The Truth in Lending Act (TILA) is a federal law designed to protect borrowers from entering into any type of loan without receiving accurate information from the lender regarding the costs, terms, and conditions of the financing agreement.
About of the Truth in Lending Act
The United States federal government enacted the TILA in 1968 as part of the Consumer Credit Protection Act. Although the law has been reformed since its initial implementation, the basic purpose remains the same. The purpose of this legislation is to protect consumers from predatory lending practices by requiring full and clear disclosure prior to the execution of any contract for credit.
The idea behind the law is not to prevent consumers from borrowing money or to keep lenders from earning a profit. For example, the Act does not set limits on allowable interest rates in most circumstances. It simply requires that interest rates be fully disclosed before a loan agreement can be executed. The TILA simply exists to make sure that consumers utilizing consumer credit are fully informed about agreements into which they enter.
While the TILA applies to all types of interest bearing consumer loans, there are special provisions that apply only to mortgage loans. These items include:
- Limitations on mortgages with rates and fees higher than specified amounts
- Total annual cost of reverse mortgage loan transactions
- Prohibition of predatory mortgage lending practices
TILA and Mortgages
To comply with TILA, lenders must follow specific requirements for sharing information with borrowers prior to entering into a credit agreement. Within three days of completing an application for a mortgage loan, the lender is required to provide the applicant with a Good Faith TIL estimate. This document provides an overview of the expected out-of-pocket costs required to close on the loan and general information about the expected cost of credit. To be in TILA compliance, before a mortgage loan can be closed the lender must provide the mortgagee with a comprehensive Truth in Lending disclosure statement. The statement provided at closing is likely to be somewhat different than the initial estimate, and it replaces the Good Faith TIL estimate.
The TILA disclosure provides written documentation about the true cost of credit, and spells out all terms and conditions of the loan. It must be written in language that can easily be understood by people who are not finance professionals.
Information that must this document includes:
- Total amount being financed
- Total finance charge
- Total payments required
- Annual percentage rate (APR)
The document will also reveal additional material facts about your loan. For example, if there is a prepayment penalty, this will be noted on the form. If you are getting an adjustable rate mortgage (ARM), details about maximum interest rate increases and dates for adjustments will be included.
When you receive the disclosure, you should thoroughly review the document to make sure that you clearly understand all terms and conditions associated with your loan. Verify that the interest rate reflected on the document is the one to which you agreed, and ask the loan officer or closing agent to clarify any points that do not seem clear before you sign anything.
TILA Enforcement
The Truth in Lending Act is enforced by the Federal Trade Commission. Additionally, legal action may be brought against any creditor that fails to comply with disclosure requirements in any competent court for a period of one year following the violation. Creditors found to be out of compliance with TILA are responsible for paying the borrower's legal fees, and can be required to pay statutory damages in both individual and class action cases.
Consumer Protection
The Truth in Lending Act exists to make sure that consumers have access to all the information necessary to make sound decisions before borrowing money. As a homebuyer or homeowner, it's your responsibility to make sure that you understand the material facts revealed to you about the terms and conditions of any credit contract your sign. Take the time to read the disclosure provided before closing. Make sure you understand all the important details of your mortgage loan agreement before you sign on the dotted line.
