One of the many important documents received by Escrow from a lender is the Truth in Lending Disclosure Statement (TIL). The TIL disclosure statement is one of the most misunderstood documents required for closing, and Escrow Officers are often faced with many questions from the borrower regarding this document. This post is designed to educate the borrower (purchase or refinance) as to how to best understand the Truth in Lending Disclosure Statement. For further details on other documents that are invovled in the escrow process, view our previous Life of an Escrow post.
A lender is required to give the borrower a Truth in Lending “statement” containing information on the loan’s annual percentage rate (APR), the finance charge, the amount financed, schedule of payments, and the total payments required. The statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. The lender will require that the TIL disclosure statement is signed by the borrower along with many other loan documents, all of which must be received back into Escrow.
What is a TIL?
It is important to understand that the TIL statement is not an agreement between the borrower and the lender. It is a federal-required disclosure document (Regulation Z) under The Truth-in-Lending Act (TILA), which is an important part of the federal Consumer Credit Protection Act. The TIL disclosure statement requires complete disclosure of all credit terms, conditions and consumer costs of obtaining credit. Unlike the “Good Faith Estimate” document which discloses an entire sale transaction’s cost, Truth-in-Lending deals only with the cost of the loan.
Understanding the APR Calculation in the TIL Statement
One of the most common questions Escrow receives regarding the TIL statement often has to do with the annual percentage rate. This piece of information in the TIL statement often confuses borrowers, as the APR calculation is prominently displayed on the document. It is not uncommon for a borrow to panic when they are presented with the statement during Escrow and loan document signing, as the APR is usually higher than the agreed contract interest rate of the loan.
To many borrowers APR, or “annual percentage rate”, sounds a lot like “interest rate.” The APR is not an interest rate. It is a measure of the total cost of credit, expressed as a percentage rate. The contract interest rate is defined in the promissory note. The purpose of the APR is to provide the borrower with a uniform measure of the total cost of a loan. The APR calculation includes the contract interest rate in addition to the other costs of the loan, including any prepaid costs (points and fees) that are part of the cost of borrowing. The contract interest rate in the note is only one part of the finance charges. The APR is a representation of the total finance charges.
Though it is important to understand how the APR is calculated, it is equally important to thoroughly understand the other elements of the TIL statement, as the lender requires the statement is signed by the borrower and given to Escrow. For more specific questions related to a borrower’s loan, Escrow will assist the borrower in contacting the lender representative.