A federal law enacted in 1968 with the intention of protecting consumers in their dealings with lenders and creditors. The Truth in Lending Act was implemented by the Federal Reserve via a series of regulations.
The most important aspects of the Act concern the pieces of information that must be disclosed to a borrower prior to extending credit: annual percentage rate (APR), term of the loan and total costs to the borrower. This information must be conspicuous on documents presented to the consumer before signing, and also possibly on periodic billing statements.
Investopedia Says: TILA applies to most types of credit, whether it be closed-end credit (such as an auto loan or mortgage), or open-ended credit (such as a credit card). The Act regulates what companies can advertise and say about the benefits of their loans or services. For example, borrowers considering an adjustable-rate mortgage must be offered specific reading materials from the Federal Reserve Board to ensure they understand the parameters of an ARM.
Different states and industries have their own variations of TILA, but the chief feature remains the proper disclosure of key information to protect both the consumer and the lender in credit transactions.
Also called the Consumer Credit Protection Act, legislation enacted in 1968 requiring money lenders to be explicit about the true costs of credit transactions. The Truth-in-Lending Act outlaws the use of threatened or actual violence to collect debts and restricts the amount of garnishments. The act also established a National Commission on Consumer Finance.
Act passed by Congress in 1969 requiring lenders to disclose key terms in extensions of credit. The act, part of the Consumer Credit Protection Act, requires venders to disclose the method of computing finance charges, the conditions under which a finance charge may be imposed, and the finance charge expressed as an Annual Percentage Rate. These credit terms must be disclosed clearly and conspicuously in consumer credit applications. The act also requires that borrowers who sign credit agreements giving the lender a security interest in the borrower's home have the right to rescind the contract within three business days. This is known as the borrower's Right of Rescission. The Truth in Lending Act, the earliest of the federal consumer protection statutes, has been amended several times, and has been copied in several states by state laws containing similar consumer protections. See also Adverse Action; Effects Test; Equal Credit Opportunity Act fair credit reporting act; regulation b; regulation m; regulation z.
This entry contains information applicable to United States law only.
Legislation contained in Title I of the Consumer Credit Protection Act (15 U.S.C.A. § 1601 et seq.), which is designed to assure that every customer who needs consumer credit is given meaningful information concerning the cost of such credit.
The Truth-in-Lending Act requires that the terms in transactions involving consumer credit be fully explained to the prospective debtors. This act sets forth three basic rules: (1) a creditor cannot advertise a deal that ordinarily is not available to anyone except a preferred borrower; (2) advertisements must contain either all of the terms of a credit transaction or none of them; and (3) if the credit is to be repaid in more than four payments, the agreement must indicate, in clear and conspicuous print, that "the cost of credit is included in the price quoted for the goods and services."
This law does not impose regulations upon the advertising media, only upon the prospective creditor.
A reverse mortgage is a type of loan used by older homeowners to tap the equity they have in their homes. Borrowers can receive three types of payments: a lump sum, a line of credit to be used as need arises, or a monthly payment for a fixed amount of time or as long as the homeowner lives. The borrower continues to hold the title to the home, and the loan does not have to be repaid until he or she moves out or dies—in the latter case, the borrower's heirs usually sell or refinance the home to pay off the debt. There are only two requirements for eligibility: the borrower must own his or her own home and be at least sixty-two years old. There are no restrictions on how the payments may be used.
The Truth in Lending Act (TILA) (P.L. 90-321, 82 Stat.146) is a federal statute which Congress enacted in 1969 and amended and expanded on numerous occasions after that date. In adopting TILA, the legislature declared:
The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from the awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure the meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.
