What the Truth in Lending Act Means for You
If you’ve ever applied for a home loan or opened a credit card, then you have experienced the Truth in Lending Act, or TILA. The federal law, enacted in 1968, protects you from predatory lending practices and promotes the informed use of consumer credit.
TILA requires creditors to disclose finance charges, annual percentage rates and other terms to help consumers understand the cost of credit and to comparison shop for it.
“The overarching point of TILA is that it has certain borrower protections that lenders are required to adhere to,” says Justin Wiseman, associate vice president and managing regulatory counsel at the Mortgage Bankers Association.
Also known as Regulation Z, TILA applies to most open-end and closed-end credit transactions, according to the Federal Trade Commission. Open-end credit, such as credit cards, allows you to repeatedly borrow as long as you repay, while closed-end credit can be used once and must be paid by a specific date. Examples are mortgages or car loans.
“The most important thing to understand about TILA is that it ensures borrowers are informed about the credit they are getting and the cost of that credit,” Wiseman says.
Why TILA Came Into the World of Consumer Protection
The Truth in Lending Act requires creditors to disclose all terms and fees to consumers. TILA also standardized how borrowing costs are calculated and disclosed to make comparing them across lenders easier for consumers.
Before TILA, predatory lenders could bury loan information in pages of fine print, making it hard to figure out the true cost of credit. Basically, TILA puts all credit costs in writing before you borrow and allows you to go into a purchase with eyes wide open.
“Congress passed TILA so people could be aware of the cost of credit in a transparent way,” Wiseman says.
How the Truth in Lending Act Works
The FTC enforces the Truth in Lending Act, which mandates that borrowers receive written disclosures about important terms of credit before they are legally bound to pay. TILA disclosures are often provided in loan contracts, according to the Consumer Financial Protection Bureau.
With a mortgage, all costs are laid out on the closing disclosure, Wiseman says. TILA disclosure statements for loans and lines of credit include:
- Finance charges.
- Payment schedule.
- Amount financed.
- Total amount made in payments.
TILA also requires disclosure of late payment fees, interest rate increases, and service charges and fees.
Another important provision of the law allows the right of rescission. This gives borrowers three days to back out of refinances and home equity loans or lines of credit without losing money. The right of rescission does not apply to mortgages once closing documents are signed.
This right gives you time to change your mind and cancel. The intention is to help protect borrowers from the high-pressure tactics of predatory lenders, according to the Office of the Comptroller of the Currency.
What the Truth in Lending Act Does for Consumers
TILA not only creates a uniform system for disclosures but also offers consumers these safeguards, according to the FTC:
- Protects against inaccurate and unfair credit billing and credit card practices.
- Offers rescission rights for certain loans.
- Provides rate caps on some dwelling-secured loans.
- Limits home equity lines of credit and some closed-end home loans.
- Sets minimum standards for dwelling-secured loans.
- Prohibits unfair or deceptive lending practices.
What the Truth in Lending Act Does Not Do for Borrowers
Also, TILA does not tell financial institutions how much interest they can charge or whether they can approve a loan, according to the Office of the Comptroller of the Currency.
Penalties for Violating TILA
Violations of the Truth in Lending Act may entitle consumers to compensation. Common violations include undisclosed finance charges and interest rate errors.
Mortgage-related violations may involve failures to promptly credit payments, to provide payoff statements upon request, to send periodic statements, or to issue interest rate and payment change notices, according to the Philadelphia-area Law Office of Joseph M. Adams.
Adds Wiseman: “There are some strong penalties and ways for consumers to get their rights appealed if TILA is not followed.”
Awards for violations range from $500 to $5,000. Reach out to your financial institution for guidance on dealing with a TILA violation, says Elizabeth LaBerge, senior director of advocacy and counsel at the Credit Union National Association.
If you belong to a credit union, you might start by contacting its supervisory committee, “which is tasked with resolving complaints, among other duties,” LaBerge says.
You could also choose to seek advice from an experienced consumer protection attorney.
Generally, you can try to avoid the hassle of filing a TILA claim by knowing what you are signing before you get a credit card or loan. Always read terms carefully.
Wiseman reminds: “If you have any questions about the loan you are taking out, you should always ask your lender because they will explain the information so you understand the cost and your payment obligations in the future.”