Truth in Lending Act – Consumer Rights and Protections

    The Truth in Lending Act (TILA) is a federal law passed in 1968 to ensure that consumers are treated fairly by businesses in the lending marketplace and are informed about the true cost of credit. The TILA requires lenders to disclose credit terms in an easily understood manner so that consumers can confidently comparison shop interest rates and conditions.

    Lenders must provide a Truth in Lending (TIL) disclosure statement that includes information about the amount of your loan, the annual percentage rate (APR), finance charges (including application fees, late charges, prepayment penalties), a payment schedule and the total repayment amount over the lifetime of the loan.

    The TILA outlines rules that apply to closed-end accounts, such as home or auto loans, and open-ended accounts like credit cards. It does not put restrictions on banks regarding how much interest they may charge or whether they must grant a loan. It does require lenders to disclose information about all charges and fees associated with a loan.

    Consumers who are refinancing residential mortgage loans have the “right of rescission,” which is a three-day cooling off period during which they may cancel the loan without losing any money.

    What Is Regulation Z?

    Regulation Z is a Federal Reserve Board rule that requires lenders to give you the true cost of credit in writing before you borrow. That includes spelling out the amount of money loaned, the interest rate, APR, finance charges, fees and length of loan terms.

    In short, Regulation Z is another name for the Truth in Lending Act. The two are used interchangeably.

    The TILA and Regulation Z have been amended so many times since passage in 1968 that it would take a book to describe all the changes. The first came in 1970 and prohibited unsolicited credit cards, but that was just the start of an onslaught of amendments dealing with almost every aspect of lending and credit cards.

    One of the major amendments was to give the Consumer Financial Protection Bureau (CFPB) rulemaking authority under the TILA. The CFPB has used it muscle heavily in this area, issuing rules for ability-to-repay requirements for mortgages, refined loan originator compensation rules and points and fees limits that apply to qualified mortgages.

    TILA and the CARD Act

    The most significant amendments had to do Regulation Z rules regarding credit cards that came with the 2009 signing of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act).

    The CARD Act requires financial institutions and businesses to disclose vital information when issuing new credit cards. A card issuer must disclose interest rates, grace periods and annual fees. The issuer is also required to remind you of an upcoming annual fee prior to a card’s renewal. If the issuer offers credit insurance, you must be made aware of changes in coverage.

    The highlighted changes from that amendment include:
    • Card companies are prohibited from opening a new account or increasing the credit limit on an existing one without first considering the consumer’s ability to pay.
    • Credit card issuers are required to give consumers at least a 45-day notice before charging a higher interest rate and at least a 21-day “grace period” between receiving a monthly statement and a due date for payment.
    • Card companies are required to disclose on statements that consumers who make only minimum payments will pay higher interest and take longer to pay off the balance
    • Fee for using mail, phone or electronic payment method are eliminated, except when using an expedited service
    • Companies are prohibited from charging fees for over-the-limit transactions, unless the cardholder opts in to this form of protection.
    • Card companies are prohibited from offering gift cards, t-shirts or other tangible items as marketing incentives for signing up for a card.

    A 2015 study by the CFPB found that the CARD Act helped reduce over-the-limit fees by $9 billion and late fees by $7 billion — a total of $16 billion saved by consumers.

    The same study said that the total cost of credit was down two percentage points in the first five years since the CARD Act was passed and that more than 100 million credit card accounts were opened in 2014.

    Other Acts Related to TILA

    As consumer needs changed over the years, the Truth in Lending Act was amended to help consumers in several areas.

    TILA now includes the following acts to protect consumers:
    • Fair Credit Billing Act
    • Fair Credit and Charge Card Disclosure Act
    • Home Equity Loan Consumer Protection Act
    • Home Ownership and Equity Protection Act

    The Fair Credit Billing Act

    Dating back to 1975, the Fair Credit Billing Act (FCBA) protects consumers from unfair billing practices and provides a method for addressing errors in open-end credit accounts such as credit cards. Billing issues include math errors, charges for the wrong date or amount and unauthorized charges. The act also covers statements mailed to a wrong address or failure to credit payments to an account.

    To dispute a billing error, send a written notice of the discrepancy to the creditor within 60 days of the statement date. Include details of the error, as well as copies of receipts and any other forms of proof. Send the information to the “billing inquiries” address on your statement.

    The creditor is required to respond to the dispute within 30 days and has a maximum of 90 days to investigate and resolve the error. If you’ve taken the appropriate steps to report an error, your liability is limited to $50.

