What is truth in lending act (TILA)?

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-business-day cancellation period starts after the last of these events:

1. The loan agreement becomes binding at closing
2. You receive the required Notice of Right to Rescind
3. You receive all required 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 covered high-cost mortgages based on limits for the APR, points and fees, or prepayment penalties. The limits vary with the loan amount and type. 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
• General prohibition on balloon payments, with certain exceptions
• 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 or assets; employment status if employment income is relied on; payment on the loan; payments on simultaneous loans; mortgage-related obligations (taxes, insurance, HOA fees); current debts, alimony, and child support; debt-to-income ratio or residual income; and credit history.

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; since 2021, the general definition limits the loan's price instead of capping DTI at 43%). 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.