is to use the standard figures when comparing financing offers.
Two offers with the same interest rate can have different APRs because of fees, and two offers with the same APR can have different total costs if their terms differ. Looking at the finance charge and the total of payments side by side avoids being misled.
In practice
Real-world examples.
Example
A consumer applies for a personal loan online. Before accepting, she receives a disclosure showing the APR, finance charge, amount financed and total of payments, and she uses it to compare two lenders.
Example
A homeowner takes out a refinance secured by her main home. She has three business days after closing to cancel the transaction, and the lender cannot release the funds until that period has passed.
Example
A furniture store offers customers an instalment plan for sofas. The store's advertisement that states a low monthly payment must also state the number of payments and other required terms.
Formula
Calculation
Total of payments = amount financed + finance charge
A borrower takes a $20,000 car loan, repaid in 36 monthly payments of $620, with no prepaid finance charges. Total of payments = $620 x 36 = $22,320. Finance charge = $22,320 - $20,000 = $2,320. The lender must disclose the $20,000 amount financed, the $2,320 finance charge, the $22,320 total of payments and the APR.Case study
Seen in the real world.
Bluebell Auto Finance is an illustrative, fictional dealership lender. Its advertisements said "only $199 a month", and a complaint prompted a review of how the figure was presented.
The compliance team found that the adverts did not state the number of payments or the down payment required, which the rule treats as terms that must accompany the payment figure. The company rewrote its marketing, trained its sales staff and added a disclosure panel to its website. The illustrative lesson is that a headline price is always judged against the full terms.
Bluebell also created a standard disclosure box that sat next to every price or payment shown on its site, listing the number of payments, the down payment and the APR. Customer complaints about hidden costs fell, and the sales team reported fewer disputes at the signing desk.
Watch out
Common mistakes.
- Comparing loans by interest rate alone, when the APR includes certain fees and gives a fuller picture.
- Assuming the rule applies to all borrowing, when business credit is generally excluded.
- Forgetting the right to cancel on certain home loans, when funds cannot be released until the cancellation period ends.
Questions
People also ask.
What does the APR include?
It includes interest and certain fees that are part of the finance charge, expressed as a yearly rate, which is why it is usually higher than the quoted interest rate when fees apply.
Who enforces the rule?
The Consumer Financial Protection Bureau writes the rule, and several federal agencies enforce it depending on the type of lender, with state regulators also taking part.
Does the rule apply to credit cards?
Yes, it includes specific rules on credit card statements, fees and rate changes.
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