The Truth in Lending Act (“TILA”) is a United States federal law that was enacted in 1968 to promote an informed consumer by requiring disclosures about the terms and costs associated with using borrowed money. The Act was meant to safeguard consumers that utilize credit by requiring a full disclosure of the terms and conditions present in credit card transactions or offers of credit.
The act also created the National Commission on Consumer Finance to study consumer credit transactions and make further recommendations on the need for further regulations on the creditor market and consumer finance industry.
One of the most well known regulations by the Act is the introduction of the annual percentage rate of charge (“APR”) calculation that was mandated by the Act for all consumer lenders. The introduction of a mandated disclosure of APR was meant to stop certain misleading interest calculations that were being used, mainly on auto loans.
It is important to note that there are certain exceptions to TILA where the requirements of the Act do not apply. For example, TILA requirements are not applicable on the following types of credits:
- Credit that is given primarily for agricultural, business, or other commercial purposes;
- Credit that is given to an entity, such as a government agency; or
- Credit that is given in excess of an annually adjusted threshold, that is not secured by a piece of real estate or personal property, which is used or expected to be used as a homestead.
Further, it is important to note that the governmental agency with the rulemaking authority granted by TILA transferred from the Federal Reserve Board (“FRB”) to the Consumer Financial Protection Bureau (“CFPB”) in July 2010 as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act. It is important to understand this change, as the laws regarding what must be disclosed are now located in a different part of the Code of Federal Regulations (“CFR”).
The Dodd–Frank Wall Street Reform and Consumer Protection Act is a federal law that was enacted in July 2010 that further overhauled the financial regulation market. The law was passed as a result of the recession from years prior, and made sweeping changes that overhauled all of the financial regulatory agencies, such as by creating the CFPB.
What Is The Truth In Lending Disclosure Statement?
As mentioned above, the 1968 Truth in Lending Act mandates that certain disclosures and terms and costs associated with extensions of credit or loans be made by lenders to consumers seeking the loan or credit line. One of the requirements of the Act is that a truth in lending disclosure statement be provided to the consumer. In short, the truth in lending disclosure statement is a statement issued to consumers that provides all the information about the cost of the loan or credit.
Some of the key disclosures that are present in the truth in lending disclosure include:
- Annual Percentage Rate: As noted above, one of the requirements of TILA is that the APR be disclosed. The APR is the cost of your credit shown as a percentage. The APR is the one the easiest ways to see how expensive a loan will be over time. This is because if the APR is high, then you will be paying a higher interest rate on the loan over the course of a full year. It is important to note that APR accumulates daily, not yearly. Further, there are typically other fees associated with the loan that will need to be factored in to get a true APR;
- Finance Charge: The finance charge disclosure is the dollar amount of most of the charges plus all the interest that is to be paid over the life of loan if the loan amounts are paid on time. This disclosure assumes the loan will be paid on a timely and perfect schedule, so the actual amount paid over the life of the loan may be higher or lower depending on if the loan amount is paid off earlier or later;
- Amount Financed: This disclosure is the full dollar amount of the loan, called the principal, minus most of the charges that are being paid out of loan proceeds. The amount financed number is intended to show how much is actually received in cash and benefits from the loan. If you compare the amount financed to the principal of the loan, and if the principal is much higher than the amount financed, that means that you are paying or will pay high fees for the loan;
- Payment Schedule: The payment schedule shows when the payments are due on the loan, including the dollar amount due and the date in which it must be paid. The payment schedule also shows the date and amount of both the first and last payment if the loan is paid on schedule. This disclosure is important as it will also be used to determine if a payment is late;
- Total of Payments: The total of payments disclosure is the amount of money that will be paid at the end of the loan term if every payment is timely made on the loan;
- Credit Insurance: Credit insurance is optional and may include credit life or credit disability insurance. If credit insurance is purchased, separate papers will be filed and disclosed by the lender in the truth in lending disclosure statement. Lenders will often profit from the sale of credit insurance, so they will typically try to include it in the loan package;
- Late Charge: The late charge disclosure goes hand in hand with the payment schedule disclosure. The late charge disclosure tells you how many days after the due date a payment will be considered to be late, as well as how much money will be paid in penalties; and
- Prepayment Charge: The prepayment charge disclosure informs the consumer whether or not a penalty will have to be paid if the loan is paid off before it is due. Prepayment penalties can often be very expensive. Therefore, the prepayment charge disclosure is a very important piece of information to understand if you plan to pay off the loan early, or if you plan on refinancing if interest rates decrease in the future.
What Else Should I Know About the Truth in Lending Disclosure Statement?
Once again, the truth in lending disclosure statement is required to be provided to lenders. Therefore, if the lender does not provide a truth in lending disclosure statement when you first apply for a loan, you should demand that one be provided. As can be seen above, the truth in lending disclosure statement will help you to understand the terms and costs of the loan.
Borrowers will likely receive two truth in lending disclosure statements, an initial disclosure statement when applying for the loan, and a final disclosure statement before the mortgage documents or final documents are signed. The reason that a borrower may receive two disclosure statements is if any of the terms or costs associated with the loan change over time.
It is important to compare the initial and final lending disclosure statements in order to see if any terms or costs have changed that you do not agree with. If you are not in agreement with the terms and costs of the final disclosure statement, then do not sign the final documents for the loan or credit to be issued.
Do I Need an Attorney for Help With Truth in Lending Disclosure Statements?
As can be seen, understanding the full terms and costs associated with a loan or line of credit is often confusing. Although a truth in lending disclosure statement is helpful in understanding the terms and costs, the disclosure statement is no substitute for an expert’s advice.
Therefore, if you have any questions regarding a loan, especially a mortgage loan, you should consult with an experienced mortgage attorney. An attorney will help you fully understand the terms and costs of a loan, and ensure that you are comfortable with your purchase.