Truth in Lending

Truth in Lending (TIL) is a law set up to require lenders to provide uniform information that allows consumers to make easy comparisons between loans and lenders. It is a good idea, and one that is sorely needed. Sadly, though, in its current form TIL does a poor job of providing consumers with useful information.

Rather than providing consumers with simple, easy-to-understand information, TIL disclosures are complicated and often incomprehensible to everyday borrowers. A useful disclosure might include the interest rate, the upfront costs expressed as a percentage of the total loan, the upfront costs expressed in dollars, and the interest cost over the expected life of the mortgage.

TIL, on the other hand, includes total payments, the amount financed, the finance charge, and the Annual Percentage Rate (APR). The first three numbers are meaningless to most consumers. They also have limited use in comparing loans of different types and terms. APR also is included in place of an interest rate. However, the concept of APR has a number of flaws.

First of all, all upfront costs are not included in the APR. Which costs are included also vary by lender. This is deadly for a measurement meant to compare easily across loans and lenders. APR is also limited in its usefulness because it assumes that everyone is going to keep their loan for the full term. This ignores the reality that most people either refinance their mortgage or sell their home at some point. A measurement utilizing your best estimation of how long you are likely to stay with the loan would be much more useful.

Overall, TIL is a good idea that is simply executed poorly. It does provide some good points, such as warning borrowers if their loan includes a prepayment penalty.