TILA

The Truth in Lending Act (TILA) is a federal law that requires lenders to disclose loan terms and costs in a clear, standardized format. TILA ensures borrowers can compare loan offers and understand the true cost of credit before committing. TILA is implemented through Regulation Z, which specifies disclosure requirements and borrower protections.

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Who TILA Protects

TILA applies to most consumer credit transactions, including:

• Mortgage loans (purchase, refinance, home equity)
• Credit cards
• Auto loans
• Personal loans
• Student loans

TILA does not apply to:

• Business or commercial loans
• Loans over $58,300 not secured by real estate (adjusted annually)
• Agricultural loans

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Key Disclosures

TILA requires standardized disclosure of loan terms so borrowers can compare offers across lenders.

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Right to Rescind

TILA provides a right to cancel certain mortgage transactions within 3 business days of closing. Transactions covered:

• Home equity loans
• Home equity lines of credit (HELOCs)
• Refinances with a new lender
• Most loans secured by a primary residence (except purchase loans)

Transactions NOT covered:

• Purchase money mortgages (loans to buy a home)
• Refinances with the same lender where no new money is borrowed

How rescission works:

1. Borrower receives two copies of rescission notice at closing
2. 3 business day waiting period begins (Sundays and federal holidays excluded)
3. If borrower exercises right, lender must cancel the transaction
4. Any fees paid must be refunded within 20 days
5. Lender must release any security interest in the property

Extended rescission right: If proper rescission notices weren’t provided, the right extends up to 3 years from closing.

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Adjustable-Rate Mortgage (ARM) Disclosures

TILA requires additional disclosures for adjustable-rate mortgages to ensure borrowers understand how payments can change. Required ARM disclosures:

• Index used to determine rate changes
• Margin added to the index
• How often the rate can adjust
• Rate caps (per adjustment and lifetime)
• Maximum possible payment amount
• Historical example showing how payments would have changed

Lenders must provide the Consumer Handbook on Adjustable-Rate Mortgages (CHARM booklet) for all ARM applications.

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High-Cost Mortgage Protections

TILA provides additional protections for “high-cost” mortgages (loans exceeding APR or fee thresholds). A loan is high-cost if:

• APR exceeds the Average Prime Offer Rate by more than 6.5% (first liens) or 8.5% (subordinate liens)
• Points and fees exceed 5% of loan amount
• Prepayment penalties exceed certain limits

High-cost loan protections:

• Pre-loan counseling required from HUD-approved counselor
• Balloon payments prohibited
• Negative amortization prohibited
• Default interest rate increases prohibited
• Most prepayment penalties prohibited
• Modification fees prohibited

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Prohibited Practices

TILA prohibits certain lending practices: Steering Loan originators cannot steer borrowers toward loans with higher costs or unfavorable terms when they qualify for better options, even if the originator would earn more. Dual compensation Loan originators cannot receive compensation from both the borrower and the lender on the same transaction. Compensation based on terms Originator compensation cannot vary based on loan terms (other than loan amount). This prevents incentives to push higher-rate loans.

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Mortgage Servicing Rules

TILA includes rules for how mortgage servicers must handle loans after closing: Periodic statements Servicers must provide monthly statements showing:

• Payment amount due
• Breakdown of principal, interest, and escrow
• Transaction activity
• Contact information for assistance

Prompt crediting Payments received by the due date must be credited that day. Payoff statements Servicers must provide accurate payoff amounts within 7 business days of request. Error resolution Servicers must acknowledge written error notices within 5 business days and resolve within 30 days.

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Enforcement and Penalties

Statutory damages:

• Individual actions: $400 to$4,000
• Class actions: up to $1 million or 1% of creditor’s net worth

Actual damages: Borrowers can recover actual financial harm caused by TILA violations. Enhanced damages for high-cost mortgages:

• All finance charges and fees paid
• Attorney fees and costs

Extended statute of limitations:

• 1 year for damages
• 3 years for rescission

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Filing Complaints

Consumer Financial Protection Bureau (CFPB) Primary enforcement agency for TILA. Website: consumerfinance.gov/complaint Phone: 1-855-411-2372 State regulators Many states have additional lending regulations and enforcement agencies. Private legal action Borrowers can sue lenders directly for TILA violations.

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