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Truth in Lending Act

DEFINITION

Federal act that requires lenders and brokers to provide loan disclosures to prospective borrowers to promote consumer intelligence of mortgage and consumer products. Additionally, the act standardized the mortgage rate process by requiring all lenders to disclose rates using A.P.R as the financial industry standard.

EXPLANATION

The Truth in Lending Act (TILA) is a federal law passed in 1968 that created a uniform system for calculating and disclosing loan interest rates. Initially regulated by the Federal Reserve Board, the Act’s provisions are now enforced by the Consumer Financial Protection Bureau.

Prior to the Act, the ways lenders calculated and advertised their loan rates were not standardized. Consequently, consumers were unable to accurately compare loan products from different lenders. The creation of a standardized system allows consumers to better understand and compare available loan products.

Lenders must provide borrowers with documentation about the specific loan they are receiving. For example, if a borrower is applying for an adjustable rate mortgage, the lender must provide him or her with a copy of the Federal Reserve’s Consumer Handbook on Adjustable-Rate Mortgages.

Buyers have the right to rescind a mortgage within three days of the mortgage’s closing.

One of the documents that lenders must provide to borrowers is the Truth in Lending Disclosure Statement. Mortgage disclosures must be provided within three days of a borrower’s submission of an application. This statement provides borrowers with a simplified version of the mortgage terms, including:

Annual Percentage Rate (APR)

Loan amount

Monthly mortgage payments

Late charges

Prepayment penalties

Insurance payments

One of the Truth in Lending Act’s main provisions requires lenders to use an annual percentage rate (APR) as the standard mortgage description term for mortgage products. APR is the cost of credit expressed as a yearly rate in a percentage.

The right of rescission gives a borrower the ability to void a loan, whether it be a refinance or addition of a second mortgage within three days of closing.

Benefits of Transfer Disclosure Statement

The act has many components, all of which are created to expand disclosure laws and to create a uniform mortgage rate description system.

The disclosure component of the act requires for example lenders to inform consumers of the risks of adjustable rate mortgage and to provide people with the breakdown of the mortgage. Such measures are intended to equip borrowers with necessary information to make the best loan decisions.

Lenders are refrained from offering programs that are to the borrower’s detriment or being compensated for pushing risky loans with higher fees.

Case Law As It Relates to the Truth in Lending Act

Case Review: Pac Shore Funding vs. Lozo

The case, Pacific Shore Funding v. Lozo (2006) 138 Cal.4th 1342., involved a lender who violated the Truth in Lending Act.

A borrower (Lozo) was granted a mortgage by a lender (Pacific Shore Funding) in the amount of $28,000. Less than three years later, Lozo was approved for a $71,600 from the same lender. Lozo used the second loan to pay off the balance of his first mortgage, then rescinded the first loan.

Pacific Shore Funding brought suit against Lozo, alleging that borrowers are not entitled to rescind a first loan after they refinance a second loan with the same lender. Lozo filed a cross complaint. He argued that the first loan was subject to the Truth in Lending Act, which had been violated by the lenders. Lozo contended that Pacific Shore Funding had failed in their requirement to provide disclosures to Lozo within the required timeframe. Therefore, Lozo argued that he was able to rescind the loan.

The Superior Court argued that Lozo’s repayment of the first loan terminated his rights to rescind the loan under the Truth in Lending Act. It ruled in favor of Pacific Shore Funding. Lozo appealed.

The Court of Appeals reversed the lower court’s ruling. It contended that one violation would result in a violation the Truth in Lending Act (TILA). Therefore, Pacific Shore Funding’s failure to provide Lozo with the required disclosure forms extended Lozo’s rescission period from three days to three years, and his notice of rescission was timely. The court ordered Pacific Shore Funding to refund all interest and fees, including loan points, closings costs, and prepayment penalties.

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