Truth in Lending Act (TILA)?
The Truth in Lending Act (TILA) was implemented by the Federal Reserve Board through a series of regulations. It is a federal law enacted in 1968 to help protect consumers in their deals with lenders and creditors. Pieces of information must be conspicuous on documents presented to the borrower before signing and, in some cases, on the borrower’s periodic billing statements. Some of the most critical aspects of the act concern the info that must be disclosed to a borrower before extending credit, such as the annual percentage rate (APR), the term of the loan, and the total costs to the borrower.
How the Truth in Lending Act (TILA) Works
The provisions of the act apply to most types of consumer credit, including closed-end credit, such as car loans and home mortgages, and open-end credit, such as a credit card or home equity line of credit.
The TILA is all about truth in lending, as its name clearly states. It was implemented by the Federal Reserve Board’s Regulation Z (12 CFR Part 226) and has been amended and expanded many times in the decades since.
The Truth in Lending Act (TILA) gives borrowers the right to back out certain kinds of loans within a three-day window.
Some states have their own variations of a TILA, but the chief feature is still the proper disclosure of key information to protect the consumer and the lender in credit transactions.
The rules were designed to make it easier for consumers to shop when they want to borrow money or take out a credit card, as well as safeguard them from misleading or unfair practices on the part of lenders to make it fair on both parties.
TILA’s Provisions Examples
The act outlaws numerous practices. For example, loan officers and mortgage brokers are prohibited from steering consumers into a loan that will mean more compensation for them, unless the loan is actually in the consumer’s best interests.
Another example is when would-be borrowers request an application for an adjustable-rate mortgage (ARM). They must be provided with information on how their loan payments could rise in the future under different interest-rate scenarios.
The TILA provides borrowers with a right of rescission for certain types of loans. The right of rescission protects not just borrowers who may simply have changed their minds but those who were subjected to high-pressure sales tactics by the lender. It gives them a three-day cooling-off period during which they can reconsider their decision and call off the loan without losing money.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 transferred the rule-making authority under the TILA from the Federal Reserve Board to the newly created Consumer Financial Protection Bureau (CFPB), as of July 2011. In most instances, the TILA does not govern the interest rates a lender may charge, nor does it tell lenders to whom they can or can’t extend credit, as long as they are not violating the laws against discrimination and unjust actions.