The Truth in Lending Act (TILA) is regulation designed to protect consumers from unfair credit billing practices. It requires lenders to provide clear information about loans, such as the annual percentage interest rate (APR) and any fees.
Let’s learn more about how this regulation is structured, what it and how it benefits consumers.
Definition and Examples of the Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) is regulation, passed in 1968 and has undergone several changes since. It aims to protect consumers from predatory lending by requiring lenders to make specific disclosures.
- Alternate name: Regulation Z
TILA requires meaningful disclosure of credit terms to allow easy comparison for consumers. All financial institutions must use the same credit terminology and rates. TILA is implemented through Regulation Z, which prohibits certain practices with the extension of credit involving a consumer’s dwelling.
TILA addresses the following topics:
- Credit card disclosures
- Annual percentage rates (APRs)
- Mortgage loan disclosures
- Mortgage loan servicing requirements
- Mortgage loan appraisal requirements
- Periodic statements
The Truth in Lending Act does not tell financial institutions how much they can charge or whether they must grant a consumer a loan.
How TILA Regulates Open- and Closed-End Credit
TILA treats open-end credit and closed-end credit differently. An open-ended credit account is one in which a consumer borrows with a revolving balance, like a credit card or home-equity line of credit.
For open-ended credit accounts, TILA’s rules include limiting the fees a consumer can pay in their first year, as well as restrictions on increases in APRs, fees, and other charges.
Closed-end credit accounts are one-time installment loans such as a car loan or mortgage. TILA dictates specific timing requirements for disclosures of mortgage transactions, and requires additional disclosures on mortgage rates and payment schedules.
TILA allows consumers to back out of loans secured by homes, such as home-equity loans, within three days if they feel they were unfairly pressured into a loan. This is called their right of rescission, although it does not apply to mortgages.
How Does the Truth in Lending Act Work?
The goal of TILA is to protect consumers so they are not surprised by financial charges, payments, or fees. Before a lender extends credit, they are required to inform consumers of the following terms:
- Annual percentage rate (APR): The cost of credit represented as a yearly rate in percentage terms
- Finance charge: The cost of credit expressed as a dollar amount (total amount paid over the life of the loan)
- Amount financed: The amount of money you borrow
- Total payments: The total amount you will pay by the end of the loan, including principal repayment and finance charges
- Other terms: Monthly payment amount, number of payments, whether there is a prepayment penalty, among others
For example, Capital One provides clear terms about its SavorOne credit card on its website, including the fact it has a 26.99% variable APR, no annual fees, and a late payment fee of $40. Consumers who get the card will see information about how much their monthly payments will be, and how long it will take to pay off the card, according to their balance.
Compare the APR, finance charges, and late fees on credit cards to choose a card that’s right for you. Read all of the disclosures before opening up any credit account.
TILA provides other consumer credit protections beyond interest rate and fee standardization. For example, it protects consumers against unfair billing and credit card practices, and prohibits unfair mortgage practices. It also standardizes terminology with disclosure requirements so that consumers can better compare financial products.
Benefits of the Truth in Lending Act
The Truth in Lending Act gives consumers a range of protections and provides clarity on financial products they may be considering. Through the disclosures TILA requires, consumers can gain a comprehensive understanding of loans or credit products, including how particular products compare to others.
TILA does have some limitations. It does not apply to federal student loans, credit from public utility companies, or credit from an employer-sponsored retirement plan. It also does not apply to the extension of credit to commercial businesses, agricultural businesses, or government agencies.
While federal student loans are exempt from the entirety of TILA, there are some disclosures that are required, including whether the interest rates are fixed or variable. Private education loans also have disclosure requirements concerning APRs and finance charges.
- The Truth in Lending Act (TILA), also referred to as Regulation Z, is a regulation that aims to protect consumers from unfair financial billing practices.
- TILA requires disclosure on items such as APRs, finance fees, late fees, and payment schedules when consumers apply for a credit account.
- The disclosures required by TILA help consumers compare financial terms across different lenders.