What is the Truth in Lending Act?
Trust is a foundational element to virtually every relationship, whether it's personal or business-related. Trust is what enables people to make decisions and provides a sense of security that when someone says they're going to do something, they'll follow through.
At the same time, though, trust isn't something that's easily given; it's earned. So if you're looking to buy or refinance a home, seeking out a lender that can provide you with the financing you need, how can you know they'll live up to their word?
The Truth in Lending Act is one such reason. Enacted under the Consumer Credit Protection Act over 50 years ago, the TILA is likely something you've heard of but might not know much about. However, this particular law is worth understanding because it can help provide a better perspective on the homebuying process and assurance that the lender you select has your best interests in mind.
Here's more information about a fairly little known statute that can give you added guidance and security on your mortgage shopping journey:
What is it?
Signed into law on May 29, 1968, by President Lyndon B. Johnson and going into effect approximately a year later, the TILA is a sweeping regulation that requires both credit card providers and lenders, in general, to provide certain protections for you as a consumer. For example, you've probably heard of why it's important to "read the fine print" before selecting a credit card, because it often contains language detailing various fees and costs that come with signing up. The TILA requires lenders to specify exactly what those terms and rates include - in a language you can clearly understand - so you can make a more informed decision.
As noted by Credit Karma, full disclosure hasn't always been a part of the financial product selection process for consumers. It is, of course, in lenders' best interest to be as fully transparent as possible with their customers about the particulars of a product or service, but it's not something that they were necessarily required to do. The TILA, in effect, mandated transparency so consumers have more authority over how they spend their money.
How has the TILA changed over the years?
Any law that's been in place for more than half a century is bound to go through some alterations; the TILA is no different. Its first amendment, for example, occurred shortly after its effective date, when Congress decided to prohibit unsolicited credit cards, according to the Consumer Financial Protection Bureau. Other significant updates followed suit, including the Fair Credit Billing Act of 1974, the Consumer Leasing Act of 1976 and the Home Equity Loan Consumer Protection Act of 1988.
One of the more recent updates to the TILA occurred during the Great Recession. The then-new stipulation to an existing statute, dubbed Regulation Z, barred lenders from "unfair, abusive or deceptive lending and serving practices," according to the CFPB.
Installed in 2008, the update required lenders to cease and desist in supporting or producing any advertisements that could be construed as misleading. It also required that they provide disclosures regarding interest rates, for example, several days prior to customers making a decision on whether to take out a loan or other financial product.
In short, the TILA has been amended numerous times over the years, and will likely continue to be - to ensure you're always the one who is in control of your financial affairs.
How you can use the law to your advantage when buying a home
You know the home shopping process entails a lot of paperwork, but much of these documents are for your benefit and stem from the TILA.
For example, say you're interested in a home equity line of credit, or HELOC. Even though you may have already signed on the dotted line for a deal, you have three days from when you did so to back out if you choose. The right of rescission enables you to walk away from certain loan offers without worrying about losing money due to penalties.
Additionally, the aforementioned Regulation Z required that other aspects of a mortgage deal be put in writing. This includes need-to-know aspects like the amount of money that is being borrowed, the agreed-upon interest rate, charges and life of the loan.
It's worth noting that the principles and particulars governing the TILA don't apply to all mortgages. In fact, they more often relate to home equity loans and HELOCs. Other home loans fall under the auspices of the Home Mortgage Disclosure Act.
The TILA is not there to confuse you, but to work for you. If you have additional questions about it, please don't hesitate to ask us here at Residential Mortgage Services - a lender you can trust.