Truth in Lending Act
The Truth in Lending Act is a federal law that requires lenders to disclose credit terms.
What is the Truth in Lending Act?
The Truth in Lending Act or TILA is Title I of the Consumer Credit Protect Act. Congress passed this act in 1968 to protect borrowers from lenders. It required lenders to specify certain information lenders must disclose to borrowers before approving a loan or credit application.
Regulation Z is synonymous for the Truth in Lending Act, although this Federal Reserve Board rule is only a part of the TILA. This rule dictated that lenders must provide written disclosures of important credit terms. These terms include the finance charges, the annual percentage rate, the amount financed, and the total payments of the loan. As a result, consumers could easily compare their different financing options among different lenders in a uniform way.
Additionally, Regulation Z standardized how lenders disclosed interest charges. For example, lenders are not allowed to quote a lower interest rate but stipulate in the fine print that the interest rate is expressed in per week terms.
Regulation Z also prohibits a conflict of interest between a creditor and a mortgage broker. This rule deters lenders and brokers from profiting by selling loans to consumers with adverse terms. In other words, creditors were not allowed to pay brokers or any other loan originations for certain mortgage terms or conditions. This transaction must solely be based on the amount of credit provided.
Truth in Lending Disclosures
Originally, you would receive an initial Truth in Lending disclosure when you first applied for a mortgage. Then, you would receive a final Truth in Lending disclosure before closing.
In October 2015, a new form called the Loan Estimate replaced the initial Truth in Lending Disclosure, and the Closing Disclosure replaced the final Truth in Lending disclosure.
Benefits of the TILA
Right of Rescission
For certain loans, such as a mortgage refinance loan, you had three days from when you signed the contract and received your Truth in Lending disclosures to exercise your right of rescission. This right allows to cancel a home equity loan or line of credit with a new lender or to cancel a refinance contract with a new lender. Within 20 days, the lender must return all upfront costs that you paid.
The Truth in Lending disclosures gives you a consistent document to compare different lenders. It outlines all your rates, terms and fees in a way that is easy to understand.
TILA limits the changes a lender can make on your loan or credit terms after the loan has been approved. For instance, creditors must mail or deliver written notices of changes within a designated time frame. Additionally, notices must be given 45 days in advance for changes to credit card accounts.
Unfortunately, older homeowners are especially vulnerable to home equity loan scams. TILA also protects them by limiting lenders from making unreasonable requests, such as terminating a loan early or expediting balance payments on home equity loans.