Understanding Truth in Lending: How It Protects Borrowers

The Truth in Lending Act, signed into law in 1968, was designed to protect consumers. It was aimed at stopping questionable practices by lenders and financial institutions. Here are the basics of how the Truth in Lending Act benefits borrowers.

Interest Terms

When borrowers are going through the process of getting a loan, the Truth in Lending Act determines how lenders disclose information to them. Before the Truth in Lending Act came about, lenders did not have a standard method of conveying the APR to their customers. The lenders could also change the interest rate at any time before the loan was done without disclosing it to the borrowers. Now, if the interest rate on the loan changes more than 1/8 percent, they have to notify borrowers in writing. This means that the lenders have to be more forthcoming with their interest rates and any changes to them. This protects the borrowers so that they are not agreeing to something that they do not want to agree to. 

Good Faith Estimates

The closing costs of a mortgage loan can add up to a substantial amount of money. Before the Truth in Lending Act was put into effect, borrowers had no way of knowing exactly what their closing costs would be. The closing costs could be manipulated or changed based on a borrower's needs in the deal. Thanks to the Truth in Lending Act, lenders are now required to provide a "good faith estimate" to their borrowers.

This good faith estimate has all of the different closing costs spelled out in detail for the borrower. It will give the names of all of the fees and their specific amounts. The good faith estimate has to be given to the borrower within three days of his or her applying for a loan. If the lender does not meet this deadline, they are in violation of the Truth in Lending Act. Good faith estimates are a way for borrowers to make sure that they fully understand all of the charges involved in getting a mortgage. It also helps consumers by giving them an easy way to shop around for loans. You can easily compare the closing costs of multiple lenders with this document. 

Waiting Periods

Another way that the Truth in Lending Act helps borrowers is by enforcing a mandatory waiting period. Before a mortgage can go through, the lender and borrower have to wait at least 7 days from the date of application. When the borrower applies for a loan, the lender must provide him or her a copy of the Truth in Lending Act to review. From the date that a borrower gets that paperwork, he or she has to wait 7 days to close on the mortgage.

There is also another waiting period associated with changing interest rates. If the interest rate that you were quoted changes for any reason, a 3-day waiting period goes into effect. Every time the interest rate changes, they add 3 more days on. This allows consumers plenty of time to consider the impact that a change in APR has before signing the loan.