What is the Truth in Lending Act (TILA)?
In a not so distant past, consumer credit was the wild west of the finance industry. Lending, while regulated, contained so many pitfalls that it was entirely too easy for the less than honest institutions to take advantage of consumers and trap them in debt or drain them of their hard earned money and assets. Predatory lending practices can have a life-changing impact on their victims.
A good portion of the problem came from lenders lying about or simply neglecting to disclose the actual costs of the loans or credit lines that they were offering to consumers. There was too much left to the very fine print, and many consumers ended up in situations where they could not afford the debt obligations that they were now contractually obligated to repay. Many folks ended up going bankrupt or even losing their homes in the process of dealing with some of these shady lenders.
In response to the growing problem, the government finally came to the rescue with the Truth in Lending Act or “TILA”. The aim with TILA was to better regulate how consumer credit was handled by financial institutions, as well as make credit transactions more transparent. The TILA was originally overseen by the Federal Reserve Board, who enacted and enforced the regulations outlined in the act.
The industry standard practices that consumers see today when applying for credit or financing of any kind are a direct result of the regulations brought about by the Truth in Lending Act.
What is the Truth in Lending Act?
The Truth in Lending Act, sometimes referred to as “TILA”, is a federal law enacted on May 29th of 1968 that was designed to protect consumers from unfair or predatory credit practices and billing through the informed use of consumer credit. Through the TILA, now overseen by the Consumer Finance Protection Bureau, the government sought to standardize the way that the costs associated with borrowing were calculated and disclosed to consumers. This included requiring lenders to provide accurate disclosures of costs associated with the loans they offer to make the entire transaction as transparent as possible for the consumer and allow them to shop around and compare the costs of loans that may benefit them.
The Truth in Lending Act is also responsible for introducing the concept and calculation of an Annual Percentage rate or “APR”. The annual percentage rate is a much more useful figure than the interest rate on a mortgage, loan, or credit line since it more accurately represents the full cost of borrowing funds. It accomplishes this by combining the total amount of interest due and the cost of other fees and charges, averaged over the length of the loan term and expressed as a percentage.
History of the Truth in Lending Act
While particularly popular in its own right as far as the credit and lending practices of today are concerned, the Truth in Lending Act was actually just Title I of the larger Consumer Credit Protection Act, which was enacted on the 29th of May in 1968. When originally enacted, the TILA was under the authority of the Federal Reserve Board (FRB). After the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act signed into effect by President Barack Obama on July 2010, a more streamlined agency was born known as the Consumer Finance Protection Bureau (CFPB). After July 21, 2011, the Truth in Lending Act’s general rule making authority was transferred to the CFPB.
Consumer Protections Listed in the Truth in Lending Act
The TILA regulates how companies are allowed to advertise and make claims about the benefits of their loans or services. This regulation entails that lenders provide reading materials created by the Federal Reserve Board about the specific loan or credit product that they are offering, in order to ensure that the consumer fully understands the legitimate parameters of that product. This prevents lenders from presenting unfair or predatory terms to consumers who wouldn’t be aware otherwise of what was going on.
The truth in lending act also has regulations for actions that occur behind the scenes as well. For example, there is a regulation of the TILA that prohibits loan originators from being compensated for originating mortgage loans where the compensation is based on the addition of certain terms and conditions found within the loan documents. There is also a regulation that prevents lenders from steering consumers to loans or credit services that only financially benefit the lender. The TILA requires that lenders show potential borrowers all available, applicable loan products or credit offerings.
A major provision of the Truth in Lending Act is granting borrowers their “right of rescission”. According to the TILA, borrowers for certain loan types that use the borrower’s principal dwelling as security for the principal amount the right to cancel the loan agreement with no negative repercussion to their personal finances or credit report. The TILA mandates that lenders must honor and provide written notice of a borrower’s right of rescission when applicable. Failure of the lender to do so renders the loan agreement legally null.
The right of rescission grants a borrower a period of three business days (including Saturdays, and excluding Sundays and federal holidays) after signing a loan agreement to change their minds and cancel the loan contract if need be. After a borrower exercises their right of rescission, the lender must release them from the debt obligation and refund any money paid towards fees or costs of the loan within 20 business days. The right of rescission was created to give borrowers who were faced with high-pressure tactics to close a loan time to go over the documentation and decide whether or not the loan is truly in their best interests.
There are some things that aren't covered under the Truth in Lending Act as well. The TILA does not maintain any control or regulation over the interest rate that a lender is allowed to charge potential borrowers. The act also does not cover the issue of who credit can be extended to, as there are already anti-discriminatory laws in place which address that subject.
Amendments to the Truth in Lending Act
Over the years since the Truth in Lending Act was first enacted, the United States Congress has done it’s best to keep the TILA updated and relevant to the current state of the economy. Some notable amendments include:
1970: Banned lenders from issuing unsolicited credit cards
1988: Required Lenders to provide detailed disclosures for adjustable rate mortgage products.
1994: Added a provision to extend the amount of information disclosed for reverse mortgage products
1995: Redefined limits for Lender liability in regards to errors on disclosure forms
2009: Extended the amount of time in which lenders had to notify consumers before changing or updating terms for credit cards
2013: Updated the limits placed on fees charged by credit card lenders
2013: Switched from “Truth in Lending Disclosures” to “Loan Estimate Disclosure” for mortgage loans.
The Truth in Lending Act in Regards to Mortgage Loans
When it comes to home loans, the Truth in Lending Act has had a huge influence on the way lenders disclose loans. What were originally good faith estimates, eventually became Truth in Lending Act disclosures. As of October 3rd, 2015, Truth in Lending Act disclosures have been replaced by two new separate forms in conjunction with the Real Estate Settlement Procedures Act (RESPA) to form the modern-day TILA-RESPA Integrated Disclosures.
Replacing the initial Truth in Lending Disclosure is the “Loan Estimate Disclosure”. The final Truth in Lending Disclosure has been replaced with the “Closing Disclosure”. The first form is provided midway through the mortgage transaction to give borrowers an idea of what the mortgage costs will look like once accepted, and the second one is provided before the mortgage transaction is closed, as a more accurate summation of all of the costs and fees that the borrower will be responsible for paying.
In addition to better disclosure procedures and forms, the TILA’s right of rescission is definitely a major benefit when it comes to home finance. Borrowers with certain types of home loans, including refinances (with a different lender than their current lender), home equity loans, and home equity lines of credit are eligible to cancel a loan agreement within an allotted period of three days after closing. The right of rescission gives these borrowers the option of reviewing the loan documentation and possibly changing their minds with no financial repercussions.