Truth in Lending Act - Explained
What is TILA?
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What is the Truth in Lending Act?
The Truth in Lending Act (TILA) was passed with the purpose of protecting individuals from entering into deceptive or confusing credit relationships. The group of regulations implementing the provisions of TILA is known as Regulation Z. These regulations contain the bulk of the requirements for businesses to comply with TILA. The CFPB, along with the Federal Reserve Board, has rule-making authority under Regulation Z. The FTC has enforcement authority for TILA.
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When does the Truth in Lending Act Apply?
TILA places requirements on businesses that extend credit to consumers to make certain disclosures regarding the terms of the credit. Most notably, it requires a uniform manner of disclosure of the borrowing costs and payment associated with a particular loan. This allows consumers to more readily compare credit terms across lenders. TILA applies to consumer transactions with the following characteristics:
the lender is in the business of extending credit for loan of money, sale of property, or furnishing a service;
- the debtor is a person;
- a finance charge may be imposed; and
- the credit obtained is primarily for personal, family, household, or agricultural purposes.
Other provisions of TILA protect consumers entering into consumer transactions requiring them to post their personal residence as collateral.
Note: TILA applies specifically to loans made for consumer purposes. Business loans, even for closely-held businesses, are not included.
What are the Disclosure Requirements under TILA?
Disclosures are required when the buyer pays in four installments of more. TILA requires the following specific disclosures:
Finance Charge - The sum of all charges payable directly or indirectly by the debtor or someone else to the creditor as a condition of the extension of credit.
Example: Finance charges include: interest, service charges, loan fees, points, finders fees, fees for appraisals, credit reports or investigations, and life and health insurance required as a condition of the loan.
Annual Percentage Rate - The lender must disclose the finance charge, express it as an annual percentage rate, and specify the methods for making the computation.
Note: TILA introduced the Annual Percentage Rate (APR) calculation mandated for all consumer lenders.
Financing Statement - Before extending credit, the lender must provide a detailed financial statement to the borrower before extending credit.
Note: The financing statement must contain the APR, finance charges, any default or delinquency charges from late payment, description of property used as security, the total amount financed, and a separate statement of the debt from finance charges.
How is TILA Enforced?
TILA allows for various penalties and remedies. Civil remedies for violation of TILA include an amount twice the amount of finance charges, plus attorneys fees. Creditors may avoid liability for an error if they notify and correct the error within 60 days of discovery. The borrower may generally rescind the transaction within 3 days of the transaction or upon receipt of notice of right to rescind. The right to rescind is heightened if there is a failure to adequately disclose on a mortgage loan.
Discussion: What do you think about the underlying objectives of TILA? Do you think the extensive disclosure requirements achieve these objectives? Why or why not? Do you think that the applicability of the provisions are adequate? Why or why not?
Practice Question: Cary owns a small business that sells consumer goods. She routinely extends credit to individuals purchasing her goods. Cary charges a financing charge and interest rate that is based upon the customers credit score. What disclosures must Cary make to her customers prior to entering into a financing arrangement?
Academic Research on Truth in Lending Act (TILA)
- Legislative Methodology: Some Lessons from the Truth-in-Lending Act, Rubin, E. L. (1991). Geo. LJ, 80, 233. The Truth in Lending Act of 1968 had three primary objectives: Stabilization of the economy via an increase in the informed use of credit. Offering the most favorable credit terms to consumers. Protection of consumers against inaccurate or unfair billing. TILA mandated that creditors disclose the annual interest rate on all consumer loans. Although the Act was unsuccessful in achieving its intended goals, it ended up achieving quite a few unintended goals.
- Truth, understanding, and high-cost consumer credit: The historical context of the truth in lending act, Peterson, C. L. (2003). Fla. L. Rev., 55, 807. This paper identifies the following categories in which policy strategies for confronting the harmful aspects of consumer credit can be classified: Amnesty towards debtors, Restrictions applied to contracts, Selective protection, Self-help free markets, Charitable lending, Cooperative lending. The credit disclosure requirements enforced by TILA are, without doubt, innovative. However, the practical outcomes of the Act fell rather short of its theoretical success.
