Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) is a federal law enacted in 1968 that requires lenders to provide standardized disclosures of credit terms and costs to borrowers. For mortgage lending, TILA mandates disclosure of the annual percentage rate (APR), total finance charges, payment schedule, and total amount paid over the life of the loan.
What This Means
Purpose and Scope
TILA is implemented through Regulation Z, enforced by the CFPB. The law's primary purpose is to promote informed credit decision-making by ensuring borrowers can compare the true cost of credit across different lenders and loan products. TILA applies to most consumer credit transactions, including mortgage loans, home equity lines of credit, and refinances. It does not set maximum interest rates or fees; rather, it requires their transparent disclosure.
Key Disclosure Requirements
For mortgage transactions, TILA requires lenders to disclose:
- Annual Percentage Rate (APR): The cost of credit expressed as a yearly rate, incorporating the interest rate plus certain fees and charges. This allows borrowers to compare offers beyond the stated interest rate alone.
- Finance charge: The total dollar amount the borrower pays for credit over the loan's lifetime.
- Amount financed: The actual loan amount after prepaid finance charges are deducted.
- Total of payments: The cumulative sum of all payments the borrower will make over the loan term.
Under the TRID rule, these TILA disclosures are now integrated into the Loan Estimate and Closing Disclosure forms rather than delivered as standalone documents.
Right of Rescission
TILA provides a right of rescission for certain mortgage transactions, including refinances and home equity loans on a borrower's primary residence. This right allows the borrower to cancel the transaction without penalty. The right of rescission does not apply to purchase-money mortgages used to buy a home.