What is Reg Z?

Within three days after receipt of your completed loan application, Federal law requires the lender to prepare a Truth-in-Lending Disclosure Statement, which is designed to provide meaningful disclosures to individuals who are receiving credit. Four large boxes at the top of the first page characterize this statement, sometimes referred to as a "REG Z" after the Federal regulation that governs it. Truth-in-lending requirements are quite extensive. This article will primarily focus on the figures that appear in the four boxes.

The simplest way to explain this statement is to start with the third box, Amount Financed. The Amount Financed is referred to as a net figure as it represents the principal loan amount plus any other amounts financed (for MOP loans, this figure could include financed closing costs) less escrow company fees and any prepaid finance charges. Since there are no points or loan fees associated with a MOP loan, the only prepaid finance charge is initial interest. Initial interest is the amount of interest owed from the date the loan funds through the end of that month. An estimate of the amount of initial interest is included on the Truth-in-Lending statement in the area immediately below the four boxes. This figure will vary depending on whether your loan is scheduled to fund toward the beginning of the month versus the end of the month.

The second box, Finance Charge, is the dollar amount the credit will cost you. This is the total amount of interest and other charges you would pay over the life of the loan (assuming the rate stays the same). For MOP loans, this is equal to the total loan interest plus initial interest and any escrow fees. All adjustable rate mortgages, including MOP loans, use the initial interest rate to calculate the amount of interest that will be paid over the life of the loan. Although this rate may stay the same, it is more likely to change over the life of the loan.

The first box, Annual Percentage Rate (APR), is the cost of the Amount Financed expressed as an annual percentage rate. If the Finance Charge equaled the calculated loan interest, the APR would be equal to the Note rate on your loan. However, the Amount Financed is net of certain fees as described above. As a result, the APR is usually higher than the Note rate on your loan. Comparing the APR from different lenders is the simplest way to determine the actual cost of the loan under different loan programs. As the MOP program does not assess any lender fees or points, there will typically be a smaller difference between the MOP loan APR and the MOP loan Note rate than the APR and Note rate of conventional lenders.

The fourth box, Total of Payments, is simply the total amount of principal and interest and other fees, you will pay over the life of the loan. It is calculated by adding Finance Charge and Amount Financed. As noted above, this calculation assumes that the interest rate will stay the same.

For adjustable rate mortgages, Reg Z requires the lender to detail every aspect of the program that will affect the interest rate. In addition, each lender is required to disclose a rate history, with corresponding payment, of the loan program. (A complete rate history of the MOP program is also available). For the MOP program, this rate history, and related disclosures, takes up the remainder of page one and the majority of page two. The MOP program Truth-in-Lending Disclosure Statement concludes with general disclosures specific to the MOP program.