Key Takeaways
- TILA requires disclosure of the Annual Percentage Rate (APR), which includes interest and certain loan costs for comparison shopping
- Borrowers have a 3-business-day right of rescission for refinances and home equity loans on their principal residence (not purchase money mortgages)
- Trigger terms in advertising (payment amount, number of payments, finance charge) require full disclosure of all credit terms
- Higher-Priced Mortgage Loans (HPMLs) have an APR that exceeds APOR by 1.5% or more for first liens and must include escrow accounts
- TILA covers consumer credit transactions, not business, commercial, or agricultural loans exceeding threshold amounts
- Regulation Z implements TILA and is enforced primarily by the CFPB for most mortgage lenders
TILA (Truth in Lending Act)
The Truth in Lending Act (TILA) is a landmark consumer protection law enacted in 1968 to promote informed use of credit. TILA is implemented by Regulation Z, issued by the Consumer Financial Protection Bureau (CFPB).
Purpose and Scope
TILA was designed to:
- Require meaningful disclosure of credit terms
- Enable consumers to compare credit offers
- Protect against inaccurate and unfair billing
- Provide rescission rights for certain home-secured credit
Covered Transactions
TILA covers consumer credit transactions where:
| Covered | NOT Covered |
|---|---|
| Individual/family/household purpose | Business or commercial purposes |
| Credit extended by a creditor | Seller-financed transactions (under certain thresholds) |
| Subject to a finance charge OR payable in more than 4 installments | Student loans made by educational institutions |
| Secured by consumer's dwelling | Agricultural credit over $81,500 (2026) |
Key Definitions
| Term | Definition |
|---|---|
| Creditor | Person who regularly extends consumer credit |
| Finance charge | The dollar amount the credit will cost |
| Annual Percentage Rate (APR) | The cost of credit expressed as a yearly rate |
| Closed-end credit | Credit with fixed payments and a definite term |
| Open-end credit | Revolving credit without a fixed payment schedule |
The APR: The Heart of TILA
The Annual Percentage Rate (APR) is TILA's cornerstone disclosure. It expresses the cost of credit as a yearly rate, allowing borrowers to compare loans with different terms and fees.
What's Included in APR
| Included in APR | NOT Included in APR |
|---|---|
| Interest | Title insurance (owner's policy) |
| Loan origination fees | Recording fees |
| Discount points | Transfer taxes |
| Mortgage broker fees | Attorney fees (for title) |
| Private mortgage insurance (PMI) | Appraisal fees (if paid by buyer) |
| Prepaid interest | Credit report fees |
APR Tolerance
The APR disclosed at consummation must be accurate within:
- 1/8 of 1% (0.125%) for regular transactions
- 1/4 of 1% (0.25%) for irregular transactions (multiple advances, etc.)
Finance Charge
The finance charge is the total dollar cost of credit, including:
- Interest
- Points and origination fees
- Mortgage broker fees
- Required life insurance premiums
- Any other charges imposed by the creditor as a condition of credit
Right of Rescission
TILA provides a powerful protection for certain home-secured loans — the right of rescission.
When Rescission Applies
| Applies | Does NOT Apply |
|---|---|
| Refinances | Purchase money mortgages |
| Home equity loans | Construction-only loans |
| Home equity lines of credit (HELOCs) | Loans on investment properties |
| Loans secured by principal residence | Loans on second homes |
Timing
-
Borrowers have 3 business days to rescind after:
- Consummation (closing)
- Receiving material TILA disclosures
- Receiving notice of right to rescind
- Whichever is LAST
-
If disclosures are not provided, rescission right extends to 3 years from consummation
How Rescission Works
- Borrower notifies creditor of intent to rescind (midnight of 3rd business day)
- Creditor has 20 calendar days to:
- Return any money or property given
- Take necessary action to reflect the termination
- Release any security interest
- Borrower then returns any funds received
Business Day Definition for Rescission
For rescission purposes, a business day includes:
- All calendar days except Sundays and federal legal public holidays
- Saturday IS a business day for rescission timing
Advertising Requirements
TILA strictly regulates how creditors can advertise credit terms. The concept of "trigger terms" is crucial.
