Truth in Lending Act

Truth in Lending Act (TILA) is the foundational federal consumer protection statute — enacted in 1968 and implemented through Regulation Z — that requires lenders to present credit terms in a standardized, transparent format so borrowers can compare loan products on equal footing. For secondary mortgage note investors, TILA is far more than an origination-era formality: disclosure defects from the original closing can follow the loan into the secondary market and create legal exposure for subsequent holders of the debt.

Key TILA Disclosure Requirements

TILA mandates that lenders disclose specific terms before and at closing. The most important disclosures for mortgage transactions include:

For loans originated after October 2015, TILA and RESPA disclosure requirements were merged under the TILA-RESPA Integrated Disclosure (TRID) rule. Instead of separate Truth in Lending and Good Faith Estimate forms, borrowers now receive a Loan Estimate before closing and a Closing Disclosure at the closing table.

Why TILA Matters to Note Investors

TILA violations at origination do not disappear when a loan is sold. They travel with the note and can surface as borrower defenses during foreclosure or collection proceedings. The most significant risks include:

• Right of rescission — For certain mortgage transactions (primarily refinances of a primary residence), TILA gives borrowers three business days to rescind the loan after closing. If the lender failed to provide proper disclosures, the rescission window can extend up to three years. A borrower who successfully rescinds can unwind the loan entirely.
• Affirmative defenses — Even when the rescission period has expired, material TILA violations can be raised as a defense against foreclosure. A borrower who demonstrates the APR was understated by more than a specified tolerance, or that required disclosures were missing, may be able to delay or prevent enforcement.
• Assignee liability — Under TILA, a note buyer who qualifies as an "assignee" may inherit certain liabilities from the original lender. The statute limits assignee exposure primarily to violations apparent on the face of the disclosure documents, but this is enough to warrant careful review during due diligence.
• Statutory damages — Borrowers can recover actual damages plus statutory damages (up to $4,000 for individual actions) for TILA violations, along with attorney's fees.

TILA Due Diligence for Note Buyers

When evaluating a loan for purchase, note investors should examine the collateral file for evidence of TILA compliance:

1. Locate the original disclosures — Look for the Truth in Lending disclosure statement (pre-TRID loans) or the Closing Disclosure (post-October 2015 loans). If these documents are missing from the file entirely, that is a red flag.
2. Verify APR accuracy — Compare the disclosed APR against the note's interest rate, points, and origination fees. An APR that appears significantly lower than expected may indicate understated finance charges.
3. Check rescission documentation — For refinance transactions, confirm that the borrower received two copies of the notice of right to rescind and that the rescission period has expired.
4. Assess origination era and lender type — Loans originated during periods of aggressive lending (2004-2008) or by non-bank lenders carry higher TILA violation risk. Owner-financed notes created by private sellers who were unaware of TILA requirements are also common problem areas.

TILA and the CFPB

The CFPB is the primary federal agency responsible for TILA enforcement and rulemaking. The bureau has authority to examine lenders and servicers for compliance, issue fines, and update Regulation Z. Note investors should monitor CFPB guidance and enforcement actions, as they can shift the interpretation of TILA obligations and affect how loan servicing companies handle compliance on behalf of note holders. Changes at the federal enforcement level do not eliminate existing TILA obligations embedded in origination documents — the borrower's rights under the statute remain enforceable regardless of the current regulatory climate.