The Truth in Lending Act of 1968, also known as Regulation Z, defends consumers against unlawful credit practices in real estate.
Lenders who violate the Truth in Lending Act may lose money, spend time in jail, and tarnish their reputations in the real estate industry. As a future real estate professional, you should keep an eye out for predatory lending practices in the housing market.
In this post, we’ll define the Truth in Lending Act, provide examples of its usage, and review how it supports a fair housing market.
What Is the Truth in Lending Act?
The Truth in Lending Act (TILA) protects consumers against unfair and predatory lending practices from credit companies. This act, passed in 1968, requires that lenders fully explain to consumers the terms and conditions of their loans.
According to the TILA, all creditors must disclose the following information on all credit transactions:
- Identity of the creditor
- Annual percentage rate
- Finance charging
- Number of payments
- Monthly payment costs
- Late fees
The TILA is part of the Consumer Credit Protection Act, which protects consumers from creditors, banks, and lenders of all kinds.
What Is Regulation Z?
When researching the Truth in Lending Act, you may have come across the term Regulation Z. This is because Regulation Z is part of the TILAC; in fact, people often use these terms interchangeably.
What Loans Does the Truth in Lending Act Cover?
The TILA (Regulation Z) covers most types of consumer loans, including the following closed-end and open-end credit loans:
- Car loans
- Home mortgages
- Reverse mortgages
- Credit card loans
- Home equity lines of credit
Why Is the Truth in Lending Act Important in Real Estate?
The Truth in Lending Act prohibits unfair credit practices that are designed to put more money in mortgage brokers’ pockets. This act protects consumers who are taking out home mortgage loans and home equity lines of credit.
The Role of TILA in Home Mortgages
A mortgage is a loan from a bank, mortgage company, or other lending services that help consumers purchase a house. Most people cannot afford to buy a home outright, so they take out a mortgage to pay back in monthly installments. If a consumer fails to pay back their loans, the lender has every right to take back the property.
The Truth in Lending Act ensures that lenders provide consumers with a Closing Disclosure explaining all the mortgage loan details. These details include
- Loan terms
- Purchase price
- Monthly payment amount
- Closing costs
- Other fees
A Closing Disclosure must be five pages long, delivered to the borrower in three days, and list all of the critical information about the loan. This means that banks and mortgage companies can’t pull any fast ones on their borrowers, further protecting consumers’ rights in housing.
The Role of TILA in Home Equity Loans
A home equity line of credit (HELOC) allows consumers to borrow against the remaining equity on their homes. For example, if a borrower’s house is worth $500k, but they still owe $400k on their loan, then they have $100k in equity from which they can borrow.
Because the Truth in Lending Act protects home equity loans, lenders must fully disclose the terms of the credit agreement as they would for any other type of loan.
What Actions Violate the Truth In Lending Act?
So what does it look like when a lending company isn’t following the rules of the TIAC? Examples of violations include improperly disclosing the following credit terms:
- Identity of the lender
- Amount financed
- Annual percentage rate
- Finance charges
- Total number of payments
- Security interest disclosures
Lenders are responsible for these violations and will face penalties for incorrectly disclosing information, regardless of their intent.
Example of the Truth in Lending Act in Real Estate
Say that a real estate agent makes the following deal with a mortgage company; if the agent recommends the mortgage company to their clients, the company will give the agent a commission for certain types of loans. The mortgage company then pressures the recommended borrowers into choosing this type of mortgage loan, even if there are better financial options than this one.
This behavior violates the Truth in Lending Act, as each party has ulterior motives and is engaging in predatory lending practices.
Penalties for Violating the Truth in Lending Act
If a creditor violates the Truth in Lending Act for any reason, they may be fined $5,000, face one year of imprisonment, or both in severe cases.
Who Enforces the Truth in Lending Act?
Three different agencies enforce the TILA and safeguard consumers from corrupt creditors. These agencies are
- The Federal Trade Commission
- The Consumer Protection Financial Bureau
- The Office of the Comptroller of the Currency
The Federal Trade Commission
The Federal Trade Commission (FTC) is the primary agency that protects consumers from unlawful and anticompetitive business practices. Created in 1914, the FTC’s original purpose was to take down big monopolies that violate antitrust laws.
While the FTC still upholds antitrust law, its role has expanded to regulating lending companies and enforcing the TILA. If a lending company breaks federal law, the Federal Trade Commission will penalize them and protect the rights of consumers.
The Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) is a government agency that ensures that banks, credit companies, and lenders treat consumers fairly. If a consumer feels a creditor is breaking the TILA, they can file a complaint with the CPFB, who will look into the issue.
The CPFB also informs consumers by providing educational lending resources, including guides for buying a house and getting a car loan.
The Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) supervises national banks and requires creditors to fix situations where loan terms are disclosed inaccurately.
The OCC even offers a PDF handbook on its website breaking down the TILA and how it applies to their supervision of national banks.
What Does the Truth in Lending Act Not Cover?
While the TILA protects many consumers from predatory lending practices, it does not cover the following types of loans:
- Student loans
- Business loans
- Commercial loans
- Loans over $25,000 (unless the loans are for housing)
It’s also important to note that the TILA does not control what kinds of loans a creditor offers, the loan terms, or who can apply for loans. Luckily, other laws cover these areas, such as the Equal Opportunity Act, which makes it illegal to discriminate against a borrower based on protected characteristics.
What Is the Fair Credit Billing Act?
While the Truth in Lending Act plays a significant role in the real estate world, the Fair Credit Billing Act (FCBA) takes it a step further. Enacted in 1974, the FCBA amends the TILA by ensuring creditors cannot negatively impact an individual’s credit before an investigation is done.
The Fair Credit Billing Act allows consumers to dispute credit billing errors, including
- Unauthorized charges
- Finance charges with incorrect amounts
- Finance charges with incorrect dates
- Charges for items or services that were not delivered
- Questionable charges
Furthermore, the FCBA demands a fair and timely resolution for credit billing disputes so that the offending lenders right their wrongs as soon as possible.
As long as borrowers dispute credit billing errors within 60 days from the time they receive their bill, the FCBA has their back and will protect their credit.
What Is the Dodd-Frank Truth in Lending Act?
There’s another notable act we should know about that amended the TILA, and that’s the Dodd-Frank Truth in Lending Act. The Dodd-Frank TILA, enacted in 2010, requires the following extra protections from lending companies:
- Mortgage loan officers need a license to offer credit loans
- Lenders must adjust the dollar threshold for exempt consumer credit annually
- Lenders must make reasonable determinations of a consumer’s ability to pay back the credit for a home
The last amendment listed is among the most important, as it means creditors cannot give out loans to borrowers who likely cannot repay them. We know that credit checks are now required to determine a borrower’s ability to repay, but this was not always the case before acts like the Dodd-Frank TILA were enacted.
What Is the Federal Deposit Insurance Corporation?
If we’re talking about consumer rights, we can’t leave the Federal Deposit Insurance Corporation (FDIC) out of the conversation. The FDIC is one of the agencies that protect consumers who deposit their income with or take out loans from banks. Even if a bank fails, the FDIC protects consumers from losing all their money.
What to Know Before the Real Estate Exam
The Truth in Lending Act plays a critical role in protecting homebuyers and other lendees against unfair credit practices. Knowing how this act works in the real estate market is imperative for passing your exam and succeeding as a future agent.
Get familiar with other important terms using our free Real Estate Flashcards! With the help of this tool, you’ll be passing the real estate exam before you know it.