The Truth in Lending Act protects mortgage borrowers. It ensures these borrowers receive fair treatment. It oversees the disclosures, advertisements, and notifications consumers receive. In short, it regulates how lenders run their business. It also helps borrowers compare loans, finding the best deal for their loan.
What is the Truth in Lending Act?
The Truth in Lending Act or TILA began in 1968. It’s a law that ensures the protection of consumers. It’s the reason lenders must disclose all fees and interest rates. The law doesn’t monitor what costs or rates lenders charge. It protects consumers by making sure lenders disclose all fees and rates at the right time.
TILA makes sure borrowers know all of their available options. Lenders can’t steer borrowers to one specific loan because it benefits the lender. Lenders must disclose all options and let borrowers decide for themselves. TILA ensures borrowers know the interest rate, closing costs, and APR. It also provides the 3-day Right of Rescission. This gives borrowers refinancing their loan a chance to change their mind about a loan 3 business days after closing.
The Loan Estimate
One of the largest benefits of TILA is the Loan Estimate requirement. Lenders must send you this document within 3 business days of applying for a loan. This document details all aspects of the loan. You’ll find:
- Loan amount
- Interest rate
- Monthly payment
- Estimated closing costs
- Breakdown of closing costs
- Cash needed to close
If you comparison shop, this document will help you choose the right loan. Choosing a loan based on interest rate alone may not work. Knowing the closing costs and APR can help you decide. This way you know the full cost of the loan, not just how your monthly payment is affected.
Protection From Rate Changes
Adjustable rate loans offer a low introductory rate. Many borrowers opt for this rate because it’s more affordable up front. What they may not realize is the full implication of the adjusted rate. If your rate can change, your lender must disclose this. TILA requires lenders to disclose an estimate of the first rate adjustment. They must also disclose the ‘worst case scenario’ for this adjustment. If there are more possible rate adjustments, the lender must disclose them as well.
Protection Against Penalties
TILA also regulates the penalties lenders may charge. If you make your mortgage payment late, TILA regulates when a lender can charge you. Your payment must be more than 15 days late before the lender can charge a late fee. If you prepay your interest, the lender must wait 30 days before charging a late fee. Lenders can’t charge more than 4% of the amount you owe. They also can’t add late fees onto other late fees.
The Truth in Lending Act protects you, the consumer. If lenders violate the act, they face penalties. TILA ensures you know the full extent of the loan you borrow. With full disclosure, you can determine if the loan is right for you.