Truth in Lending Disclosure Explained
Truth in lending disclosure provides information on the terms of credit granted to consumers in writing before they take the loan. Federal laws that outline the requirements, the Truth in Lending Act (TILA), originally passed the U.S. Congress in 1968. Most states also have their own statutes governing the disclosure of information for loan products.
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Significance
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TILA provides the primary foundation for consumer protection regulations that deal with consumer loans and the costs to borrow money over a specific period. The original act has several amendments attached to it, including Regulation Z. Regulation Z deals with the majority of the rules. These laws ensure that consumers receive reliable, sufficient and timely details about money they plan to borrow.
Types
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Truth in lending disclosure applies to nearly all types of credit transactions, including home mortgages, automobile loans, and credit cards. TILA dictates what a lender can say in their advertisements and the fine details of their particular loans or services. Whether you receive an adjustable-rate loan, jumbo mortgage or vehicle loan, you must receive information about the loan.
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Features
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Generally, you can apply the following standard mortgage transaction terminology to other loan products. The lender must disclose details about the loan in a document called the Real Estate Settlement Statement. The statement contains an itemized list of the various costs and other financial details associated with the loan, such as annual percentage rate (APR), finance charge, amount charge and the total payments a borrower must make over time. The lender must state the information clearly on documents and in billing statements.
The APR indicates the cost of the credit stated as an annual rate, or the amount actually financed. Typically, costs such as discount points and prepaid finances charges drive up the cost of the transaction higher that the interest charged on the loan. When making comparisons between loan products, always compare APR to APR.
The finance charge consists of the cost of the credit extended to you, which is expressed in dollars. It represents the interest rate over the entire period of the loan. This rate includes "adjusted interest" and "mortgage insurance."
The amount financed refers to the loan amount, subtracting the prepaid finance charges. Prepaid finance charges include points (loan origination fees), adjusted interest and the initial mortgage insurance premium. The loan amount financed is lower than what you actually borrowed. If you applied for $60,000 and the amount of fees equals $4,000, then the amount financed would be $56,000.
The "total amount" represents the sum you will pay if you make the minimum payments over the loan period. This amount includes principal, interest and mortgage insurance premiums. Do not include real estate taxes and property insurance in this figure.
Time Frame
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Within three days of receiving a loan application, the lender must give you a truth in lending disclosure statement. If the APR changes after you receive the initial document, and when you take the loan, you must receive a new statement.
Advertising Disclosures
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Lenders must follow specific guidelines when advertising their products. For instance, an advertisement that states certain terms of credit must stick to the terms the consumer can actually obtain. If the APR may increase after the deal, the advertisement must include that information.
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References
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