Truth in Lending Act (TILA) Overview

Truth in Lending Act (TILA) - Key Provisions

• Enactment and Purpose: Enacted May 29, 1968, effective July 1, 1969; Amended & revised many times thereafter. Primarily regulates mortgage lenders, requiring standardized disclosure of loan terms for consumer understanding and comparison.

• Uniform Disclosure Requirements: Lenders must use standardized terms and calculation methods to disclose interest and loan costs. Prevents the use of confusing terminology and formats.

• Consumer Protections: Covers accurate & fair credit billing, allows borrowers to rescind certain home-secured transactions, limits home equity lines of credit & certain mortgage types and sets minimum standards for dwelling- secured loans. Defines & prohibits unfair/deceptive mortgage practices.

TILA - Transaction Coverage & Exemptions

• Covered Transactions: Loans to consumers, by lenders in the business of lending, that require charges or are payable in more than four installments, primarily for personal, family, or household purposes. Includes loans secured by owner-occupied residences.

• Exempt Transactions: Loans primarily for business, commercial, or agricultural purpose; non-owner-occupied residential properties (exemption based on loan purpose, not property use); loans to entities other than natural persons (e.g., corporations, LLCs).

TILA - Disclosure Requirements & Timing

• Standardized Disclosures: Crucially, TILA mandates standardized APR (Annual Percentage Rate) disclosure- a measure of the credit cost expressed as a yearly rate. The APR considers all relevant loan factors, providing a uniform benchmark for comparison. APR disclosures must be accurate or re-disclosed if inaccurate. Tolerance for accuracy in APR calculation differs based on fixed vs. adjustable rate mortgages.

• Finance Charge Definition: Covers all fees directly or indirectly charged to the consumer as part of obtaining the loan. Exceptions exclude certain cash transaction-equivalent charges. "Prepaid finance charge" covers separately paid fees before/at closing.

• Seller Contributions: Seller contributions towards borrower costs (e.g., seller's points) are excluded from the finance charge, even if passed on to the buyer through a higher sales price.

• Adjustable Rate Mortgage (ARM) Specifics: Requires a disclosure booklet on ARMs, and a detailed loan program disclosure for each applicable program.

• Rescission Rights: Borrowers have a three-business-day right to rescind (cancel) certain transactions involving loans on their primary dwelling, providing time to reconsider. Exceptions exist for financing initial construction, non-new funds added during refinance/consolidation situations, state agency-originated loans, and certain advance-renewal transactions. Notice rights and procedures for all those in title to the property must be followed for rescission.

• Transaction Rescission Timing: Rescission notice to the creditor must be in writing by midnight of the third business day, following the latest of: consummation, disclosure delivery, or rescission notice receipt. A "business day" is any day other than Sundays and legal public holidays.

TILA - Advertising Regulations

• Truthful Advertising: Advertisements must reflect actual loan terms offered, and required disclosures must be presented clearly and conspicuously. If APR may increase after loan consummation, that fact must also be disclosed. If a dwelling is security, then the advertisement can only state a simple annual rate, in conjunction with an APR, but not more conspicuously.

• Triggering Terms: If advertising mentions terms like down payment amounts, payment numbers or amounts or interest rates, additional required disclosures must clearly and conspicuously be included, encompassing full loan terms (including balloon payments), APR, adjustable loan terms and conditions, and other relevant disclosures.

• Dissemination Options: Multi-page ads, websites or other electronic formats, radio or television advertisements should follow clear dissemination guidelines for sufficient disclosure.

• Deceptive Practices Prohibition: TILA prohibits certain deceptive or misleading acts/practices in advertisements for mortgage loans, including misrepresentation of fixed rate terms, inappropriate comparisons of payments and rates with alternative options under advertised terms, use of government names falsely misleadingly, false claims of debt elimination or other misleading claims, deceptive uses of names of current lenders, misleading advertising that uses foreign languages for terms/disclosures, claims that are not backed by the specific products.

Home Ownership and Equity Protection Act (HOEPA) - Section 32

• Amendments & Enforcement: Dodd-Frank Act amendments expanding HOEPA coverage and protections; primarily enforced by the CFPB.

• HOEPA Loan Definitions: A loan is a HOEPA loan if the APR exceeds the APOR by specified amounts, or the points and fees exceed 5% of the loan (or 8% and $1,000 maximum dollar adjusted for inflation for loans under $20,000). Additional criteria includes circumstances surrounding prepayment, fees, or penalties.

• HOEPA Loan Restrictions: Prohibiting balloon payments (except in certain circumstances), negative amortization, prepayment penalties, financing points/fees (other than bona fide third-party charges), limited late fees, pay-off statement fees, and modification or deferral fees and other compensation limitations. Lenders must determine consumer ability to repay high-cost loans and verify income and assets. Restrictions against lender-recommedations and encouragement of loan defaults or refinancing as a high-cost product.

• HOEPA Loan Loan Counseling Requirements: Loans to first-time homebuyers must enforce homeownership counseling before loan approval, with required disclosure on Counseling options available

• Pre-Closing Disclosure: Additional disclosure requirement stating that the borrower is not obligated to enter into the transaction from the mere receipt of disclosures. The risk of home loss associated with the loan must be explicitly outlined.

Higher-Priced Mortgage Loan (HPML) - Section 35

• Definition: A "higher-priced mortgage loan" as defined by a range of conditions that depend on lien-type and loan amount.

• Requirements: HPMLs typically require more stringent requirements than other loan types regarding loan origination , appraisal requirements within 3 business days (with additional appraisal if property is being “flipped”), and income verification along with the prohibition of prepayment penalties (exceptions, two years; refinancing is exempt), fixed interest rates and payment amounts typically for at least four years, and prohibition of further lender compensation after default.

• Escrow Requirements: Escrow accounts for property taxes and hazard premiums are usually mandatory, with some exceptions, for most mortgages. This applies regardless of the LTV ratio. Loan-term exceptions exist for cooperative housing, construction transactions, bridge/temporary loans, and reverse mortgages.

• Additional Considerations: Mortgage lenders must provide copies of any appraisal to the borrower regardless of loan closure. There is a 30-day grace period for non-consummated loans.