TILA generally applies to creditors who regularly extend consumer credit that is primarily used for personal, family, or household purposes. The lender must extend the credit to a natural person, and the loan must be repayable with either a finance charge or by written agreement in more than four installments. TILA does not apply to (1) credit transactions in which the total amount financed exceeds $25,000 and which are not secured by real property or personal property used as a dwelling, or (2) loans made pursuant to a student loan program under the Higher Education Act of 1965. To effectuate TILA's goals and policies, the Federal Reserve Board promulgated "Regulation Z," which is found in the Code of Federal Regulation. Contained in the appendices to Regulation Z are a number of model forms for use in lending contracts, and creditors who properly use the forms are deemed to be in compliance with TILA. The United States Supreme Court has held both TILA and Regulation Z constitutional (Mourning v. Family Publications Service, Inc., [1973]).
Congress' primary purpose in adopting TILA was to provide disclosure of credit terms to consumers, and consequently it devoted much of the act to financial disclosure issues. It requires sellers and lenders to inform consumers of terms in a manner that clarifies their meaning and promotes understanding. This enables consumers to easily compare compare the credit terms of various sellers and lenders, which in turn enables them to shop for a contract that most suits their needs.
In addition to credit term disclosure requirements, TILA and Regulation Z also contain provisions governing credit card issuance, liability for unauthorized credit card use, credit card billing error resolution procedures, notice and disclosure requirements for credit card solicitations, disclosure requirements for high-rate mortgages and reverse mortgages, and rescission provisions for various types of transactions in which a security interest is retained in a consumer's principal residence.
"The Definition of Creditor"
TILA applies only to "creditors," a term defined to include natural persons, business organizations, estates, trusts, and governmental units who regularly extend consumer credit and to whom the obligation is initially payable on its face. A person regularly extends consumer credit and so is subject to TILA only if the person extended credit more than twenty-five times in the calendar year immediately preceding the transaction that was subject to TILA and was not secured by the consumer's principal dwelling (unsecured credit.) A person may also become a creditor by extending consumer credit secured by the consumer's principal dwelling (secured credit) more than five times in the preceding calendar year. Persons who satisfy either standard are creditors, for both types of transactions. Once a person becomes a creditor in a calendar year, that person is a creditor for all credit transactions in the next calendar year, regardless of the number of transactions that take place. But for the subsequent year, the counting test again comes into play, and a person will not be a creditor until the requisite number of transactions takes place.
Finally, the legislation and accompanying regulations consider the person to whom the obligation is initially payable a creditor subject to TILA. If the creditor assigns the contract to another person, however, that person (called the assignee) is subject to liability for violations of the act if the assignment was voluntary and if the violations are apparent on the face of the instrument assigned. A violation is considered "apparent" if it involves a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents, or a disclosure which does not use the terms required by the act.
Disclosure Requirement
Regarding the disclosure provisions, the TILA applies to both open-end and closed-end extensions of credit. Open-end credit is typified by the conventional credit card plan, and all other types of consumer credit are closed-end transactions. For open-end credit transactions TILA's disclosure requirements include:
general disclosure requirements;
credit and charge card applications and solicitations;
home equity plans;
initial disclosure statements for charge cards; and
periodic billing statements for credit cards.
For purposes of closed-end transactions required disclosures include:
the name of the creditor;
the amount financed;
the payment schedule;
the total of payments;
the total sale price; and
the existence of any security interest.
The two most important disclosures are the finance charge and the annual percentage rate. The finance charge is the term used to reflect the cost of credit as a dollar amount and includes any charge, such as interest, imposed by the creditor as a condition of the extension of credit. The annual percentage rate is the term used to reflect the finance charge as a percentage of the total annual payments made on the debt. Both terms have to be disclosed more conspicuously than any other terms. Sellers and lenders in closed-end transactions must disclose information clearly, conspicuously and in writing and must provide a copy to the consumer. The disclosures must be grouped together, segregated from everything else, and must contain only information directly related to the required disclosures. This requirement has resulted in use of what is commonly called the "Federal Box," a place on the document where all TILA disclosures are grouped together, separating them from all other information.
