What is Truth In Lending?

Question: What is Truth In Lending?

Answer: In our office it is also called the "Oh, my goodness statement!"

Regulation Z or The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring Clear Disclosure of key terms of the lending arrangement and all costs.  It was actually implemented for auto purchases and later modified for home mortgages.

Clear Disclosure is defined by the following:  Is it assumable? Does it have a prepayment penalty?  How much interest is paid in a dollar amount over the course of the loan?

And the clearest of all is the APR or annual percentage rate. That is, if you consider mud transparent.  The APR expresses the mortgage rate as an annual rate, rather than just a monthly rate.  Think of it as your note rate with a bunch of stuff that is piled on to it. The additions could include the following: Monthly mortgage insurance (MIP) for FHA or conventional loans (PMI), upfront mortgage insurance for FHA or USDA and the upfront VA funding fee.

And that is before the closing costs:  origination fee, discount points (if applicable), title escrow fees, title courier-e-mail fees, underwriting, document preparation, processing fees, interest from the date closing until the end of the month and other costs determined by the Fed.

For example, on a thirty year FHA mortgage at a 5.00 percent interest rate, after adding the upfront mortgage insurance and the monthly mortgage insurance and an origination fee, and title fees, it could bump the APR over the 5.750 percent range.  And no, your lender is not trying to stick it to you.

July 30, 2009 was the first of the recent changes to the TIL.  Without getting into all the gory details behind these changes it now means if the TIL is incorrect (higher or lower) by more than .125, the transaction stops until the client is re-disclosed.  Some lenders may feel like they have been tasered by the Fed police.

On January 31, 2011 the TIL was updated again.  The new form is two pages, and now the note rate is disclosed on the front page (finally) along with the APR.  But as with all disclosures, the customer needs to read them and the documents needs to be explained.  And that is the truth.

FYI:  Seller paid or lender paid closing costs do not affect the TIL.  If the seller or lender is paying some or all of the closing costs, it is ignored in the APR calculation.