What is the Purpose of the Truth in the Lending Act?
Dena Standley | May 17, 2023
Edited by Hannah Locklear, B.A.
Summary: The Truth in Lending Act or Regulation Z is a federal law, enacted in 1968, that obligates lenders to disclose the terms and costs of consumer credit. A careful look at all disclosures is the best way to take advantage of the Truth in Lending Act. The act gives consumers the ability to compare loan and credit card terms.
Since May 1968, the Truth in Lending Act (TILA) has protected consumers when they borrow money from banks, credit unions, and nonbank institutions. Under this federal law, TILA, consumers are protected from unfair lending practices.
For credit transparency, TILA ensures lenders disclose the interest rates and fees charged on consumer loans, such as credit cards and second mortgages. Under the TILA, consumers can also rescind certain home equity loans or lines of credit.
An example of this right is the homeowner's right to cancel a home equity line of credit or HELOC agreement within three business days of taking the loan. Similarly, account holders must know any rate increases or other significant changes to credit card account agreements at least 45 days in advance.
Keep reading to learn more about the purpose of the TILA and its importance in protecting consumer rights.
Under TILA, the process of calculating and disclosing borrowing costs is standardized. This information makes comparing loans and credit costs from different lenders easier for consumers. The TILA doesn't regulate interest rates or who lenders can lend to, so long as they are not breaking federal laws that protect against discrimination against protected classes.
As part of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has been responsible for implementing the TILA since July 2011, which:
Protects consumers from unfair lending practices by unethical lenders.
Simplifies comparison of loans and credit with multiple lenders through standardized and transparent lending practices.
Ensures consumers are informed about the interest rates, fees, and costs before taking out credit and being legally obligated to repay it.
Note that some types of loans are excluded from TILA’s coverage, including business loans, student loans, and loans of more than $25,000 that are not used for housing purposes.
What information does the TILA disclosure statement include?
A credit card company cannot use inaccurate and unfair credit billing practices without your permission under the Truth in Lending Act (TILA). The law requires lenders to provide you with loan cost information so that you can compare rates.
The information provided under the TILA disclosure statements includes:
Borrowing costs: The cost of credit expressed as an annual percentage rate, or APR, over a given period
Finance charges: The dollar amount showing the credit cost-- the total amount of interest and fees you pay over the life of the loan
Amount financed: the amount borrowed
Total payments: All payments made by the borrower at the end of the loan, including principal repayment and finance charges
Charges for late payments
Increased interest rates
Fees related to service
Who is responsible for enforcing TILA?
Multiple federal agencies enforce TILA, including the Consumer Financial Protection Bureau and the Federal Trade Commission. The Consumer Financial Protection Bureau (CFPB) protects Americans' financial interests as an independent Federal Reserve System bureau. As part of its role, it enforces the TILA to prevent unfair lending practices.
The Federal Trade Commission (FTC) enforces TILA compliance on nonbank financial institutions. For instance, the FTC may use the TILA to crack down on payday loan predators who charge undisclosed and outrageous fees. It violates the TILA.
Other agencies responsible for enforcing TILA include:
The National Credit Union Administration (NCUA)
The Office of the Comptroller of the Currency (OCC)
The Federal Deposit Insurance Corporation (FDIC)
The Federal Reserve Board (FRB)
The Farm Credit Administration (FCA)
The Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture
The Department of Transportation (DOT)
TILA related Acts
The Truth in Lending Act has been amended several times in response to consumer needs.
As part of TILA, consumers now have access to the following protections:
The financial impact of purchasing a car, home, or other asset through credit or loans can be significant. Review the TILA disclosures carefully to choose the most appropriate borrowing option.
Under TILA, creditors and loan originators cannot be self-serving, especially to the detriment of their clients. As part of a consumer protection measure, certain loans allow consumers to revoke their agreements after a specified period. The Truth in Lending Act protects both consumers and their lenders and creditors.
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