What is the Truth in Lending Act?
The Truth In Lending Act (“TILA”) is a federal statute designed to require creditors to disclose their terms and costs to allow consumers an opportunity to make a more informed decision regarding their credit.
TILA does not apply to loans that a mortgagor takes out to purchase their principal residence. However, it does cover any other loan sought that involves the principal residence (i.e. refinancing). Such loans are subject to TILA’s disclosure requirements.
Under TILA, consumers can cancel certain transaction (including liens on a principal dwelling). Failure to comply with the rules of TILA would render the loan unsecured, thus devaluing the mortgage to the lender because it is not tied to any collateral (i.e. your home).
Therefore, the initial loan documents are pored over to ensure that all TILA requirements were met and in compliance with federal and state consumer protection laws.
Among the required disclosures:
- For credit transactions with a fixed rate of interest:
- the APR and
- amount of regular monthly payment;
- For any other credit transaction,
- the APR of the loan,
- amount of regular monthly payment,
- a statement that the interest rate and monthly payment may escalate,
- amount of the maximum monthly payment – based on the maximum interest rate
TILA Violations & The ThreeDay Right of Rescission
If your lender failed to make these disclosures, you may have a claim for actual damages, statutory damages, and attorney’s fees.
The type of loan determines the proper set of disclosure requirements. For instance, a closed-end loan (one for a fixed term of years) has different requirements from an open-ended loan (one for no fixed term).
TILA also has a very powerful tool, where the borrower has a three day right of rescission. Rescission allows the borrower to cancel the contract without any penalty. If the required disclosures are not made, this three day right of rescission can be extended to three years. Under TILA, the borrower (and spouse) must be given two copies each of their right to rescind their mortgage agreement and at least one of these must be signed.
Success in seeking rescission under TILA would also require the lender to return to the borrower all fees and mortgage payments made under the rescinded mortgage contract. These charges would then be set off against the principal amount of money issued to the borrower. The borrower would then tender an offer to the lender to pay off the remaining balance, for which the lender would have twenty days to accept or reject.
Should the lender fail to respond within twenty days, they may waive any right to collecting off the principal amount.
