Truth in Lending Act

The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in title I of the Consumer Credit Protection Act, as amended (15 USC 1601 et seq.). The regulations implementing the statute, which are known as "Regulation Z", are codified at 12 CFR Part 226. Most of the specific requirements imposed by TILA are found in Regulation Z, so a reference to the requirements of TILA usually refers to the requirements contained in Regulation Z as well as the statute itself.

The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms, cost to standardize the manner in which costs associated with borrowing are calculated and disclosed. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires uniform or standardized disclosure of costs and charges so that consumers can shop. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and certain higher-cost mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.

Organization

The statute is divided into subparts and appendices as follows:

Subpart A contains general information. It sets forth: (i) The authority, purpose, coverage, and organization of the regulation; (ii) the definitions of basic terms; (iii) the transactions that are exempt from coverage (which would be any business purpose loan); and (iv) the method of determining the finance charge.

Subpart B contains the rules for open-end credit. It requires that initial disclosures and periodic statements be provided, as well as additional disclosures for credit and charge card applications and solicitations and for home equity plans subject to the requirements of Sec. Sec. 226.5a and 226.5b, respectively. The Subpart also covers the right of rescission requirements and the advertising restrictions for open-end credit. For example, a home equity line of credit advertisement cannot mention any tax benefits without verbiage suggesting that the consumer consult a tax adviser.

Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission requirements, and advertising.

Subpart D contains rules on oral disclosures, Spanish language disclosure in Puerto Rico, record retention, effect on state laws, state exemptions (which only apply to states that had Truth in Lending-type laws prior to the Federal Act), and rate limitations.

Subpart E contains special rules for mortgage transactions. Section 226.32 requires certain disclosures and provides limitations for loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with mortgage transactions.

Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures which if used properly will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.

Other

The lender must disclose to the borrower the annual percentage rate (APR). The APR reflects the cost of the credit to the consumer. It contains things other than interest such as origination fees and discount points. The Truth-in-Lending Act defines "finance charge" as all fees paid either directly or indirectly by the person to whom the credit is extended, incident to the extension of the credit. There are exceptions to this rule found at 12 CFR 226.4. Generally fees paid to the lender are considered finance charges regardless of any costs they are designed to cover.

References

*United States Code (2004). [http://www.access.gpo.gov/uscode/title15/chapter41_subchapteri_parta_.html 15 USC 1601 et seq.] .
* [http://www.access.gpo.gov/uscode/title15/chapter41_subchapteri_parta_.html FDIC, Truth in Lending Act] .
*What happens when mortgage lenders fail to comply with the Act's disclosure provisions? [http://bigpicture.typepad.com/comments/2007/08/coming-soon-tru.html Truth-in-Lending Disclosure Failures Lead to Mortgage "De-Securitization"]
* [http://www.occ.treas.gov/handbook/til.pdf Truth in Lending Handbook] , Office of Comptroller of the Currency, Administrator of National Banks, December 2006.