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Truth
in Lending Act
"Regulation Z"
The Truth in Lending Act (TILA),
Title I of the Consumer Credit Protection Act, is aimed at promoting the
informed use of consumer credit by requiring disclosures about its terms
and costs. In general, this regulation applies to each individual or
business that offers or extends credit when the credit is offered or
extended to consumers; the credit is subject to a finance charge or is
payable by a written agreement in more than four installments; the credit
is primarily for personal, family or household purposes; and the loan
balance equals or exceeds $25,000.00 or is secured by an interest in real
property or a dwelling.
TILA is intended to enable
the customer to compare the cost of a cash versus credit transaction and
the difference in the cost of credit among different lenders. The
regulation also requires a maximum interest rate to be stated in variable
rate contracts secured by the borrower's dwelling, imposes limitations on
home equity plans that are subject to the requirements of certain
sections of the Act and requires a maximum interest that may apply during
the term of a mortgage loan. TILA also establishes disclosure standards
for advertisements that refer to certain credit terms.
In addition to financial
disclosure, TILA provides consumers with substantive rights in connection
with certain types of credit transactions to which it relates, including
a right of rescission in certain real estate lending transactions,
regulation of certain credit card practices and a means for fair and
timely resolution of credit billing disputes. This discussion will be
limited to those provisions of TILA that relate specifically to the
mortgage lending process, including:
- Early and Final
Regulation Z Disclosure Requirements
- Disclosure
Requirements for ARM Loans
- Right of Rescission
- Advertising
Disclosure Requirements
Early and Final
Regulation Z Disclosure Requirements:
TILA requires lenders to make
certain disclosures on loans subject to the Real Estate Settlement
Procedures Act (RESPA) within three business days after their receipt of
a written application. This early disclosure statement is partially based
on the initial information provided by the consumer. A final disclosure
statement is provided at the time of loan closing. The disclosure is
required to be in a specific format and include the following
information:
- Name and address of
creditor
- Amount financed
- Itemization of amount
financed (optional, if Good Faith Estimate is provided)
- Finance charge
- Annual percentage rate
(APR)
- Variable rate
information
- Payment schedule
- Total of payments
- Demand feature
- Total sales price
- Prepayment policy
- Late payment policy
- Security interest
- Insurance requirements
- Certain security
interest charges
- Contract reference
- Assumption policy
- Required deposit
information
Disclosure Requirements
for ARM Loans:
If the annual percentage rate
on a loan secured by the consumer's principal dwelling may increase after
consummation and the term of the loan exceeds one year, TILA requires
additional adjustable rate mortgage disclosures to be provided,
including:
- The booklet titled
Consumer Handbook on Adjustable Rate Mortgages, published by the Board
and the Federal Home Loan Bank Board or a suitable substitute.
- A loan program
disclosure for each variable-rate program in which the consumer
expresses an interest. The loan program disclosure shall contain the
necessary information as prescribed by Regulation Z.
TILA requires servicers to
provide subsequent disclosure to consumers on variable rate transactions
in each month an interest rate adjustment takes place.
Right of Rescission:
In a credit transaction in
which a security interest is or will be retained or acquired in a
consumer's principal dwelling, each consumer whose ownership is or will
be subject to the security interest has the right to rescind the
transaction. Lenders are required to deliver two copies of the notice of
the right to rescind and one copy of the disclosure statement to each
consumer entitled to rescind. The notice must be on a separate document
that identifies the rescission period on the transaction and must clearly
and conspicuously disclose the retention or acquisition of a security
interest in the consumer's principal dwelling; the consumer's right to
rescind the transaction; and how the consumer may exercise the right to
rescind with a form for that purpose, designating the address of the
lender's place of business.
In order to exercise the
right to rescind, the consumer must notify the creditor of the rescission
by mail, telegram or other means of communication. Notice is considered
given when mailed, filed for telegraphic transmission or sent by other
means, when delivered to the lender's designated place of business. The
consumer may exercise the right to rescind until midnight of the third
business day following consummation of the transaction; delivery of the
notice of right to rescind; or delivery of all material disclosures,
whichever occurs last. When more than one consumer in a transaction has
the right to rescind, the exercise of the right by one consumer shall be
effective for all consumers.
When a consumer rescinds a
transaction, the security interest giving rise to the right of rescission
becomes void and the consumer will no longer be liable for any amount,
including any finance charge. Within 20 calendar days after receipt of a
notice of rescission, the lender is required to return any money or
property that was given to anyone in connection with the transaction and
must take any action necessary to reflect the termination of the security
interest. If the lender has delivered any money or property, the consumer
may retain possession until the lender has complied with the above.
The consumer may modify or
waive the right to rescind if the consumer determines that the extension
of credit is needed to meet a bona fide personal financial emergency. To
modify or waive the right, the consumer must give the lender a dated
written statement that describes the emergency, specifically modifies or
waives the right to rescind and bears the signature of all of the
consumers entitled to rescind. Printed forms for this purpose are
prohibited.
Advertising Disclosure
Requirements:
If
a lender advertises directly to a consumer, TILA requires the
advertisement to disclose the credit terms and rate in a certain manner.
If an advertisement for credit states specific credit terms, it may state
only those terms that actually are or will be arranged or offered by the
lender. If an advertisement states a rate of finance charge, it may state
the rate as an "annual percentage rate" (APR) using that term.
If the annual percentage rate may be increased after consummation the
advertisement must state that fact. The advertisement may not state any
other rate, except that a simple annual rate or periodic rate that is
applied to an unpaid balance may be stated in conjunction with, but not
more conspicuously than, the annual percentage rate.
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