Learn more about how the Truth in Lending Act requires mortgage lenders to disclose important loan information and prohibits unfair lending practices.
Federal law requires lenders to disclose important loan information so that borrowers can make informed decisions. The Truth in Lending Act (TILA) states that lenders must make specific disclosures to borrowers. When you close on a new home with a mortgage, you will receive a statement with all of the information required by TILA.
The following is an overview of TILA and what it does to protect borrowers’ interests.
What is the Truth in Lending Act?
Unscrupulous individuals and businesses have used loans, credit cards, and even mortgages to take advantage of people. They might misrepresent the terms of a loan, or hide terms deep within the paperwork to give themselves an unfair advantage over the borrower. People often didn’t have enough knowledge about lending, credit, and other financial matters to make informed decisions.
Congress enacted TILA in 1968 as part of the Consumer Credit Protection Act. The purpose of the law, according to Congress, was to promote “the informed use of credit” by consumers. Making consumers aware of the important terms of a loan helps them “avoid the uninformed use of credit” and protects them from “inaccurate and unfair credit billing and credit card practices.” The Consumer Financial Protection Bureau (CFPB) has the authority to implement and enforce TILA’s terms.
Statutes passed by Congress are often rather vague. Federal agencies usually step in and create rules and regulations to implement the statute. It’s a long and dry process, but it can have very important consequences.
The text of TILA itself doesn’t offer much guidance on what lenders are supposed to do. The CFPB has much more specific rules, collectively known as Regulation Z, or “Reg Z.”
Reg Z establishes specific requirements for many kinds of loans and credit arrangements, including home mortgages, refinances, reverse mortgages, home equity loans, and home equity lines of credit (HELOCs). Requirements for lenders include:
Written disclosure of interest rates, escrow amounts, fees, and other charges before and at closing
Monthly billing statements that show the remaining principal on the loan, the amount of interest paid, and other information
Advance notice to borrowers about a change in the interest rate on adjustable-rate mortgages (ARMs)
Timely and fair handling of billing disputes by borrowers
Prohibition on practices that create conflicts of interest between lenders and brokers, or that are unfair to borrowers
Reg Z addresses several aspects of the relationship between borrowers and lenders. As mentioned above, it requires lenders to provide information to borrowers and to deal fairly and promptly with disputes over bills and billing practices.
The regulation also addresses the relationship between mortgage lenders and mortgage brokers. Borrowers usually don’t see this part of the mortgage lending process, but Reg Z provides an important safeguard for their interests.
The list above mentions conflicts of interest between lenders and brokers. A broker receives a fee or commission from a lender for bringing them a borrower. Reg Z prohibits lenders and brokers from steering borrowers into loans that won’t be in their best interests but will mean a larger commission for the broker.
What do mortgage lenders have to disclose to borrowers?
Read our guide on how to understand each page and section within a closing disclosure.
One of the most important provisions of TILA is the requirement that mortgage lenders disclose information after a borrower applies for a loan, and again shortly before closing. The CFPB requires lenders to use specific forms for these disclosures:
The information provided by the different forms is mostly the same, and may include the following:
The total amount of the loan, meaning the amount that the lender will provide at closing
The annual percentage rate (APR) that the borrower will pay
The circumstances in which the APR on an ARM could change
The total finance charge, which is typically expressed as the total amount of interest that the borrower will pay over the 15- or 30-year life of the loan
The total cost of the loan, meaning the total amount that the borrower will pay over the life of the loan, including repayment of the principal and interest payments. For a $450,000, 30-year mortgage with a fixed APR of 4.5%, the total cost after 30 years could be more than $820,000.
The estimated cost of property taxes and homeowner’s insurance
Special or unusual features of the loan, such as penalties for early payment
What if the right to recession on a mortgage?
With certain types of loans, TILA gives borrowers a three-day right of rescission. During that three-day period, they can change their mind about the loan and scrap the entire deal. The money from the loan remains in escrow during this period. If the borrower decides to exercise their right of rescission, the escrow agent returns all the money.
The right of rescission does not apply to mortgages used to buy a home. It does apply to the following types of mortgages:
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