The Truth in Lending Act was introduced in 1968 as a way to promote fair lending practices and to protect borrowers who deal with lenders. The most important part of the Truth in Lending Act refers to what type of information has to be disclosed to the customer before giving them a loan. This information must be presented to the borrower in writing before closing the loan, and possibly even on the monthly billing statements.
The main goal of the Truth in Lending Act is to protect borrowers from unethical lending practices. This act makes it illegal for lenders to withhold important information regarding your loan, therefore protecting you and the economic activity that influences several parts of the economy, such as the housing market, which relies strongly on people who make purchases using credit cards or loans.
What Is Disclosed
The Truth in Lending disclosure statement must include a few important elements of the mortgage loan that you are closing. Understanding the contents of this document will help you better understand what your rights and responsibilities are. The Truth in Lending disclosure statement is only used for fixed-rate loans. Because the interest rate fluctuates on an adjustable-rate loan over its lifetime, it is impossible to determine how much the payments and interest rate will be. Here’s what the Truth in Lending disclosure statement contains:
- The financed amount. This represents the amount that you are borrowing. This amount doesn’t include the interest rate, but includes other charges that are part of the loan which will be removed from the total if they are paid up front.
- The Annual Percentage Rate (APR). The APR is going to be the interest rate plus a few additional costs that you are going to be paying.
- The finance charge. This is the total amount that you will be paying on top of the financed amount, and it only changes if you make late mortgage payments and penalty fees are added, or in case you pay off your loan earlier than scheduled.
- The total payments. This is the total amount that you will pay over the life of the loan. It includes the financed amount, the interest rate, and all other costs.
- The prepayment penalty. Some mortgage loans include a clause that requires you to pay a penalty if you pay off the loan before a certain period of time.
- The payment schedule. This part of the Truth in Lending disclosure statement explains how many payments you will have to make until the loan is paid off, and how much your payments will be.
What Isn’t Disclosed
Federal law doesn’t require lenders to disclose certain aspects of your loan. Some lenders choose to disclose these aspects, but it is mostly your duty to find them out before closing a loan. Here are some of the most important parts of your loan that may not be disclosed by your lender:
- All of your lender’s fees. Unlike fees such as mortgage points, which are charged as a percent of the total loan amount, other fees that your lender will charge you are not based on the size of the loan. What’s worrying is that, even if you figure out what these fees will cost you, the lender will not be committed to that amount and can charge you more at closing. A good way to counter this practice is to ask your lender to give you a signed document which includes all of the fees that you will be required to pay.
- The margin. Only applicable to adjustable-rate mortgages, the margin is the percent that the lender will add to the interest rate when the rate is adjusted. You will be made aware of what the interest rate will be, but not the lender’s markup, so it’s a good idea to ask them to give you the margin in writing as well.
- Simple interest loans. Find out if the interest rate on your payments accumulates daily or monthly. In case you have a simple interest loan, the interest rate will accumulate daily, which means that you will have to pay some large penalties if you fall behind on a monthly payment.
- Subordination policy. You may be prohibited from refinancing your first mortgage by the lender of your second mortgage. Subordination policies vary from a small fee to prohibition, so you should find out what the lender’s subordination policy is before taking out a loan.
- Mortgage insurance. Normally, people who can’t afford to make a 20 percent or more down payment are required to pay mortgage insurance. Unfortunately, if you are not careful when closing a loan, you might be required to pay mortgage insurance even if you put the 20 percent down. Make sure you find out if you are required to pay mortgage insurance before signing anything.
When taking out a loan, keep in mind that while the law is mostly on your side, it doesn’t cover all aspects of the loan. The lenders are required to disclose elements of the loan that are very important, but there are others that are not disclosed. While some of them may not matter much, there are some hidden dangers that will end up costing you money over time and provoke unnecessary stress.