The Truth in Lending Act

Consumer Credit Protection Under Federal Law

When you’re looking to obtain credit, whether for a home or car, or to enjoy the ease of managing your purchases with a credit card, you can easily find yourself at the mercy of the lender. You’ll typically be given a number of complex financial and legal documents, making it difficult to discern exactly what your rights are. There’s good news, though. In an effort to protect consumers from predatory or deceptive lending practices, Congress enacted the Truth in Lending Act in 1968, with the stated goals of ensuring that consumers are fully informed about the terms of any credit extended to them, so that they can understand the actual costs.

Disclosures Required by the Truth in Lending Act (TILA)

The overarching purpose of the disclosure requirements set forth by TILA is to ensure that the information and terms provided to consumers are easily understood, so that persons entering a credit agreement can meaningfully compare interest rates and other conditions of different credit offers. Under TILA, lenders must provide borrowers with a disclosure statement that includes all of the following:

• A statement of the principal amount of the loan
• The annual percentage rate to be charged on the loan
• All potential charges related to the loan, including application fees, prepayment penalties, and late fees
• A schedule of when payments will be due
• The total amount of principal and interest that will be paid over the lifetime of the loan

In 2009, Congress passed the Credit CARD (Card Accountability Responsibility and Disclosure Act) Act, an amendment to TILA, which establishes rules related specifically to the extension of credit through a credit card. Under the Credit CARD Act, a lender must inform you of:

• The annual interest rate
• Any annual fees charged for use of the card
• The due date for payments, along with the grace period (The law requires a minimum 21-day grace period.)
• Whether credit insurance is available, as well as any changes that are made in credit insurance coverage

Under the Credit CARD Act, a lender may not extend credit or increase an existing credit line without first examining the applicant’s ability to make payments. Lenders must also disclose that those cardholders who make only minimum payments may be charged a different (and higher) interest rate and that doing so means that it will take more time to pay off the balance.

TILA’s Right of Rescission When Primary Residence Is Pledged as Collateral

If a borrower pledges their principal residence as collateral for the loan, but the loan is not for the purpose of purchasing the home, the borrower has a right under TILA to rescind and cancel the loan agreement within three business days of signing the contract. That right remains in place until midnight on the third business day following execution of the credit agreement, or until delivery of all required disclosures under the Truth in Lending Act, whichever comes later. If the lender fails to provide required disclosures, or if the disclosures have errors or omissions, the rescission period may be extended up to three years.

When a borrower rightfully exercises the right of rescission, the security interest held by the lender is automatically voided and the borrower has no financial responsibility to the lender. If the lender has already delivered funds or property to the borrower, the borrower must return that money or property in full within 20 calendar days and must remove any indication or claim of a security interest from the public records.

Other Federal Laws Amending the Truth in Lending Act

The Truth in Lending Act has been modified a number of times over the past half century:

• Fair Credit Billing Act (FCBA)—Enacted in 1975, FCBA addresses the rights of consumers in open-end credit agreements (primarily credit cards), providing relief for unfair billing practices, as well as a process whereby consumers can address billing errors, such as unauthorized charges, incorrect charge amounts, or math errors. Creditors are required to respond to billing-error disputes within 30 days and must investigate and resolve any disputes within 90 days. Cardholders who follow the procedures set forth in FCBA will have personal liability capped at $50 per transaction.
• Fair Credit and Charge Card Disclosure Act (FCCCDA)—Passed by Congress in 1988, FCCCDA sets forth the disclosure requirements for lenders who issue new credit cards. The offer must clearly state annual interest rates, grace periods, late fees, annual fees, and policies governing cash advances. The lender must also provide written notice prior to charging any annual renewal fee.
• Home Equity Loan Consumer Protection Act (HELCPA)—HELCPA, signed into law in 1988, protects the rights of consumers entering into a home equity loan. It requires the lender to fully disclose the terms of the loan before the agreement is signed, providing the borrower with information about interest rates, payment dates, late fees and other charges, application fees, and annual service fees. HELCPA gives the borrower the right to rescind the home equity loan agreement (with a full refund of any application fees) if terms change between the loan application and the first transaction.
• Home Ownership and Equity Protection Act (HOEPA)—Passed in 1994, this federal statute seeks to eliminate predatory home equity lending, identifying specific “unfair tactics” in which lenders may not engage, including lying, coercion, or taking advantage of lack of financial experience or knowledge.