What is the Truth in Lending Act

The Truth In Lending Act (TILA) is a federal statute that requires creditors to disclose all of the essential terms of the mortgage. This helps ensure consumers are knowledgeable of their transaction and allows them an opportunity to make a more informed decision regarding their credit.

TILA’s Disclosure Requirements

TILA does not apply to loans that a mortgagor takes out to purchase their principal residence. However, it does cover any other loan sought that involves the principal residence (i.e. refinancing). Such loans are subject to TILA’s disclosure requirements.

Under TILA, consumers can cancel certain transaction (including liens on a principal dwelling). Failure to comply with the rules of TILA would render the loan unsecured, thus devaluing the mortgage to the lender because it is not tied to any collateral (i.e. your home).

Therefore, the initial loan documents are pored over to ensure that all TILA requirements were met and in compliance with federal and state consumer protection laws.

Among the required disclosures:

1. For credit transactions with a fixed rate of interest:
   • the APR and
   • amount of regular monthly payment;
2. For any other credit transaction,
   • the APR of the loan,
   • amount of regular monthly payment,
   • a statement that the interest rate and monthly payment may escalate,
   • amount of the maximum monthly payment – based on the maximum interest rate

Congress enacted this legislation to help ensure the rights and ability for consumers to readily compare various credit terms. These terms include but are not limited to things such as the finance charges expressed as an annual percentage rate (APR), and the total of all loan payments. Finance charges are defined under 15 USC 1605 as, the sum of all charges, payable directly or indirectly by the borrower such as interest rate, discount rates, and origination fees. Congress then requested that the Federal Reserve publish extensive interpretations and to fill the necessary gaps within the statute.

Every charge must be disclosed as either part of the “amount financed” which is equivalent to the amount provided on behalf of the borrower or as part of a “financed charge” representing the dollar cost to the borrower. The financed charge includes what was paid directly or indirectly by the lender. The APR is calculated by adding the interest rate and the financed charges, which provides the actual interest rate paid annually.

The type of loan determines the proper set of disclosure requirements. For instance, a closed-end loan (one for a fixed term of years) has different requirements from an open-ended loan (one for no fixed term).

TILA Violations

Most violations of TILA occur because of incorrect disclosure and understated finance charges. If your lender failed to make the proper disclosures, you may have a claim for actual damages, statutory damages, and attorney’s fees.

Under TILA, the lender must also give the borrower (and spouse) two copies each of their right to rescind their mortgage agreement and at least one of these must be signed. Failure to provide all borrowers with fully signed copies of disclosures or less than two signed copies of the 3-day notices of right of rescission can lead to TILA violations.

The Three Day Right of Rescission

TILA has a very powerful tool, where the borrower has a three day right of rescission. Rescission allows the borrower to cancel the contract without any penalty, and essentially reverses the transaction in its entirety. If the required disclosures are not made, this three day right of rescission can be extended to three years. Rescission also invalidates the loan securitization of the mortgage to the property.

Success in seeking rescission also requires the lender to return to the borrower all fees and mortgage payments made under the rescinded mortgage contract. These charges would then be set off against the principal amount of money issued to the borrower. The borrower would then tender an offer to the lender to pay off the remaining balance, for which the lender would have twenty days to accept or reject.

Should the lender fail to respond within twenty days, they may waive any right to collecting off the principal amount.