What is Truth in Lending?
The Truth in Lending Act is a federal law requiring full disclosure of all terms associated with any credit transactions. This includes all costs. The law was first passed in 1968 and was intended to provide consumers with some protection against lenders, especially those acting in a predatory way. The Truth in Lending Act is also known as Regulation Z, which is where most of the requirements are spelled out. The main focus of the law deals with fees the lender may charge for extending a line of credit. This includes, but is not limited to, the annual percentage rate. Other fees are also required to be disclosed, all under the term “Finance Charges.” For ease of access, the Truth in Lending Act is broken down into several subsections generally broken down by loan type. Subpart A contains general rules. Subpart B outlines regulations for open-ended credit. Subpart C discusses close-ended credit. Subpart D is a miscellaneous section. Subpart E details special rules for certain home mortg
Mortgage lenders are required to give you a Truth in Lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required. For adjustable rate loans, the “total payments” figure is estimated as a “worst case” scenario. The figure represents the payments you would make if your loan adjusted upward to the maximum rate allowed by annual and lifetime caps and then stayed there for the duration of the loan. The TIL statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. If you have an adjustable rate loan, it may outline the limits on the adjustments (annual and lifetime caps) and give an example of what your next year’s payment might be, depending on interest rates.
Federal law requires lenders to provide specific disclosures to borrowers within three days of receiving a loan application. These disclosures are referred to as Truth In Lending or Regulation Z disclosures, and they are intended to provide the borrowers with a “good faith” estimate of the fees, APR, and program specifics of the credit they are applying for.
