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
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.