10. 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.
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.
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, finder’s 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.
TILA allows for various penalties and remedies. Civil remedies for violation of TILA include an amount twice the amount of finance charges, plus attorney’s 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 customer’s credit score. What disclosures must Cary make to her customers prior to entering into a financing arrangement?