What Is Truth in Lending Act (TILA)?
The Truth in Lending Act (15 U.S.C. § 1601) is a federal consumer protection law requiring lenders to disclose the true cost of credit using standardized terms — including the annual percentage rate (APR), finance charge, and total payments. It gives borrowers a 3-business-day right to cancel certain refinances, and CFPB Regulation Z implements its requirements for all consumer credit products.
Key Facts
- TILA was enacted in 1968 as part of the Consumer Credit Protection Act (Pub. L. 90-321) and is implemented by CFPB Regulation Z (12 CFR Part 1026) — together, they require lenders to disclose the APR, finance charge, amount financed, and total of payments before closing on any consumer credit transaction
- The right of rescission (15 U.S.C. § 1635) gives borrowers 3 business days after closing to cancel a refinance of their primary residence — the lender must provide two copies of the rescission notice at closing, and the 3-day clock does not start until proper notice is given
- TILA Section 129 (15 U.S.C. § 1639), known as HOEPA (Home Ownership and Equity Protection Act), imposes additional restrictions on high-cost mortgage loans — those with APRs or fees above specified thresholds — including a mandatory 3-day waiting period before closing
- The Ability-to-Repay (ATR) rule under TILA (12 CFR § 1026.43) requires lenders to make a good-faith determination that a borrower can repay a mortgage before originating it — Qualified Mortgages (QMs) satisfy ATR with a presumption of compliance
- The TILA-RESPA Integrated Disclosure rule (TRID), effective October 3, 2015, replaced the Good Faith Estimate (GFE) and HUD-1 with two standardized forms: the Loan Estimate (LE, provided within 3 business days of application) and the Closing Disclosure (CD, provided 3 business days before closing)
What Is the Purpose of TILA?
Before TILA's passage in 1968, lenders used wildly different methods to describe borrowing costs — making it nearly impossible for consumers to compare credit offers. One lender might quote a "monthly rate" of 1.5%, while another quoted "12 points per year" for the same effective cost. TILA standardized the disclosure of credit costs by requiring all lenders to express the cost of credit as an annual percentage rate (APR), calculated using a uniform formula.
Over the following decades, Congress expanded TILA substantially. The Fair Credit Billing Act (1974) added credit card dispute rights. The Home Ownership and Equity Protection Act (HOEPA, 1994) added protections for high-cost mortgages. The Dodd-Frank Act (2010) added the Ability-to-Repay rule and transferred TILA enforcement to the CFPB, which consolidated it with RESPA into the integrated TRID disclosure framework.
The Annual Percentage Rate (APR) Disclosure
The APR is TILA's signature contribution to consumer protection. Unlike the interest rate (which only captures the cost of the loan principal over time), the APR incorporates:
- The nominal interest rate
- Mortgage points (prepaid interest at origination)
- Origination fees
- Mortgage broker fees
- Certain required closing costs
This makes the APR a more accurate measure of the true annual cost of the loan. A mortgage with a 6.50% interest rate and two points might have an APR of 6.85% — a meaningful difference when comparing loan offers. The APR must appear prominently in TILA disclosures and advertising. A lender advertising a "6.50% mortgage" must also disclose the APR if it differs.
The Right of Rescission
The right of rescission is one of TILA's most powerful and least understood consumer protections. When you refinance a mortgage on your primary residence — or take out a home equity loan or HELOC on your primary residence — federal law gives you 3 business days after closing to change your mind and cancel the transaction, with no penalty and no reason required.
The 3-day clock begins only when the lender has given you all three of the following:
- A completed Closing Disclosure (or TILA disclosure for older loans)
- Two copies of the Notice of Right to Rescind (one to keep, one to return if you want to cancel)
- All material disclosures accurately reflecting the loan terms
If the lender fails to provide proper notice, the rescission period can extend up to 3 years from closing. Courts have found that material errors in TILA disclosures — such as a significantly understated APR — can trigger the extended rescission period. This is not an esoteric technicality: in the years following the 2008 financial crisis, many borrowers successfully rescinded abusive subprime loans using TILA's extended rescission right.
Note: The right of rescission does NOT apply to purchase mortgages — only to refinances and home equity loans/HELOCs on a primary residence.
HOEPA: Protections for High-Cost Mortgages
TILA Section 129 (HOEPA) adds an extra layer of protection for "high-cost mortgages" — defined as mortgages where the APR exceeds the average prime offer rate by 6.5 percentage points for first liens (8.5 points for subordinate liens), or where fees exceed 5% of the loan amount. For these loans, HOEPA requires:
- A mandatory 3-business-day waiting period after receiving disclosure, before closing
- Mandatory pre-loan counseling from a HUD-approved housing counselor
- Prohibition on balloon payments (for loans under 10 years)
- Prohibition on negative amortization, prepayment penalties, and due-on-demand clauses
- Prohibition on financing of points and fees into the loan
Subprime mortgages that triggered the 2008 crisis frequently violated HOEPA — many had balloon payments, negative amortization, and prepayment penalties that trapped borrowers. The 2010 Dodd-Frank Act substantially strengthened HOEPA and lowered the thresholds for coverage.
