March 28, 2005

Proposed Reforms to Federal Reserve Regulation Z ('Truth in Lending')

Key materials
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The Regulation

  • The Federal Reserve is examining whether reforms are necessary to its "Regulation Z," which implements provisions of the 1968 Consumer Credit Protection Act, more popularly referred to by the Act’s Title 1, "Truth in Lending."
  • The current review focuses on the disclosure requirements for open-end or revolving credit accounts not secured by a home (credit cards).

Our Findings

The myriad possible changes on which the Federal Reserve seeks comment have the potential to be quite costly for several reasons.

  • The current rule appears to be in the very costly stages of diminishing returns;
  • Large-scale changes can be preferable to many small changes assuming an either-or trade-off; and
  • Innovation necessarily upsets the regulatory balance rendering it unstable. By the Numbers We estimate that the proposed changes are likely to generate significant costs for credit providers (of at least an additional $2.7 billion in the first year of the changes) while providing little improvement in consumer understanding of credit terms.


  • The Fed’s research agenda should move beyond evaluations of awareness and into studying the effects of disclosure on consumers’ credit behavior.
  • For example, before taking action, the Fed must examine whether improved disclosure about credit costs and terms will in fact lead to better decisions about and consumer use of credit.