There has always been a lot of lending in the United States. There hasn’t always been a lot oftruth.
Lenders could obscure information on interest rates, finance charges and other items ofinterest. Consumers were often unaware of what they’d signed up for when they got amortgage or a credit card.
Congress tried to stop the runaround in 1968 when it passed the Truth in Lending Act (TILA),which required lenders to disclose loan particulars in simpler, standardized terms.
The goal was to make sure consumers had a clear understanding of the conditions they’dagreed to. TILA has helped, but the battle for truth in lending is never over.
How Does the Truth in Lending Act Work?
Lenders have to provide borrowers a Truth in Lending disclosure statement. It hashandy information like the loan amount, the annual percentage rate (APR), finance charges,late fees, prepayment penalties, payment schedule and the total amount you’ll pay.
The law also established a “right of recession” for certain types of home loans. It’s basically a cooling-off period that gives consumers three days to cancel their loans without anyfinancial penalty.
TILA does not require institutions to loan money to specific applicants or regulate theinterest rates they can charge. It just requires banks, credit unions and other lenders to clearlylay out what the terms of the loan will be.
Applying the Truth in Lending Act
The law covers most forms of consumer loans, whether they are closed-end or open-end credit. Closed-end loans mean you get a set amount of money when the loan closes andhave to pay it back (with interest, of course). Think mortgages or auto loans.
Open-end is money you can draw repeatedly, up to a pre-approved amount. Thinkcredit cards and lines of credit.
Though TILA does not regulate interest rates, it does prohibit lenders from imposingexcessive penalties if a borrower is late making a payment.
These loans are covered under TILA:
- Credit cards
- Mortgages
- Home equity loans
- Auto loans
- Home equity lines of credit
These loans are not covered:
- Business loans
- Student loans
- Public utilities
What Is Regulation Z?
Regulation Z prohibits certain loan practices, like steering customers to inferior loansbecause the lender would make more money from it. The term “Regulation Z” came out of theConsumer Credit Protection Act (CCPA) and is used often interchangeably with “TILA.”
Both have been amended on a regular basis since 1968 as the lending and credit-cardindustries evolved. A major change gave the Consumer Financial Protection Bureau (CFPB)rulemaking authority.
The CFPB gradually expanded its role, issuing rules for ability-to-repay requirements formortgages, refined loan originator compensation rules and other things that only a federalbureaucrat could find interesting.
TILA and the CARD Act
The CARD stands for Credit Card Accountability Responsibility and Disclosure Act. Let it neverbe said federal bureaucrats can’t come up with catchy acronyms.
The bill was passed in 2009 and strengthened consumer protections in lending.
The highlighted changes from that amendment include:
- New account or increasing the credit limit on an existing one without first considering theconsumer’s ability to pay.
- Credit card issuers are required to give consumers at least a 45-day notice before charging ahigher interest rate and at least a 21-day “grace period” between receiving a monthlystatement and a due date for payment.
- Card companies are required to disclose on statements that consumers who make onlyminimum payments will pay higher interest and take longer to pay off the balance.
- Fees for using mail, phone or electronic payment methods are eliminated, except when usingan expedited service.
- Companies are prohibited from charging fees for over-the-limit transactions, unless thecardholder opts into this form of protection.
- Card companies are prohibited from offering gift cards, T-shirts, or other tangible items asmarketing 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 $9billion and late fees by $7 billion.
Other Acts Related to TILA
The lending business is always evolving. TILA has added the following acts to protect consumers:
- Fair Credit Billing Act: Passed in 1975, this act allowed consumers to address errors in open-end credit accounts. Borrowers could dispute things like math errors, unauthorized charges and incorrect dates. Lenders were required to respond within certain time frames.
- Fair Credit and Charge Card Disclosure Act: Passed in 1988, this act expanded disclosure requirements on new credit cards. Issuers have to include information on cash advances, annual fees and other provisions that consumers might overlook. Such information must also be part of any “pre-approved” offers, either by direct mail, telephone or other solicitations.
- Home Equity Loan Consumer Protection Act: The HELPA passed in 1988 and requires lenders to disclose terms of home equity loans before they are finalized. If the terms change before the first transaction, borrowers can refuse the loan and get their application fees refunded.
- Home Ownership and Equity Protection Act: The HOEPA passed in 1994 and strengthened protections for financially strapped borrowers. They were often targeted for predatory lending practices, such as frequently refinancing a home loan to charge fees. The act requires lenders to consider an applicant’s ability to repay the loan with interest. If the math says you can’t repay it, they can’t offer it.
» Learn more: Credit Protection Laws
Benefits of the Truth in Lending Act
Sir Francis Bacon didn’t have a credit card when he coined the phrase “Knowledge isPower” in 1597, but the English statesmen’s words certainly apply here.
TILA gives consumers knowledge about borrowing and empowers them to deal withlenders. Among the benefits:
- Protection from excessive penalties.
- Transparency in terms and fees associated with loans.
- Consumers can compare loan and credit offers.
- Expanded time to repay loans.
- Protection from predatory lending practices.
- Options to cancel loan contracts within certain time limits.
Effectiveness of TILA
There is no question that it’s a lot easier for borrowers to avoid getting the runaroundthan it was in 1968. There’s also no question TILA has been far from a magic bullet thateliminated all lending monkey business.
As soon as a rule passed, lenders tried to find ways around it. That’s led to morerules, bureaucratic expansion, and a process that gets more unwieldy by the day.
The mountain of oversight and regulations did not prevent the subprime mortgagefiasco of 2008. There will always be lenders looking to game the system to their advantage.
Expect more amendments, rules and acronyms until consumers stop needing toborrow money, which will never happen. Agencies like the Consumer Financial ProtectionBureau will play the role of watchdog, but it’s ultimately up to consumers to understand the insand outs of loans and credit cards.
Understanding Your Rights
Understanding those ins and outs can be a pain, but consumers don’t have to go it alone. Government programs, nonprofits andcredit counseling agenciesare by your side.
If the governmental gobbledygook has you confused, credit counseling from a nonprofit agency can help you understand the lending process and rights that TILA provides.
