Truth-in-Lending (Reg Z) – (Initial Disclosure LE – Part 2 of 3)

In the first post on initial disclosures, there was a discussion of the Lender Estimate (“LE”).  In this post, part 2 of 3, this is a discussion of the other major disclosure that takes place at loan application, the Truth-In-Lending Disclosure (“TIL”) or Reg Z. 

As mentioned in the first post, there are two major disclosures that take place when the loan application has reached the “trigger” point.  That is, the six items that make a loan application official for government reporting purposes. Please see part 1 of this series for more information.  The second major disclosure is the TIL.

The TIL disclosure is made up of four major components along with several other items that are disclosed that outline certain terms of the loan.  These four major components are:

1. Amount Financed
2. Total of Payments
3. Finance Charge
4. Annual Percentage Rate

Though the TIL was required by statutes (Regulation Z) to aid the consumer regarding the “true” cost of financing a loan, instead there is much confusion about the disclosure both for the consumer and, regrettably, the mortgage industry.  This is a brief synopsis of what each of these items are:

Amount Financed – The Amount Financed is the loan amount (the “note amount”) minus the fees paid by the consumer to the lender at the time of closing.  For example, if the loan amount is $400,000 and the fees paid to the lender is $1000, then the Amount Financed is $399,000.

Total of Payments – This one is self-explanatory.  This is the total of payments paid over the term of the loan if the borrower makes only the minimum monthly payments.

Finance Charge – This is the difference between the total of payments over the term of the loan and the amount financed.  Using the above example on a $400,000 loan with a $399,000 Amount Financed, at an interest rate of 4.5%, the payment per month is (P&I) is $2027.  This would be a total of payments over 30 years of $729,627. Subtracting the Amount Financed of $399,000, this leaves a finance charge of $330,627.  This is basically the interest paid over the term of the loan, if it is paid to full term.

Annual Percentage Rate (“APR”) – The APR represents figuring an interest rate based on the Amount Financed with the monthly required payment.  Using our example, this would be backing into an interest rate with an amount of $399,000 and a P&I payment of $2027. When this is done, the resulting interest rate is 4.521%.  The APR will, with very few exceptions, exceed the actual interest rate on the note.

Along with these major items, there are several other items that are disclosed on the TIL.  These include a schedule of payments; whether the loan has an adjustable rate feature; whether the loan is assumable; and whether the loan has a pre-payment penalty.

Based on what is disclosed on the form, it is understandable why a consumer can be confused on this form.  Because of the complexity of the TIL form, please contact your  Loan Officer for more information.

In part 3 of this series, there will be a discussion of non-compliance on the LE requirements or when the Reg Z must be redisclosed.


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