Truth in Lending Act

Key Takeaways

• The Truth in Lending Act is a federal disclosure law. It does not cap interest rates, it forces the cost of credit to be stated in a comparable way.
• Regulation Z, 12 CFR Part 1026, is the rule that implements the Truth in Lending Act, and the Consumer Financial Protection Bureau administers it.
• Any rate in a credit advertisement must be stated as an annual percentage rate using that term, under 12 CFR 1026.24(c).
• The three business day right of rescission does not reach a loan used to buy or build the borrower's principal dwelling, which excludes most purchase transactions.

What It Means

The Truth in Lending Act, almost always shortened to TILA, is the 1968 federal statute that makes lenders state the cost of credit in a standard way so a borrower can hold two offers side by side and compare them. Congress passed it as Title I of the Consumer Credit Protection Act. The statute is short on operating detail, and the working rules live in Regulation Z, 12 CFR Part 1026, written and enforced by the Consumer Financial Protection Bureau.

Four pieces of it turn up constantly in residential real estate. Cost disclosure: the finance charge and the annual percentage rate have to be given in a prescribed form using prescribed words. Advertising: naming certain specific terms in an ad drags in a package of additional disclosures. The Right Of Rescission: a three business day window to unwind certain loans secured by a home the borrower already lives in. And ability-to-repay and qualified mortgage standards, added after the 2008 crisis, which require a lender to make a reasonable good faith determination that the borrower can repay.

Hold on to the central point. This is a disclosure law, not a price control. An expensive loan is lawful if it is disclosed correctly, and a cheap loan is unlawful if it is not. That distinction is where most exam questions and most broker mistakes live. If loan types are still fuzzy, start with our overview of the loan types every broker should know.

How It Works in Washington

Washington has no separate state truth-in-lending statute, so the federal rule does the substantive work and state law supplies the enforcement teeth. Chapter 19.146 RCW, the Mortgage Broker Practices Act, governs loan originators and mortgage brokers operating here. RCW 19.146.0201(11) makes it a prohibited practice to fail to comply with state and federal laws applicable to the activities governed by that chapter, which pulls Regulation Z compliance inside the Department of Financial Institutions' reach. RCW 19.146.100 then provides that any violation of that chapter is an unfair or deceptive act or practice in violation of RCW 19.86.020, so a disclosure failure can become a Consumer Protection Act claim with private remedies attached.

Real estate licensees get pulled in through advertising. If your own ad quotes a rate, 12 CFR 1026.24(c) requires it to be stated as an annual percentage rate using that term. Under 12 CFR 1026.24(d)(1) the amount or percentage of a downpayment, the number of payments or the period of repayment, the amount of any payment, and the amount of any finance charge are trigger terms. Use one and the ad must also state the downpayment, the terms of repayment over the full loan term including any balloon payment, and the annual percentage rate. Washington stacks its own rule on top: RCW 18.85.361(8) makes advertising without the firm's licensed name in a clear and conspicuous manner grounds for discipline by the Department of Licensing. Rate context for your market is in our piece on interest rates and Washington home sales.

Example

Devon Marsh, a broker at Sound Ridge Realty, drafts a social post for a new listing in Olympia: own it for $2,150 a month, only 5 percent down. Both figures are trigger terms under 12 CFR 1026.24(d)(1), the amount of a payment and the percentage of the downpayment, so the ad now has to state the downpayment, the full repayment terms including any balloon payment, and the annual percentage rate using those words. Devon has none of that, and Devon is not the lender. The fix takes ten seconds: cut both numbers and write that financing options are available through the buyer's lender. The firm's licensed name still has to appear under RCW 18.85.361(8). Later in the same file the buyer, Kara Boyd, signs at $624,000 and asks whether she has three days to cancel. She does not. Her loan is a purchase-money loan on the home she will live in, and 12 CFR 1026.23(f)(1) exempts a residential mortgage transaction from rescission. The window she is thinking of belongs to a refinance with a new lender or a home equity loan, not to her purchase.

Common Mistakes and Exam Traps

• The Truth in Lending Act does not set or limit interest rates. It requires disclosure, so a correctly disclosed expensive loan is perfectly legal.
• Rescission is not available on a purchase. The three business day right covers certain loans secured by a home the borrower already occupies, not the loan used to buy or build it.
• The annual percentage rate is not the note rate. It folds in prescribed finance charges, which is why the annual percentage rate is normally the higher of the two.
• Regulation Z implements the Truth in Lending Act and Regulation X implements the Real Estate Settlement Procedures Act. Swapping the two is the classic distractor.