Many things have changed in the mortgage industry, but one thing that remains the same since 1968 is the Truth in Lending Act. Otherwise known as TILA, this federal law helps make sure consumers receive fair treatment when obtaining a loan. It ensures that all consumers understand the terms and how to shop around for the right loan for themselves.
All mortgage lenders must provide TILA documents within three business days of loan application. The information on the documents helps consumers shop around for the loan that works best for them. The documents detail the loan amount, interest rate, APR, finance charges, and other related fees. The documents also show the total amount of the loan after repayment. This gives consumers a better idea of which loan is right for them. Sometimes it’s more than an interest rate you must focus on – you need all of the details to see the true cost of the loan.
What the Truth in Lending Act Does Not Do
Just to be clear, the Truth in Lending Act does not govern how much a lender charges for a loan or the interest rate for that matter. It’s meant to give consumers transparency regarding the loans they get. It also does not govern who gets approved for the loan and who does not. It’s just meant as a level of protection for you, the consumer, to make sure you a fully informed.
Who Oversees the TILA?
Originally, the Federal Reserve Board was responsible for overseeing TILA. Today, however, the responsibility has transferred to the Consumer Financial Protection Bureau. The CFPB is run by the Federal Reserve Board, however, so the same premises apply. Although TILA has changed slightly over the years, the same idea of protecting the consumer has remained unchanged.
What Documents Will You Receive?
In order to understand the Truth in Lending Act, you need to understand the documents you will receive. In prior years, you would receive a Good Faith Estimate and Truth in Lending document. Both documents were rather confusing for consumers, though. Today, you’ll receive a Loan Estimate. This single document puts all of the information on the Good Faith Estimate and Truth in Lending document together in one document that is easier to understand.
The document lets you know the loan amount, fees associated with the loan, and the APR. It also shows the interest rate the lender quoted you and the total cost of the loan over its entire life. You’ll receive this document within three business days of applying for a loan. It’s not until you review and sign this document that the lender can move forward with your loan.
You’ll also receive a similar document at the closing, called the Closing Disclosure. This document has the same information as the Loan Estimate; however, the figures are then set in stone. These are the figures that will appear on all of your loan documents and what you will sign and make yours once you close on the loan. The figures should be very similar to those on the Loan Estimate, but as the name suggests, it was an estimate at the start of the loan. A few fees may have changed slightly.
The main goal of the Loan Estimate and Truth in Lending Act is to help you compare loans. You don’t have to accept the first offer a lender provides. You have the right to shop around and compare the Loan Estimates side-by-side.
When comparing loans, you shouldn’t focus strictly on the interest rate. Sure, you want the lowest rate possible, but sometimes the loan can cost more if there are other fees, such as origination or discount points. Look at the big picture. Focus on the APR and the total cost of loan repayment. This will let you know which loan will leave you with the best outcome.
You’ll want to consider your plans for the future too. If you know you’ll move within 5 years, paying points to lower the interest rate may not make sense. Pay the higher interest for the temporary period. You’ll likely pay less overall for the loan this way. Usually if you are going to stay for at least 7 years, it makes sense to pay money upfront for a lower rate. If not, paying a little more for the short-term will be less costly for you.
The Truth in Lending Act today provides a much simpler way to determine which loan is right for you. It gives you clear direction on what the loan will cost you in the end. As always, ask your lender any questions you have. This is a loan you’ll have for 15-30 years – it pays to know what you are getting!