What is Truth-in-Lending (TIL)?

Mortgage professionals receive more calls with regard to the Truth in Lending Disclosure than any other disclosure in the large packet furnished at the beginning of the loan process.  The Federal Reserve Regulation Z was authorized by the “Truth-in-Lending” Act of 1969.  The purpose of the law was to agree to a uniformed formula for calculating the true cost of credit by developing an APR (Annual Percentage Rate).  The APR is intended to weigh the monthly payments of the loan against the non-interest finance charges of the loan.  This ACT also allows the borrower to cancel a transaction within 3 days (excluding Sundays and holidays) of signing a loan that results in a lien against their primary residence (refinance only).  This is known as the Right of Rescission.

Another purpose of this law was to provide applicants with an “early disclosure” of the APR.  This requires the TIL to be delivered to the applicant within 3 business days.  The logic behind this early disclosure is permit the applicant to comparison shop and avoid settling for a loan that has hidden fees due to improper verbal disclosure by a mortgage professional.  Delivering this disclosure typically causes the applicant to call the mortgage professional and question them about the change in interest rate from what was previously discussed.  Those of us who have been there, know that the applicants do not know the difference between the interest rate and the APR and it is our job to clearly explain the difference.

The issue is that APR and interest rate mean the same thing to the applicant, but refer to two different concepts.  The APR will be higher than the interest rate and will confuse applicants when they review the TIL.  Most applicants are familiar with consumer loans, credit cards, car loans which typically have a simple interest rate with no fees.  Likewise, the phrase “Amount Financed” that appears on the TIL is lower than the amount applied for in the initial application.  On the surface, these two items give the perception of deception on the mortgage professional’s part, but it isn’t.  It is actually detailed disclosure intended to help the applicant make an informed decision. 

There are 4 boxes on the TIL Disclosure; the APR, Finance Charge, Amount Financed and Total of Payments.  Below these 4 boxes is a Payment Schedule which is followed by various other disclosures detailing the loan terms.Here are some very basic working definitions for the boxes.  There is more to it, but you can get the basic concept from the following:

Total of Payments- Computes the total of payments by multiplying payment schedule, including PMI by the amount of payments

Amount Financed- is the loan amount, less points, prepaid interest, PMI and lender fees.

Finance Charge- is the Total of Payments less the Amount Financed

APR- Compute the APR by dividing the Total of Payments by the number of payments and apply that against the Amount Financed, as if it were the loan amount.

These definitions can be confusing and very difficult to explain to applicants.  That is why it is important to have a knowledgeable mortgage professional working with your customers.  A lack of knowledge typically gives applicants the perception that that are being mislead.  If you referred the applicant to this person, what does that say about you?  Will it change your customer’s perception of you?  Out of ignorance, customers are unfortunately misled frequently.  This practice is against the spirit of the law in the first place.  We all need to take the time to make sure that we can explain the disclosures in our chosen profession.  There is a reason for them and no it is not to make our lives difficult!