Truth in lending
Do you remember when you were first eligible for credit, For most of us, it was our first step into adulthood and financial independence. You've undoubtedly changed since that first credit card appeared in your wallet and so has federal policy governing credit.
If you haven't applied for home financing recently, you'll find the process has changed. It doesn't make the ability to get finiancing easier, but it makes the disclosure aspect of the loan, as well as the paperwork, easier. Since 1968, when the Consumer Credit Protection Act was established, there has been a consumer oriented law in place regarding credit. This law set up a framework of uniform disclosures, limits on advertising and tools to facilitate comparisons of competing credit offers.
The Truth in Lending Act is part of the original Consumer Credit Protection Act, which makes it mandatory to disclose terms and costs associated with a credit transaction in a uniform manner. The Federal Reserve Board has overseen the Truth in Lending Act since its inception, but that responsibility shifted to the new Consumer Financial Protection Bureau as of July 21, 2011.
The Truth in Lending disclosure form as it relates to all forms of credit, but particularly to mortgage credit, has the following elements:
The annual percentage rate commonly referred to as the APR. This is defined as the cost of the loan in the form of a percentage. These costs include not only the interest, but also origination fees, prepaid interest, private mortgage insurance and any other costs associated with the loan. The APR is calculated by spreading these charges over the life of the loan.
Prepaid finance charges are charges in connection with the loan, which must be paid by the borrower upon the close of the loan. For example, they include loan origination fee, points, taxes service fees, etc. but do not include appraisal and credit report fees.
The finance charge is the amount of interest, prepaid finance charges and certain insurance premiums, if any, that the borrower will be expected to pay over the life of the loan.
The amount financed is the loan amount applied for less the prepaid finance charges.
The total of payments represents the sum of all payments made toward principal, interest and mortgage insurance.
The payment schedule outlines the principal, interest and private mortgage insurance, if there is any, for the life of the loan.
The truth in lending regulation allows for a three day right of rescission or a cooling off period for home equity lines of credit and refinancing of principal residence with a new lender. This three-day period does not apply to the purchase of a principal residence purchase of a second home or refinancing of a principal residence with the original lender.
The 2010 Dodd-Frank Amendment to the truth in lending law has added a few new regulations. It is now required that mortgage lenders provide a monthly statement to borrowers during each billing cycle, including the principal balance due, current mortgage interest rate and other payment and loan information.
Also for high cost or subprime mortgages, the law has stricter regulations relative to balloon payments and late fees. It also has made the Federal Truth-In-Lending Disclosure Statement very clear, showing annual percentage rate, finance charge, amount financed and total of payments in a concise boxed in area at the top of the form.
The availability of credit is the lifeblood of the United States economy, and without it the economic engine stalls. At this point, the engine may not be completely stalled, but it sure is running in second gear. I remember getting that first credit card as a rite of passage. Who knew it would get so complicated?