The Truth in Lending Act protects home equity borrowers by defining a rescission period and requiring lenders to disclose key terms.
Disclosure: Reading this may cause you to read through the mounds of paperwork you receive when borrowing money with a second mortgage. While those loan disclosures might seem incredibly intimidating and tedious, they're provided to help you understand your debt and your rights.
In 1968, lawmakers sought to implement greater protections for consumers who were borrowing money for homes by passing the Truth in Lending Act (TILA). TILA outlines what information your home equity lender must provide to you, and defines your right to cancel home equity financing contracts.
TILA's disclosure requirements apply to second mortgages and some unsecured credit accounts. For your purposes, if you intend to apply for a home equity loan or home equity line of credit (HELOC), you should expect to receive TILA-mandated disclosures. If you don't receive them when submitting your loan application, you should expect them by mail shortly thereafter. Key disclosure items to look for and understand include:
- The statement that your lender will be taking a security interest in your home; this means that you can lose the home if you don't make the scheduled payments.
- The description of conditions that would allow the lender to cancel your credit and demand full payment of all outstanding balances.
- The disclosure of your right to receive a refund of application fees if the disclosed terms change and this causes you not to proceed with the loan. (Variable rate changes resulting from fluctuations of the base index are not considered a change in terms.)
- The explanation of how payments are calculated.
- The definition of the APR. For variable rate loans, disclosures must include a stated maximum APR. Also look for the explanation of how variable rates (and payments) may change over time.
- The minimum payment pay-off example for credit lines. The example won't be based on your loan amount, but that doesn't mean it's irrelevant. It's important to understand that just making minimum payments might leave you with a big balloon payment due at loan maturity.
Right of rescission
Your lender must also explain your right to rescind any financing secured by your primary home. You have until midnight of the third business day following either the execution of the loan agreement, or receipt of full disclosures-whichever is later-to exercise this right. If you never receive the disclosures, you have three years to cancel the debt. You must notify the lender of the rescission in writing and return all funds provided. The security interest in your home will then be canceled and you won't be liable for any finance charges.
Disclosure: Ethical lenders understand and conform to TILA regulations. Knowing your rights helps you manage your loan, but also protects you from predatory lending practices. When you receive those loan disclosures, grab a cup of coffee and start reading.