Before the introduction of the Truth in Lending Act, borrowers took loans without understanding all the terms of the loan.
Lenders used different loan terms and borrowers struggled to understand what they all meant. It was all difficult for borrowers to compare loan terms and conditions before making a decision. The Truth in Lending Act eliminated these problems.
The Truth in Lending Act (TILA) was enacted by Congress in 1968. This has become the common name that is used for Title 1 of the Consumer Protection Act. The Act specifies the kind of information that the lender is expected to offer the borrower before offering any form of credit to him or her. The TILA requires that lenders explain credit terms in ways that are easily understood by the borrower. So that the borrower can easily compare rates and conditions and confidently make borrowing decisions.
The TILA applies to most credit types including open-ended revolving credit such as lines of credit and credit cards and closed-ended credit also called installment loans.
The TILA mandates lenders to share the following information with the potential borrower.
- The Annual Percentage Rate (APR)
This rate, expressed in a percentage, is the cost of the credit. The APR makes it easy for you to compare various loan rates. The APR includes the interest rate.
- Finance Charge
This refers to the cost of the credit in dollars.
- Loan Amount
This refers to the amount the borrower is borrowing.
- Total Payments
The total payments include the total amount the borrower will pay at the end of the loan period.
The lender is also mandated to provide information on loan prepayments, late fees, monthly payments, and the number of the payments the borrower makes throughout the loan period.
- Provides borrowers with rights to rescission.
- It also regulates the rates on certain dwelling-secured loans. Lenders cannot charge beyond a certain rate.
- It also protects borrowers against errors and unfair credit card and billing practices.
- It also checks unlawful mortgage practices.
- It also checks home equity lines of credit and some closed-end home mortgages.
- Fair Credit Billing Act
- Home Equity Loan Consumer Protection Act
- Home Ownership and Equity Protection Act
- Fair Credit and Charge Card Disclosure Act
Compensation for Loan Originators
TILA specifies how loan originators should be compensated. Now, lenders must use only the loan amount in calculating compensations for loan originators. They must not use any other loan terms in this process. Loan originators must also receive only one compensation. This stops the instances where loan originators receive compensation from both borrowers and creditors or third parties. The Act also prohibits loan originators from recommending loans that increase their compensation without increasing the benefit of the consumer. This is only allowed if it benefits the consumer.
Rights of Rescission
The Truth and Lending Act offers borrowers rescission rights. This right means that a borrower can reject a loan within three days after accepting the loan. Sometimes, lenders use high sales tactics to get a borrower to accept a loan package. Borrowers may also accept the loan package due to the pressure that comes with the sales tactics. However, after the borrower settles down and thinks critically about the loan product, he may realize that the credit package may not suit his needs. The borrower has every right to rescind the decision to accept that loan within three days. The creditor must accept the borrower’s decision. The rights of rescission apply to all loan types.
Items Not Governed by the Truth in Lending Act
The Truth in Lending Act does not regulate the interest rate a lender will charge on a credit facility. The Act does not specify the persons for whom credit can be extended beyond the standard laws against discrimination.
This is a rule of the Federal Reserve Board that states that a lender must provide the true cost of the credit in a written form before the borrower proceeds to borrow. It should clearly state the APR, loan amount, interest rate, fees, and repayment terms. There should be no hidden fees. If the borrower will be charged for late payments, it must be stated along with the amount to be paid. The Regulation Z and the Truth in Lending Act are sometimes used interchangeably since the provisions are the same.
What Does the Truth in Lending Act Do?
The act provides a standard system for disclosures. Apart from that, it does the following: