Truth In Lending Act (TILA): Defined And Explained

You want to know the terms and how much it’s going to cost you before moving forward with a loan or line of credit. The Truth in Lending Act (TILA) is meant to protect borrowers by making sure that lenders properly disclose any information related to loan charges and fees. We’ll go over TILA and its relationship to other consumer protection rules in lending.

What Is The Truth In Lending Act (TILA)?

Originally passed in 1968, TILA aims to protect consumers from lending practices that could be considered unethical or unfair. The primary way this is achieved is by requiring lenders to list fees and charges completely so a borrower fully understands what they’ll be charged. It covers several types of loans, including mortgages and credit cards.

TILA Violations

Many of the violations under TILA have to do with failure to disclose financing terms. These include things like the annual percentage rate (APR), total payments, financing charges and payment schedule. These have to be listed in fonts and sizes that are easily readable. Lenders are prohibited from doing anything misleading or hiding terms, among other things.

The lender or other creditor may also be in violation if there are penalty fees that exceed the limits under the act. It’s also required that creditors notify the client when a right of rescission applies. For example, on refinance transactions, borrowers are allowed to cancel the loan up to 3 business days after they close without consequences.

Regulation Z In The Truth In Lending Act

Regulation Z and the Truth in Lending Act are used interchangeably. In addition to these, the provisions may also be referred to as the Consumer Credit Protection Act. The law has been amended many times since its original introduction. Whatever it’s called, these cover the same territory. A lender who references Regulation Z is talking about TILA provisions.

There are several government agencies that regulate aspects of TILA, including the Federal Trade Commission and Consumer Financial Protection Bureau (CFPB). They enforce any penalties that apply to violations of the rule whether based on nondisclosure of information or any other provision.

What Is The Relationship Between TILA And RESPA?

The Real Estate Settlement Procedures Act (RESPA) covers the costs associated with closing a mortgage. They cover some of the same subjects in terms of loan costs, but RESPA is meant to more comprehensively cover some things that apply to real estate transactions and not others. RESPA covers the following:

• Cost disclosures for real estate settlement: In addition to loan costs, this could be costs for appraisal, survey, escrow account set up and notary or real estate attorney to be present at closing, among other closing costs.
• Kickbacks are prohibited: Service providers in a mortgage transaction including real estate agents and lenders among others aren’t allowed to accept payments or other consideration for recommending each other’s services.
• Limitations on escrow accounts: Escrow accounts are generally good because they enable you to pay for things like taxes and homeowners insurance in monthly increments rather than having one big bill at the end of the year. The regulation covers how much lenders and servicers can ask for in terms of cushion for unexpected payouts from the account as well as requiring regular statements, among other rules.

For mortgages, the CFPB has utilized TILA-RESPA Integrated Disclosures (TRID), also referred to as Know Before You Owe disclosures, that put all the information you need to know in one form. In order to shop around, you’re given a Loan Estimate within 3 business days of your completed application and a finalized Closing Disclosure 3 business days before close.

What Credit Types Does The Truth In Lending Act Cover?

The Truth in Lending Act covers several, but not all, types of financing, including the following:

• Mortgages
• Credit cards
• Auto loans

It doesn’t cover the following transactions:

• Government-provided student loans
• Commercial loans (those used for a business purpose)
• Loans over $50,000 not secured by a home or for private student loans
• Public utility agreements

TILA Provisions

TILA is meant to protect consumers from predatory lending and credit practices. The main way this is done is just by making sure the consumer has clear, easily readable documentation regarding loan terms and fees. Credit card providers are also required to provide details about how interest rates work, penalties and other finance charges.

There are also various provisions that are specific to certain industries. For example, mortgage brokers can’t steer clients to lenders who will pay higher commission if doing so wouldn’t be in the client’s best interest.

The requirements also vary quite a bit based on whether it’s a closed-ended loan like a primary mortgage or something open-ended like a credit card, because with an open-ended credit line, you’re not financing a specific amount. The CFPB website can give you more information on what’s required.

The Bottom Line: The Truth In Lending Act Provides Protection

TILA provides consumer protection, mostly by making sure that lenders disclose in a uniform manner the charges borrowers can expect to pay so that there are no hidden fees and people are able to shop around with confidence. Beyond the disclosure requirements, there are limits around the types of fees that may be charged.

Now that you understand the types of information lenders have to give you during the process, you should feel more prepared and empowered if you’re looking to buy or refinance a home. If you’re ready, you can start the mortgage process.