Legal Disputes Under Tila
TILA prohibits a card issuer from issuing unsolicited credit cards to either businesses or consumers. It also allows a consumer to assert against the card issuer any claims or defenses that the consumer has against a seller, provided the dispute involved a sale of more than fifty dollars and occurred either in the same state as the consumer's residence address or within 100 miles of the address. Finally, consumers may dispute any errors which appear on a credit card statement, and TILA requires the card issuer to promptly investigate the dispute and correct any errors.
If a creditor takes a security interest in the consumer's principal dwelling as part of a transaction, TILA allows the consumer three business days to rescind, or cancel, the transaction. The creditor must provide the consumer with a notice of this rescission right when the contract is consummated, and cannot loan any money or provide any services until the expiration of the three business days. If the creditor fails to make the appropriate disclosure of the rescission right or certain other material disclosures, the right of rescission continues until three years after the contract is signed, the transfer of all of the consumer's interest in the property, or the sale of the property, whichever occurs first.
A violation of TILA renders the creditor liable for actual damages, and statutory damages of twice the amount of the finance charge, with a minimum recovery of $100 and a maximum recovery of $1,000. If the violation involves a transaction with a security interest in the consumer's principal dwelling, the creditor may be liable for minimum damages of $200 and maximum damages of $2,000.
A creditor may avoid TILA liability for a violation if within sixty days of discovery of the disclosure error, and prior to the litigation or receipt of written notice of the error, the creditor notifies the consumer of the error and makes the necessary adjustments to ensure that the consumer will not pay a charge in excess of the annual percentage rate actually disclosed. A creditor may also avoid liability if it shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide errornotwithstanding the maintenance of procedures reasonably adapted to avoid the error. Examples of a bona fide error include clerical, calculation, computer malfunction and printing errors. An error in legal judgment in regard to the, requirements of TILA is not a bona fide error, even if made in good faith.
A consumer may file an action under the TILA in any United States District Court, regardless of the amount in controversy, or in any state court of competent jurisdiction. In an affirmative action for damages, the litigation must commence within one year of the date of the violation, and because disclosures must be made at the time the parties consummate the transaction, the date of the violation is the date of the transaction.
Bibliography
Clontz, Ralph, Jr. Truth-in-Lending Manual, 6th ed. 1995.
Fonesca, J. Consumer Credit Compliance Manual, 2nd ed. 1984.
The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in Title I of the Consumer Credit Protection Act, as amended (15 U.S.C.§ 1601et seq.). The regulations implementing the statute, which are known as "Regulation Z", are codified at 12 CFR Part 226. Most of the specific requirements imposed by TILA are found in Regulation Z, so a reference to the requirements of TILA usually refers to the requirements contained in Regulation Z, as well as the statute itself.
The purpose of TILA is to promote the informed use of consumer credit, by requiring disclosures about its terms, cost to standardize the manner in which costs associated with borrowing are calculated and disclosed. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires uniform or standardized disclosure of costs and charges so that consumers can shop. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and certain higher-cost mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.
The regulation is divided into subparts and appendices as follows:
Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission requirements, and advertising.
Subpart D contains rules on oral disclosures, Spanish language disclosure in Puerto Rico, record retention, effect on state laws, state exemptions (which only apply to states that had Truth in Lending-type laws prior to the Federal Act), and rate limitations.
Subpart E contains special rules for mortgage transactions. Section 226.32 requires certain disclosures and provides limitations for loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with mortgage transactions.
Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures which if used properly will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.
Other
The lender must disclose to the borrower the annual percentage rate (APR). The APR reflects the cost of the credit to the consumer. It contains things other than interest such as origination fees and discount points. The Truth-in-Lending Act defines "finance charge" as all fees paid either directly or indirectly by the person to whom the credit is extended, incident to the extension of the credit. There are exceptions, to this rule, found at 12 CFR 226.4. Generally, the fees paid to the lender are considered finance charges regardless of any costs they are designed to cover.
