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What You Need to Know About The Truth in Lending Act

March 5th, 2014

What You Need to Know About The Truth in Lending Act

The purpose of this Act is to protect consumers in the interaction with creditors and lenders, The Truth in Lending Act (TILA), was enacted on May 29, 1968, as title I of the Consumer Credit Protection Act. TILA was implemented by Regulation Z July 1, 1969.

Several amendments to TILA and Regulation Z have been implemented since 1969, most recently the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This act granted rulemaking authority under TILA to the Consumer Financial Protection Bureau (CFPB). It also included a number of new amendments to TILA, and in 2013, the CFPB issued rules to implement them.

The most recent amendments became effective January 2014, including the additions of ability-to-repay requirements for mortgage loans, appraisal requirements for higher-priced mortgage loans, refined loan originator compensation rules, and loan origination qualification standards.

What Does This Act Do?

TILA is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare these terms more readily and knowledgeably. Before its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Now, all creditors must use the same credit terminology and expressions of rates.

The act imposes limitations on home equity lines of credit and certain closed-end mortgages; provides minimum standards for most dwelling-secured loans; and delineates and prohibits unfair or deceptive mortgage lending practices.

Ultimately, all of these rules protect you, as the homebuyer, as you choose a mortgage provider and compare loans..

TILA and Annual Percentage Rate (APR)

Many people confuse interest rate with APR. Having a knowledge of both of these rates is helpful and important when comparing loans. The interest rate of the loan is the percentage of interest you will be paying throughout the loan life. In contrast, the APR includes all loan costs and calculates them into the total cost of the loan as a percentage. Since an APR measures the total cost of credit, including costs such as transaction charges or premiums for credit guarantee insurance, it is not an “interest” rate, as that term is generally used.

Knowing both of these figures allows a borrower to compare the interests rates of different loans and the APR to determine if closing costs are higher for one loan compared to another.

Payment schedules are used to show when payments are due and how much each principal and interest payment is throughout the loan. Adjustments for adjustable-rate mortgages appear on the TILA as well as how the lender determines adjustments in rates.

TILA can help protect you from getting a loan that has hidden fees and costs. The act is designed to help you know exactly what you are getting as you obtain a loan. As the borrower, you are able to know what the terms of a loan are, and then compare multiple loans before making a commitment.

Source: CFPB Consumer Laws and Regulations, November 2013.

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