    Fair Credit and Charge Card Disclosure Act

    The Fair Credit and Charge Card Disclosure Act (FCCCDA), enacted in 1988, requires financial institutions and businesses to disclose vital information when issuing new credit cards. A card issuer must disclose interest rates, grace periods and all fees, such as cash advances and annual fees. The issuer is also required to remind you of an upcoming annual fee prior to a card’s renewal.

    One other important requirement is that the same information must be part of any “pre-approved” offer, either by direct mail, telephone or other solicitations. The terms and conditions must be presented in writing. Card issuers must inform customers if they make changes in rates or coverage for credit insurance.

    Home Equity Loan Consumer Protection Act

    The Home Equity Loan Consumer Protection Act (HELCPA) of 1988 requires lenders to disclose the terms of a home equity loan before the loan is finalized. Interest rates, payment terms and miscellaneous charges must be disclosed with the loan application and before the first transaction. If terms change during that time, you have a right to refuse the loan and you are entitled to a refund of all application fees.

    The act also prevents creditors from changing or terminating your home equity plan after it is opened — except under special circumstances.

    Home Ownership and Equity Protection Act

    Enacted in 1994, the Home Ownership and Equity Protection Act (HOEPA) helps protect you against predatory lending (i.e. unfair lending practices designed to take advantage of consumers with potential financial shortcomings).

    Unfair tactics may include lying, coercion and taking advantage of a lack of financial experience. Lenders may add terms and conditions to a home loan which benefit themselves, or they might manipulate you or pressure you to agree to a loan.

    It can be difficult to identify predatory lending. Low income customers and those with low credit scores tend to pose higher risks for lenders because they are less likely to be able to repay a loan. To compensate, such individuals justifiably receive higher interest rates and fees.

    HOEPA attempts to draw the line between predatory and valid lending. It bars practices associated with predatory lending such as frequently refinancing a home loan in order to charge fees. It also requires lenders to take into account your ability to repay the loan with interest. Lenders cannot offer a loan which they know you cannot repay.

    Effectiveness of TILA

    The Truth in Lending Act was passed in 1968 to help clear up confusion in the credit and lending markets that left most consumers dazed about exactly what they were signing up for.

    TILA, at its base, was intended to provide a clear, easily understood explanation of the cost of credit. Since this would apply to all lending institutions, consumers would have an easy time comparing costs between competitors and thus make more informed decisions on the credit they were seeking.

    Unfortunately, that has not happened in all cases.

    Consumers certainly have a far easier time understanding the cost of credit now than in 1968, but the TILA has taken on so many aspects of credit and government agencies have added so many amendments, rules and regulations to them, that the process is just as complex and unwieldy as ever.

    It seems that as soon as a rule or a regulation is enacted, lending institutions and credit card companies find a way to go around it and more rules become necessary. The sub-prime mortgage fiasco that contributed to the 2008 Great Recession is an excellent example.

    More rules were put in place to force lenders to do a better job of qualifying borrowers, which may have helped mortgage consumers, but the auto industry jumped in on sub-prime loans and there are indications the same disaster could happen there.

    One bond issue dealing with subprime auto loans, the Skopos Auto Receivable Trust 2015-2, had 12% of its underlying loans 30 days or more delinquent in just the first four months. About one-third of those were 60 days delinquent and 2.6% of borrowers already had filed for bankruptcy or had their vehicles repossessed.

    That much failure in just four months! And they are not alone.

    According to the Federal Reserve, the average auto loan balance in 2015 is $4,070, a 9% increase over 2014 and 38% increase in just five years. According to Fitch Ratings, the delinquency rate on subprime car loans is at its highest in two decades.

    According to a study by the CFPB, the credit card industry still has some work to do to make things easier on consumers. The CFPB study from 2015 says that consumers have a tough time understanding rewards programs. Agreements tend to be too long and complex for most consumers to understand, and subprime credit companies have entered the market and are charging fees and interest rates that take advantage of consumers with low credit scores.

    So expect more amendments, rules and regulations with the credit industry under the Truth in Lending Act, and know that agencies like the Consumer Financial Protection Bureau are trying to keep up with changes in the financial marketplace. Still, the responsibility ultimately lies with the consumer to understand how much credit is being receiving, what percentage interest is being paid, how long it will take to pay off the loan and what the total cost will be when the final payment is made.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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