Truth in Lending is a federal law that requires lenders to disclose the terms of a loan to borrowers in a clear and consistent manner. The law is intended to protect consumers by ensuring that they have accurate information about the costs and terms of a loan before they agree to it. The key element of the Truth in Lending Act (TILA) is the "Annual Percentage Rate" (APR), which is a standardized way of expressing the cost of credit.
The APR takes into account not only the interest rate on the loan, but also other charges and fees associated with the loan, such as points, origination fees, and mortgage insurance. By disclosing the APR, TILA makes it easier for borrowers to compare the costs of different loans and to understand the full cost of credit.
The lender must provide the consumer with a "Truth in Lending Disclosure" which must be delivered to the consumer no later than three days after the consumer applies for the loan. Loan applications have several parts that must all be complete before the application is considered submitted. Usually the last thing to happen is an address is added to the application identifying the property being purchased. Once the application is considered complete, the three day time period activates. The disclosure must include the APR, the finance charge (the dollar amount the credit will cost the consumer), the amount financed (the amount of credit provided to the consumer) and the total of payments.
It's important to note that TILA only applies to consumer credit transactions, not business loans. Additionally, some types of loans, such as residential mortgages, are subject to additional disclosure requirements under other laws, such as the Real Estate Settlement Procedures Act.
Simply put, the Truth in Lending disclosure is an estimate of the cost of the loan and closing costs. A few days before closing the borrower will also receive a Lender Closing Disclosure which is NOT an estimate.