Truth in Lending

The truth in lending document was created to protect borrowers from lenders and creditors attempting to bait and switch a customer.  In 1968, the government created the Truth in Lending Act (TILA) to regulate the lending environment by providing customers with transparency & proof of agreed upon terms and conditions of their loans. 

TILA stipulates that lenders must disclose terms, costs, and interest rates (APR) associated with loans that may be taken out, including close ended credit such as mortgages and auto loans or open ended credit such as credit cards and HELOCs.  Standardizing the method in which these terms and conditions are communicated to a potential borrower allows borrowers to make an informed decision and promotes competition between lenders. 

Subsections of TILA

TILA consists of ten subsections; the first five stipulate the items covered in TILA while the final five consist of the rules regarding the regulation of these policies.

Subpart A - Identifies which transactions are subject to truth in lending bylaws and which transactions are exempt.  It also discusses rules which determine which fees are considered finance charges.

Subpart B - Discusses rules for open ended credit issuance including advertising, APR calculations, and resolution of billing discrepancies. 

Subpart C - Discusses rules for Closed ended credit such as mortgages, installment loans, and bank loans.  It covers items such as advertising these products, APR calculations, and credit balances.

Subpart D - This section applies to both open and close ended credit.  It defines the rules around documentation retention as evidence of compliance to the rules set forth in the TILA.  It also covers caps for variable rate transactions that use a person's property as collateral.

Subpart E - Specifically deals with reverse mortgages and high cost mortgages.  Stipulates additional rules around disclosures in these products and caps on allowable fees. 

Key Benefits of TILA


The truth in lending act shields consumers from the unfair billing and credit card practices by providing caps on the interest rates that credit cards can charge, limiting cardholder liability for unauthorized charges that could result from theft, and even stipulating that a credit card cannot be issued in an unsolicited manner.   

Secondly, another major achievement of TILA (from a consumer perspective) is that it provides for the right to rescission.  While the laws around this vary at the state level, consumers will typically have 3 business days to evaluate a transaction, such as a car or new home purchase, and terminate the agreement without any further financial obligation if they have a change of heart.  While you should always ask whether the transaction is rescindable, the creditor is responsible for providing fair disclosure surrounding your right to rescind. 

In 1994, TILA was ammended to put substantial limitations on the fees and APR's that a lender could charge above a certain percentage or fixed dollar amount.  As reverse mortgages started to become popular, TILA was ammended to include disclosures that would aid borrowers in understanding and comparing costs related to the reverse mortgage. 

Additionally, TILA regulates advertising practices in the lending world.  For example, companies cannot advertise the tax benefits of a HELOC without adding the disclaimer that customer should seek advice from a professional tax consultant to ensure their eligibility for these benefits. 
Tim Ord
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