Truth in Lending Act (Regulation Z): what every mortgage borrower is owed

TILA forces lenders to state the real cost of a mortgage the same way every time, and gives you three business days to walk away from most refinances.

The Truth in Lending Act is the oldest consumer credit law still doing daily work in American mortgage lending. Congress passed it in 1968 as Title I of the Consumer Credit Protection Act, and the Federal Reserve wrote the implementing rule, Regulation Z. Since 2011 the Consumer Financial Protection Bureau owns the rule, which is why the citation you will see on disclosures today is 12 CFR Part 1026. The law does not set interest rates or decide who gets a loan. Its job is narrower and, for a borrower, more useful: every lender must describe the cost of credit in the same terms, at the same moments, so that two offers can actually be compared.

Who TILA covers — and who it leaves out

Regulation Z applies to consumer credit: credit extended to a natural person primarily for personal, family or household purposes, by a creditor who extends such credit regularly. For dwelling-secured loans, “regularly” generally means more than five such loans in a calendar year (or more than one high-cost HOEPA loan). A purchase mortgage, a refinance, a home equity loan and a home equity line of credit on the house you live in are all covered.

The main exemptions matter as much as the coverage:

Business, commercial and agricultural purpose credit is outside TILA entirely. A loan to buy a rental property you will never occupy, a fix-and-flip loan, or a loan to a business entity is usually classified this way. That is the legal reason hard money loans come with almost none of the disclosures described on this page.
Loans to organizations (an LLC, a corporation, a trust that is not a consumer trust).
Credit above the annual dollar threshold, except that any credit secured by real property or a dwelling stays covered no matter the amount.
Student loans under federal programs, and a handful of public-utility and securities-margin arrangements.

Inside the covered zone, the rule splits mortgages into closed-end credit (a standard mortgage) and open-end credit (a HELOC), and the two have different disclosure regimes.

What the rule requires on a mortgage

For a closed-end mortgage the core disclosures are now delivered through the TRID forms — the Loan Estimate and Closing Disclosure — but the substance comes from TILA. The lender must state the annual percentage rate (the interest rate plus certain fees expressed as a yearly rate), the finance charge (the dollar cost of credit over the life of the loan), the amount financed, the total of payments and the payment schedule. The APR must be accurate within one-eighth of one percentage point on a regular loan and one-quarter point on an irregular one; a bigger miss is a violation.

Beyond the up-front numbers, Regulation Z contains rules borrowers rarely hear about until they need them:

Right of rescission. On a refinance, home equity loan or HELOC secured by your principal dwelling, you have until midnight of the third business day after closing to cancel, for any reason. Purchase loans and loans on a second home are not rescindable. If the lender failed to deliver the notice of the right to cancel or gave materially inaccurate disclosures, the window extends to three years.
Adjustable-rate notices. You must receive the ARM booklet and a program disclosure early in the application, a first-adjustment notice between 210 and 240 days before the first new payment is due, and later adjustment notices 60 to 120 days before each payment change.
Periodic statements on most closed-end mortgages, with the payment breakdown, fees, and delinquency information.
Prompt crediting of payments on the day received, and a payoff statement within seven business days of a written request.
Higher-priced mortgage loans (APR above the average prime offer rate by 1.5 points on a first lien, 3.5 on a subordinate lien) require an escrow account for generally at least five years and a full interior appraisal, with a copy to you at least three business days before closing.
Prepayment penalties are allowed only on certain qualified mortgages, only in the first three years, and capped at 2% of the prepaid amount in years one and two, 1% in year three.
Advertising rules. A rate in an ad must be accompanied by the APR; “trigger terms” such as the down payment or payment amount pull in the rest of the disclosure.

Several other regulations on this site are technically chapters of Regulation Z: the ability-to-repay rule, HOEPA, and the loan originator compensation rule.

