Real Estate Salesperson · Financing and settlement · 6 min read
Truth in Lending, Regulation Z and TRID
- Differentiate between the Truth in Lending Act, Regulation Z, and TRID disclosure requirements and scope of coverage.
- Identify finance charges, Annual Percentage Rate (APR) calculations, and advertising trigger terms that require mandated credit disclosures.
- Apply TRID timelines, delivery standards, and waiting periods for the Loan Estimate and Closing Disclosure from loan application through consummation.
The Truth in Lending Act, Regulation Z, and the Cost of Credit
The Truth in Lending Act was enacted by Congress in 1968 to promote the informed use of consumer credit. To implement the Truth in Lending Act, federal regulators issued Regulation Z. Today, the Consumer Financial Protection Bureau administers Regulation Z and shares federal enforcement responsibility with other agencies. The primary goal of this legislation is consumer protection: the Truth in Lending Act requires lenders to disclose the true cost of obtaining credit so that borrowers can make meaningful comparisons between credit offers.
The Truth in Lending Act generally applies to covered consumer credit extended primarily for personal, family, or household purposes. It does not apply to commercial, business, or agricultural loans. Furthermore, credit extended to organizations, such as corporations and partnerships, is generally exempt from the Truth in Lending Act, though certain trusts may be treated differently. Real estate salespersons, who operate under the authority of a supervising broker, must understand that standard residential consumer mortgages fall squarely under these rules, whereas investment entities or business ventures frequently do not.
Under Regulation Z, the true cost of credit is communicated through the finance charge and the Annual Percentage Rate (APR). A finance charge is the dollar cost of consumer credit, including interest and applicable fees paid directly or indirectly by the consumer as a condition of obtaining credit. These charges include interest, loan origination fees, discount points, and private mortgage insurance premiums. In contrast, in a real-estate-secured transaction, bona fide, reasonable fees for title examinations, appraisals, and credit reports are generally excluded from the finance charge.
The Annual Percentage Rate expresses the cost of credit as a yearly rate based on the amount financed. Because the APR reflects interest and applicable finance charges, rather than the interest rate alone, it is typically higher than the nominal note interest rate. It incorporates upfront financing fees into the annualized figure, although it does not reflect every fee charged in connection with a loan. The primary purpose of disclosing the Annual Percentage Rate is to allow consumers to compare the true cost of different loans effectively.
| Fee or Cost Item | Regulation Z Classification | Included in APR Calculation? |
|---|---|---|
| Loan interest and discount points | Finance charge | Yes, included in the finance charge and reflected in the APR |
| Loan origination fees | Finance charge | Yes, included in the finance charge and reflected in the APR |
| Private mortgage insurance premiums | Finance charge | Yes, included in the finance charge and reflected in the APR |
| Title examination fees (bona fide and reasonable) | Excluded fee | No, excluded from the finance charge and the APR |
| Appraisal and credit report fees (bona fide and reasonable) | Excluded fee | No, excluded from the finance charge and the APR |
Common mistakes
- Believing that the three-business-day right of rescission applies to standard residential purchase mortgages. In fact, it applies only to certain refinance and home equity transactions on a principal dwelling, never to purchase or initial construction loans.
- Assuming that real estate licensees are exempt from credit advertising rules. Salespersons working under a supervising broker must comply with Regulation Z trigger term rules when advertising financing, even though they are not lenders.
- Thinking that any change to a Closing Disclosure forces a new three-business-day waiting period. A full three-day reset is only triggered by an APR change outside allowable tolerances, a change in loan product, or the addition of a prepayment penalty; routine walk-through adjustments do not reset the waiting period.
- Counting any general financing statement as a trigger term. Phrasing like 'low down payment' or 'FHA financing available' does not trigger required disclosures; trigger terms require specific repayment periods, payment amounts, finance charges, or down payment numbers.
Key points
- The Truth in Lending Act was enacted in 1968 to promote informed credit use, implemented by Regulation Z, and administered by the Consumer Financial Protection Bureau alongside other federal agencies.
- The Truth in Lending Act covers consumer credit for personal, family, or household purposes and exempts commercial, business, agricultural credit, and most organizations.
- Finance charges include interest, origination fees, discount points, and private mortgage insurance, while bona fide, reasonable appraisal, title examination, and credit report fees are excluded in real estate transactions.
- The Annual Percentage Rate (APR) reflects the cost of credit as a yearly rate and is typically higher than the nominal note rate, providing consumers a standard tool to compare loan costs.
- Advertising trigger terms, such as specific down payment amounts, payment numbers, or finance charges, mandate disclosing the down payment, terms of repayment, APR, and whether the rate can increase.
- TRID combined previous disclosures into the Loan Estimate (replacing the Good Faith Estimate and initial TILA disclosure) and the Closing Disclosure (replacing the HUD-1 and final TILA disclosure).
- A Closing Disclosure must be received at least three business days before consummation, and a new three-business-day waiting period is triggered only by an APR variance beyond tolerance, a change in loan product, or the addition of a prepayment penalty.
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