How must lenders handle the risks of negative amortization according to Regulation Z?

Lenders must disclose the risks of negative amortization and explain how unpaid interest can potentially affect the loan balance. This requirement is rooted in the overarching goal of Regulation Z, which is to promote informed consumer decision-making by ensuring borrowers understand the terms and potential implications of their loan agreements.

By providing clear disclosures about negative amortization, lenders fulfill their responsibility to inform consumers about how certain loan features can influence their financial obligations. Specifically, if a loan has terms that could lead to negative amortization, the lender must communicate that unpaid interest may accumulate and be added to the principal balance. This helps borrowers understand the potential for increased debt over time and enables them to make more informed choices regarding their loans.

The other options do not align with the regulatory framework of Regulation Z, as they either undermine the requirement for transparency or fail to provide adequate consumer protection. Thus, the correct choice ensures compliance with the intent of the regulation and prioritizes the consumer's right to be informed about significant loan risks.