What TILA does not do

It does not cap interest rates (state usury laws do that, to the extent federal preemption allows). It does not require a lender to offer you a loan, or the cheapest loan. It does not regulate appraised values, title charges or the real estate agent. And it does not reach a loan the law treats as business-purpose, even if the borrower is an individual who feels like a consumer. Borrowers who sign a “business purpose affidavit” on a loan that is really for their own home should know that misclassification is one of the recurring fact patterns in TILA litigation.

Enforcement and remedies

The CFPB supervises the largest lenders and writes the rule; the Federal Trade Commission enforces it against non-bank lenders outside CFPB supervision; the banking agencies examine the institutions they charter. Borrowers also have a private right of action. For a closed-end loan secured by real property, statutory damages currently range from $400 to $4,000 per violation on top of actual damages and attorney’s fees, and class actions are capped at the lesser of $1,000,000 or 1% of the creditor’s net worth. The general statute of limitations for damages is one year from the violation (three years for ability-to-repay and certain HOEPA claims). Rescission claims follow their own three-year clock, and a TILA violation can generally be raised as a defense (“recoupment”) in a foreclosure at any time.

How to use it

Treat the APR as your comparison number, not the note rate, and ask any lender whose APR is far above its rate what fees are driving the gap. On a refinance, do not let anyone disburse money, record a deed or pressure you to “waive” rescission; a valid waiver exists only for a bona fide personal financial emergency, in a dated and signed statement that is not a pre-printed form. Keep every disclosure: the Loan Estimate, Closing Disclosure, ARM notices and rescission notice are the evidence if something is wrong. If the numbers on the final paperwork do not match what was disclosed, write to the lender, keep a copy, and file a complaint with the CFPB; a consumer attorney can evaluate whether a statutory claim exists. The buyer-type pages on this site explain how these protections apply to investors, veterans, self-employed borrowers and others.

Key points

Enacted 1968; Regulation Z (12 CFR 1026) is the rule, administered by the CFPB since 2011.
Covers consumer-purpose credit by regular creditors; business-purpose, investment-property and entity loans are exempt.
APR, finance charge, amount financed and payment schedule must be disclosed in a standard format (via TRID forms for mortgages).
Three-business-day right of rescission on refinances, home equity loans and HELOCs on your principal dwelling; up to three years if disclosures were defective.
ARM adjustment notices 210–240 days before the first reset and 60–120 days before later payment changes.
Higher-priced loans need an escrow account (generally five years) and an interior appraisal delivered three business days before closing.
Prepayment penalties limited to qualified mortgages, three years, 2%/2%/1%.
Private right of action: $400–$4,000 statutory damages, one-year limitations period for most damages claims; CFPB and FTC enforce.

How TILA / Reg Z applies to you

Frequently asked questions

Does TILA apply to a loan on a rental property?

Generally not. Regulation Z covers consumer-purpose credit, and a loan to buy or refinance a property you will rent out is usually classified as business-purpose, which removes it from TILA. The classification depends on facts such as occupancy and how the money is used, not on the label a lender puts on the file, so a misclassified consumer loan can still be challenged.

Can I cancel a purchase mortgage under the right of rescission?

No. The three-day right of rescission applies to refinances, home equity loans and HELOCs secured by your principal dwelling, not to the loan used to buy the home. On a purchase you may still walk away before signing, subject to whatever your sales contract says about earnest money; once the loan is consummated, TILA does not give you a cooling-off period.

How accurate must the APR be?

Within one-eighth of one percentage point above or below the true figure on a regular transaction, and within one-quarter point on an irregular one (for example, a loan with multiple advances or irregular payment periods). If the final APR drifts beyond that tolerance from the last disclosure, the lender must redisclose and, on a TRID loan, give a new three-business-day waiting period.

What is the deadline to sue under TILA?

One year from the violation for most damages claims, three years for ability-to-repay and certain high-cost loan claims, and three years for rescission when disclosures were defective. Separately, a borrower can generally raise a TILA violation defensively (as recoupment) in a foreclosure or collection action even after those periods have run. Verify with a licensed attorney in your state.