Trigger Terms
If an advertisement includes ANY of these trigger terms, it must include ALL credit terms:
| Trigger Terms |
|---|
| Amount or percentage of down payment |
| Number of payments or period of repayment |
| Amount of any payment |
| Amount of any finance charge |
Required Disclosures When Triggered
Once a trigger term is used, the ad must state:
- Amount or percentage of down payment
- Terms of repayment (including payment schedule)
- Annual Percentage Rate (using "APR" term)
- Whether APR can increase (for variable rate loans)
Prohibited Advertising Practices
| Prohibited | Example |
|---|---|
| "No closing costs" (if costs rolled into loan) | Misleading — costs exist but are financed |
| "Fixed rate" (when rate can change) | Deceptive if introductory rate |
| Bait and switch | Advertising unavailable terms |
| "Pre-approved" or "Guaranteed" (without basis) | Must have reasonable credit evaluation |
Higher-Priced Mortgage Loans (HPMLs)
TILA provides special protections for Higher-Priced Mortgage Loans (HPMLs), which are considered higher-risk.
HPML Definition
A mortgage is an HPML if its APR exceeds the Average Prime Offer Rate (APOR) by:
| Loan Type | Threshold |
|---|---|
| First-lien loans | APOR + 1.5% or more |
| First-lien jumbo loans | APOR + 2.5% or more |
| Subordinate-lien loans | APOR + 3.5% or more |
Additional HPML Requirements
| Requirement | Description |
|---|---|
| Escrow accounts | Required for at least 5 years (taxes and insurance) |
| Appraisal requirements | Written appraisal by licensed/certified appraiser |
| Second appraisal | Required for "flipped" properties (sold within 180 days) |
| Ability to repay | Extra scrutiny for borrower qualification |
Ability-to-Repay (ATR) Rule
Since 2014, creditors must make a reasonable, good-faith determination that borrowers can repay their mortgage loans.
Eight ATR Factors
Creditors must consider and verify:
- Current or reasonably expected income/assets
- Current employment status
- Monthly mortgage payment on the covered transaction
- Monthly payments on simultaneous loans
- Monthly mortgage-related obligations (taxes, insurance, HOA)
- Current debt obligations, alimony, child support
- Monthly debt-to-income ratio or residual income
- Credit history
Qualified Mortgages (QMs)
Qualified Mortgages are presumed to meet the ATR requirement and provide legal protection for creditors:
| QM Requirements |
|---|
| Points and fees ≤ 3% of loan amount (higher for smaller loans) |
| No negative amortization |
| No interest-only payments |
| Term ≤ 30 years |
| No balloon payments (with exceptions) |
| DTI generally ≤ 43% (with exceptions for GSE loans) |
Key Disclosures
Loan Estimate (LE)
Required within 3 business days of application, includes:
- Loan terms, projected payments
- Closing costs
- APR and total interest percentage
Closing Disclosure (CD)
Required 3 business days before consummation, includes:
- Final loan terms and costs
- Comparison to Loan Estimate
- Cash to close
Enforcement and Remedies
Enforcement Agencies
| Entity | Jurisdiction |
|---|---|
| CFPB | Most mortgage lenders |
| Federal Reserve | State member banks |
| OCC | National banks |
| State regulators | State-licensed entities |
Borrower Remedies
- Actual damages
- Statutory damages up to $4,000 (individual) or $1 million (class action)
- Attorney's fees and costs
- Extended rescission rights (up to 3 years)
- Criminal penalties for willful violations: $5,000 fine and/or 1 year imprisonment
Key Takeaways
- APR is the uniform measure of credit cost, enabling comparison shopping
- Right of rescission applies to refinances and HELOCs on principal residence, NOT purchase mortgages
- Trigger terms in ads require full disclosure of all credit terms
- HPMLs (APR > APOR + 1.5% for first liens) have extra protections
- ATR rule requires creditors to verify borrower's ability to repay
- Qualified Mortgages provide safe harbor from ATR liability
A borrower refinances their principal residence on Monday. When does the 3-day right of rescission period expire?
An advertisement states: "Get a home loan for only $1,500 per month!" This is a trigger term. What additional disclosures are required?
Which of the following loans would have a right of rescission under TILA?