The Truth in Lending Act (TILA)
TILA is a law in the U.S. that aims to promote transparency and protect your client when they are trying to obtain credit or financing.
Enacted in 1969 as part of the Consumer Credit Protection Act, TILA requires lenders to disclose important information about the terms and conditions of credit, including loan costs, interest rates and payment schedules. The intent was to protect your clients from deceptive lending practices.
Understanding this law not only helps you serve your clients better, but also ensures that your referring lender is compliant with federal regulations.
Here’s a breakdown of the Truth in Lending Act and how it impacts real estate transactions:
Purpose of TILA in Real Estate Transactions
The primary goal of TIAL is to ensure that borrowers receive clear, accurate and consistent information about the credit they are being offered. As a real estate agent, this means understanding how TILA applies to mortgages and other home loans, such as a home equity line of credit (HELOCs).
This helps your client make informed decisions about their financing options and ensures they understand the true cost of the loans they are considering.
Key Aspects of TILA for Real Estate Agents
- Disclosure Requirements: One of TILA’s core provisions is the requirement for lenders to provide specific disclosures to borrowers. In real estate, this is called the Closing Disclosure (CD). Which is a 5 page statement provided to the borrower (buyer) at least three business days before the buyer is to sign documents to close on a property. The closing disclosure will have the following information on it:
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- An outline of the final agreed to details of the mortgage loan, including loan amount, interest rate and monthly payment.
- A comprehensive and detailed list of all the fees that will be charged to close the loan. For example, origination fees, escrow/attorney fees, recording fees and appraisal fees to name a few.
- The closing disclosure will also outline terms of the loan the buyer is agreeing to. Loan terms (e.g. 15-year fixed), the number of payments
- The exact amount the buyer needs to bring to the closing table, which is called “Cash to Close”.
- The CD will also explain prepaid items the buyer will pay at the time of closing like homeowners insurance premiums, HOA fees and prorated property taxes.
It’s important that as a real estate agent you do not give advice or counsel about your client’s CD, but rather guide them to the qualified person to answer their questions, which is either the lender or the closer (escrow officer or lawyer).
- Right of Rescission: For certain types of loans, such as refinancing or home equity loans, TILA provides the borrower with a three-day right of rescission. This means that after signing the loan documents, your clients have three business days to cancel the loan without penalty. In real estate transactions, this is mostly commonly associated with refinancing a mortgage or taking out a home equity loan or line of credit.
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- Advertising and Marketing: TILA also regulates how lenders advertise credit terms. As a real estate agent, it’s important to know that any promotional materials related to home loans, whether flyers, email offers, or online ads – must clearly state the APR and other important terms, such as loan amount, interest rate, and repayment schedule. This helps protect consumers from misleading or deceptive marketing tactics. So, if you decide to do mutual marketing with your preferred lender, be clear on these rules.
- Credit Card Protections (Indirectly Relevant to Real Estate): While TILA’s provisions for credit cards may not directly impact your business, they do impact your clients. TILA has been amended over the years to include specific rules about credit cards, such as clearer disclosures on interest rates and fees.
What is Your Role in TILA as a Real Estate Agent?
- Ensure Your Clients are Well-Informed! While you are not qualified or licensed to give financial advice, it’s still important that you are able to help shepherd your clients towards correct answers and information.
- Refer your clients to lenders and professionals that have high moral and integral standards who can help them understand the differences between mortgage products and which loans put your client in the best financial position.
- Promote transparency and trust by including information during your buyer intake meeting. While they may not retain everything you say in the meeting, your clients will know in general terms about the closing disclosure and what to expect.
Who Enforces the Truth in Lending Act (TILA)?
The Consumer Financial Protection Bureau (CFPB) enforces TILA, and they have the authority to investigate any violations. If a lender fails to provide the required disclosures or is deceptive in any way, your clients have the right to seek legal remedies, including potentially suing the lender for damages.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, TILA was amended to improve mortgage disclosures the TRID (TILA-RESPA Integrated Disclosure) Rule, which streamlined and clarified the loan estimate and closing disclosure forms for mortgage loans.
As a real estate agent, this means you’ll be dealing with more simplified documents that give your clients a clearer picture of the financial aspects of their loan.
TILA Changes and Updates:
- The Credit Card Act of 2009: This amendment focused on credit card disclosures but also impacted how lenders disclosed terms related to consumer credit, including clarity and interest rate and fees.
- TRID Rule (TILA-RESPA Integration): This rule, effective in 2015, combined the TILA disclosure with the Real Estate Settlement Procedures Act (RESPA) disclosures to simplify and standardize the loan estimate and closing disclosure forms. This helped real estate agents as it was then easier for their clients to review mortgage offers.
If your clients ask you about the Truth in Lending Act, the most simple way to explain it is; by law, lenders can no longer engage in predatory or deceptive lending, they must disclose all fees up front before your client can sign their documents.
Related Articles:
The Dodd-Frank Wall Street Reform and Consumer Protection Act.
