Truth in Lending Act & Regulation Z: Definition & Overview

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

How much does that home mortgage actually cost? Let's take a look at the highlights of the Truth in Lending Act and Regulation Z to see how lenders must inform borrowers about the total costs of borrowing money.

Truth in Lending

Sarah and Tom are very concerned about how much their mortgage is actually going to cost them. They've seen a lot in the news lately about interest rates and how much those rates can cost a homeowner over a long period of time. How are they to know about the effects of all the little fees and charges that the lenders add to the mortgage? The Truth in Lending Act and Regulation Z obligate lenders to provide borrowers with information that explains the total cost of financing. Let's take a look at what these laws are and how they affect Sarah and Tom.

Truth in Lending Act and Regulation Z

The Truth in Lending Act of 1968 requires lenders to disclose to borrowers how the costs of borrowing for a mortgage are calculated. The purpose of the act isn't to limit the charges that lenders include with the loan, but to make it clear to borrowers what those charges are. The Act requires conspicuous presentation of the interest rate, term of the loan, and total borrowing costs before the borrower signs for the loan.

The Truth in Lending Act was implemented through regulatory guidance in Title 12 of the United States Code. Known as Regulation Z, this guidance contains the actual language that dictates what and how information is presented to borrowers like Sarah and Tom. In common usage lenders, real estate agents, and other real estate professionals use the terms Regulation Z and Truth in Lending interchangeably. The simplest way to explain the difference is that the Truth in Lending Act says what must be disclosed, and Regulation Z is how that information is presented.

Disclosure

So how does Regulation Z directly affect Sarah and Tom? Let's consider the first big piece of information that a borrower wants to know: the APR, or annual percentage rate. The APR is a standardized formula that shows the yearly cost of borrowing. The APR includes not only the base interest rate, but also the effect of adding closing costs into the mortgage. By using APR as a consistent method of expressing the cost of a mortgage, lenders cannot disguise the cost by expressing interest over different periods, such as months. This makes it easier to compare different mortgage offers.

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