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

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.

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