When you take out any type of bank loan in the United States, you're protected by the Truth in Lending Act. This law falls under the purview of the Federal Trade Commission and applies to all interest bearing loan products.
Enacted in 1968, The Truth in Lending Act came into being for the sole purpose of keeping borrowers from falling victim to predatory lenders. The law mandates that lenders are responsible for making sure that consumers are aware of what they are agreeing to when they borrow money.
Regulations
The Truth in Lending Act serves the important purpose of ensuring that all relevant information about a loan product is disclosed to borrowers before the borrowers enter into a contract with a lender.
Under this law, lenders are required to provide potential borrowers with thorough details about the cost of financing as well as all terms and conditions of the loan agreement being proposed.
This law, however, does not regulate what the terms of any finance agreement must be. Instead, the Truth in Lending Act focuses specifically on disclosure. It mandates full disclosure of the true cost of credit. Finance contracts cannot be executed until full disclosure is made and clearly communicated to borrowers.
Compliance
To be in compliance with the Truth in Lending Act, lenders must provide their customers with specific information in writing. In the case of a mortgage loan, for example, the Truth in Lending Act mandates that a "Good Faith" estimate of the amount of money the borrower is likely to have to pay out of his or her pocket in order to be able to close the loan.
The "Good Faith" estimate is required to includes the dollar amount financed, the entire finance charge, the number of payments necessary, and the interest rate expressed as an annual percentage rate (APR).
In addition, information about penalties, rate adjustments, and other information that can impact the cost of credit must also be included on the disclosure statement.
Protect your rights
As a consumer, it's essential that you know your rights under the Truth in Lending Act and that you take steps to make sure that you are fully informed before entering into any loan agreement.
Don't borrow money without being certain that you have a clear understanding of exactly how much the credit you are seeking will cost you over the life of the loan.
If you have questions after reviewing the disclosure, ask your loan officer or banker to clarify until you are comfortable that you are clear about the terms of finance contract.