Truth in Lending

The phrase truth in lending is frequently heard during real estate financing, but it also applies to other types of credit. Its full meaning may not be clear to everyone, particularly with regard to all applications and how it is enforced.

What It Is

Truth in lending is required by the Truth in Lending Act (TILA), which protects consumers from inaccurate and unfair credit and billing practices. Its goal is for consumers to be able to easily and simply comparison-shop different types of loans.

Origins

The TILA was implemented by the Federal Reserve Board’s Regulation Z in 1968, but it has been amended and expanded since that time. It is now governed by the Consumer Financial Protection Bureau (CFPB). It applies to most types of consumer credit, including home mortgages, car loans, credit cards, and home equity lines of credit. Prior to the Act, consumers could easily become confused by various terms and rates put together in differing formats, making it hard to adequately compare different offers. There are two primary ways in which the requirements of the Act protect consumers—through disclosure requirements and protections.

Disclosure Requirements

The disclosure requirements state that certain information must be provided in a visible and easy-to-understand format, such as the APR, the total cost of the loan and the term of the loan. On credit card information, it can be found in what’s called a Schumer Box on the agreement; for loans, it is included in the contract.

Other Protections

TILA also protects consumers from predatory actions by lenders by limiting the changes that can be made to terms and requiring notices be sent in a timely manner. Additional protections are also provided for vulnerable populations, such as the elderly, in order to prevent home equity loan scams and demanding that a loan end early. Certain loans may also be eligible for a right of rescission, meaning that they can be canceled within 3 days of signing.

Enforcement

TILA is enforced by the Federal Trade Commission’s Consumer Financial Protection Bureau. Violations of the requirements by lenders can result in penalties and damage awards to the consumer. Damages are often awarded based upon the actual damages sustained by the individual as a result of the violation and statutory damages, which are limited to twice the finance charge, but not less than $400 or more than $4,000.