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 disclosuresAnnual percentage rates (APRs)Mortgage loan disclosuresMortgage loan servicing requirementsMortgage loan appraisal requirementsPeriodic statements
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.
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 termsFinance 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 borrowTotal payments: The total amount you will pay by the end of the loan, including principal repayment and finance chargesOther 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. 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. 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.
