The Truth in Lending Act Explained

The Truth in Lending Act is a law that was enacted in 1968 as a way to help protect consumers. Before this law was put in place, lenders could engage in many more questionable practices than they can today. Here are the basics of the Truth in Lending Act and how it helps you as a consumer. 

Purpose of Truth in Lending Act

The main purpose of the Truth in Lending Act is to ensure that consumers understand what they are getting into. The Truth in Lending Act is designed to provide full disclosure for all financial transactions involving consumers. Therefore, when you sign a financial document, such as a loan or credit card agreement, you are now presented with all of the facts upfront, in writing. There is no "gray" area anymore, and lenders have to tell you what they are charging you before they do it. The Truth in Lending Act is broken up into different subparts to cover several different sectors of the financial community. Here are the different subparts and how they affect you. 

Subpart C

This section of the Truth in Lending Act deals with closed-end credit. The term "closed-end credit" refers to a type of loan that requires the full balance and interest be paid off by a certain time. This type of loan entails auto loans, mortgages and fixed personal loans. 

This section sets forth the rules on what must be disclosed to the borrowers. It also tells lenders how they must handle credit balances and the proper way to calculate an annual percentage rate. Before this act was put into place, the lender could alter the way that it calculated your interest rate without your knowledge. Therefore, the interest charges could end up being a lot more than what you expected. With this section of the Truth in Lending Act in place, lenders must disclose everything about their interest rates and how they are calculated. 

This section also covers the buyer's right of rescission. This gives the buyer the right to cancel a credit transaction within three days of making a purchase. 

Subpart E

Subpart E is another very critical portion of the Truth in Lending Act. This subpart deals specifically with mortgages and what they must disclose to potential borrowers. For example, lenders must show you the total annual cost of the loan as well as what you will be paying in interest charges over the life of the loan. 

In addition to this, lenders must provide a potential borrower with a "good faith estimate" of closing costs within three days of applying for a mortgage. This means that within three days of filling out a mortgage application, the lender has to give you a detailed breakdown of everything that is involved with the closing costs. If the lender does not, it is in violation of the law. This section of the law can be very helpful to you as a borrower as the lender cannot include any extra fees in the closing costs without your knowledge. 

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