- Preventing future economic crises through consumer protection law or how the truth in lending act failed the subprime borrowers, Sovern, J. (2010). Ohio St. LJ, 71, 761. This paper ascribes the economic crisis of the early 2000s to the failure of TILA in providing mortgage borrowers with the necessary tools to evaluate the feasibility of fulfilling their loan obligations. The author samples mortgage disclosures and surveys several brokers in order to understand how borrowers reacted to disclosures. The paper concludes that while borrowers in general failed to comprehend the importance of perusing loan disclosures, some of these disclosures did, in fact, mislead borrowers about their monthly mortgage payments.
- Truth in Lending Act, Miller, F. H. (1979). The Business Lawyer, 1405-1422. This paper addresses the complexities associated with the Truth in Lending Act in the first decade since its inception. Although the Congress expressed its concern regarding this issue, the complexities have all but reduced. The author prescribes an intervention from a well informed bench and bar in order to contain the situation. He believes that the Annual Survey of Truth in Lending is a right step in that direction.
- Searching for the Truth in Lending: Identifying Some Problems in the Truth in Lending Act and Regulation Z, Griffith, E. (2000). Baylor L. Rev., 52, 265. The paper conducts a thorough analysis of the Truth in Lending Act (TILA) and identifies certain issues in both TILA as well as Regulation Z. While the Truth in Lending Act of 1968 made it obligatory for lenders to provide loan disclosures to consumers, most often borrowers failed to comprehend these disclosures. The Federal Reserve Board, on its part, attempted to expedited the Truth in Lending Act by issuing Regulation Z.
- Determining the finance charge under the truth in lending act, Landers, J. M. (1977). Law & Social Inquiry, 2(1), 45-153. Ascertaining the finance charge is crucial to the Truth in Lending Act. This paper scrutinizes the complexities associated with the drafting process of the finance charge provisions and provides insight into the legal and governmental interpretations of the statutory provisions. It also analyzes the feasibility of applying this concept to different types of transactions. The paper endorses the present provisions, while still acknowledging its shortcomings, especially in statute and regulation.
- The Scope of Coverage of the Truth in Lending Act, Landers, J. M. (1976). Law & Social Inquiry, 1(2), 565-687. The Truth in Lending Act (TILA) seldom evoked questions pertaining to its scope of coverage for several years since its inception. The author offers two reasons as an explanation for this phenomenon. First, the Truth in Lending Act had a very broad undisputed coverage. Secondly, legislators of the era showed little enthusiasm for defining the perimeter of coverage.
- The Truth In Lending Act and VariableRate Mortgages and Balloon Notes, Landers, J. M., & Chandler, C. (1976). Law & Social Inquiry, 1(1), 35-86. Notwithstanding the recent trend of preference for non-traditional modes of living, owning a conventional home still forms a significant part of the middle class spirit in the United States. However, with inflation severely affecting the price of housing in recent times, there has been a dramatic shift in consumer behavior.
- It's All About the Principal: Preserving Consumers' Right of Rescission Under the Truth in Lending Act, Shepard, L. K. (2010). NCL Rev., 89, 171. This paper scrutinizes certain market conditions that threaten the consumers right of rescission as provided in the Truth in Lending Act (TILA). It also offers a solution that seeks to dissuade lenders from engaging in manipulative or fraudulent activities intended to deny rescission to the borrower. The motive of this approach is to preclude foreclosures as well as to withhold the validity of TILAs consumer-protective mandate. Can't Get No Satisfaction-Revising How Court's Rescind Home Equity Loans under the Truth in Lending Act, Murken, R. (2004). Temp. L. Rev., 77, 457. This paper discusses the rules of rescission of home equity loans enforced by federal courts under the Truth in Lending Act (TILA). Although such rules have been formulated keeping in mind the interests of borrowers, the outcomes of numerous court cases reveal that federal courts are more predisposed to shielding lenders who have violated the terms of the Lending Act, than protecting their defrauded customers.
- Lenders and Consumers Continue the Search for the Truth in Lending Under the Truth in Lending Act and Regulation Z, Griffith, E. (2007). San Diego L. Rev., 44, 611. The author scrutinizes the Truth in Lending Act (TILA) from the perspectives of the lender as well as the consumer. The primary issue associated with the implementation of this act is its interpretation. Misconstrued statutes as well as conflicting judicial decisions have negatively impacted implementation of TILA. This paper discusses several aspects of the Truth in Lending Act, including provisions such as the right of rescission, besides arbitration clauses and statutory limitations.