The Ability-to-Repay Rule and Qualified Mortgages
The post-crisis Dodd-Frank reforms added a new TILA requirement: before originating a mortgage, a lender must make a reasonable, good-faith determination that the borrower has the ability to repay. The CFPB's Ability-to-Repay (ATR) rule defines 8 factors lenders must consider: income, assets, employment, loan payment, other loan payments, other simultaneous loans, mortgage-related obligations (taxes, insurance, HOA fees), and debt-to-income ratio.
A Qualified Mortgage (QM) is a category of mortgage that satisfies specific underwriting standards (no negative amortization, balloon payments under most conditions, or terms over 30 years; DTI at or below 43% or within agency guidelines). Making a QM provides the lender with either a safe harbor or rebuttable presumption of ATR compliance. This framework was designed to prevent the reckless underwriting that generated the delinquencies the American Distress Index tracks.
State-by-State Variations
TILA establishes a uniform national standard for credit cost disclosure. State laws generally cannot impose conflicting disclosure requirements but can provide additional substantive protections, particularly for high-cost loans.
| State | Key Difference |
|---|---|
| New York | New York's predatory lending law (Banking Law § 6-l) applies HOEPA-style protections to a broader category of high-cost home loans than federal HOEPA thresholds, covering more mortgages with additional restrictions on fees, prepayment penalties, and balloon payments |
| California | The California Predatory Lending Law (Fin. Code § 4970 et seq.) covers high-cost mortgages with lower APR/fee thresholds than federal HOEPA, prohibiting prepayment penalties on loans that qualify as 'covered loans' under state definitions |
| Massachusetts | Massachusetts Chapter 183C (Predatory Home Loan Practices Act) provides broader high-cost loan protections than federal HOEPA, including a private right of action against servicers that acquire high-cost loans originated in violation of state law |
| North Carolina | North Carolina's 1999 Predatory Lending Law was the first state high-cost mortgage law, predating federal HOEPA reforms by over a decade. It bans prepayment penalties on high-cost loans and limits lender fees — other states used it as a template |
| Texas | Texas constitutional restrictions on home equity loans (Texas Constitution, Article XVI, Section 50) limit fees to 3% of the loan amount and prohibit originating home equity loans if the combined liens would exceed 80% of the home's fair market value — stricter than TILA on these specific products |
Frequently Asked Questions
What is the difference between the interest rate and the APR?
The interest rate is the cost of borrowing the principal — it does not include fees. The APR (Annual Percentage Rate) incorporates the interest rate plus required fees (origination fees, points, mortgage broker fees), expressed as an annualized percentage. The APR is always the more accurate measure of the true cost of the loan. On a 30-year mortgage, the APR is typically 0.1 to 0.5 percentage points higher than the stated interest rate.
Can I really cancel my refinance after signing?
Yes — TILA's right of rescission gives you 3 business days to cancel a refinance of your primary residence with no penalty. Saturday counts as a business day; Sundays and federal holidays do not. To rescind, notify the lender in writing within the window. If the lender did not give you proper notices at closing, the rescission period may extend up to 3 years.
What is TRID and why does it matter?
TRID (TILA-RESPA Integrated Disclosure) replaced the old Good Faith Estimate and HUD-1 with two standardized forms: the Loan Estimate (LE) within 3 business days of application, and the Closing Disclosure (CD) at least 3 business days before closing. TRID makes it easier to compare the estimated and final costs, and certain fee increases between the LE and CD are prohibited.
What is a Qualified Mortgage and why does it matter to borrowers?
A Qualified Mortgage (QM) meets specific underwriting standards set by the CFPB under TILA's Ability-to-Repay rule. For borrowers, QM loans cannot have balloon payments, negative amortization, or terms over 30 years. The QM standard was designed to prevent the reckless lending of the 2000s — though it primarily protects future borrowers, not those already in distress.
What can I do if my lender violated TILA?
TILA violations are actionable. For disclosure violations, you may be able to rescind the loan (if within the rescission period) or sue for actual damages, statutory damages up to $4,000 for closed-end mortgage violations, and attorney fees. The statute of limitations for damages is generally 1 year; for rescission, 3 years. Consult a consumer attorney — many take these cases on contingency because TILA allows fee shifting.