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The Truth in Lending Act provides consumers with key rights when borrowing money from a bank, credit union, or nonbank financial institution. This federal law, also known as the TILA, protects consumers from unfair lending practices. It requires lenders to disclose interest charges and fees on most consumer lending products, including credit cards and second mortgages.The TILA also gives consumers the right to rescind certain loans or lines of credit secured by the equity in their homes. Under this right, a homeowner who takes out a home equity line of credit, or HELOC, has three business days after becoming obligated on the debt to cancel the agreement and receive a full refund.Credit card account holders under the TILA must be notified at least 45 days in advance of any rate increases or other significant changes to their credit card account agreements. Below we explain the purpose of the TILA and its importance in protecting consumer rights.
What Is the Truth in Lending Act (TILA)?
The Truth in Lending Act, also known as the TILA, is a federal law that protects consumers from unfair or deceptive lending practices. Congress passed this legislation in 1968 as Title I of the Consumer Credit Protection Act. It requires lenders to disclose credit terms in a clear manner, including annual percentage rates of interest, fees, and charges.The TILA is also known as Regulation Z, and Congress amended it multiple times since 1968 to ban credit card companies from issuing credit cards on an unsolicited basis, among other prohibitions against unethical consumer lending practices. The TILA further bans misleading advertisements of consumer credit and loan products.Recommended: How to Find the Right Credit Card
What Is the Purpose of the TILA?
The Truth in Lending Act’s purpose is to protect consumers from “unfair credit billing and credit card practices,” according to the law itself and the Regulation Z handbook.TILA promotes full disclosure and transparency in consumer lending. Any person or organization that regularly offers installment loans or credit cards, for example, must use the same credit terminology to make it easy for consumers to compare loans and credit cards.Regulation Z sets certain ground rules in the world of consumer finance, but the TILA law does not tell financial institutions how much interest they may charge when approving credit cards.
Why Is the TILA Important?
The Truth in Lending Act is important for the following reasons:
It helps safeguard consumers from unfair and deceptive lending practices.
It requires all creditors and credit card companies to use the same credit terminology.
It promotes transparency in consumer lending by requiring creditors to disclose finance charges up front.
It gives consumers of second mortgages strong rescission rights.
Effectiveness of the TILA
The TILA is not 100% effective at preventing unlawful consumer lending practices. The law, however, does provide consumers with certain rights and gives federal enforcement agencies the power to hold unscrupulous lenders accountable.Federal regulators, for example, have historically used their enforcement powers under the TILA to go after creditors accused of understating finance charges in credit agreements. Pawnbrokers, online lenders, car title lenders, payday lenders, banks, and other entities have each faced legal action over alleged violations of the TILA.
Examples of the TILA’s Provisions
Regulation Z requires credit card companies to consider a consumer’s ability to pay before approving a consumer’s application for a credit card. This is one of the provisions of the TILA that helps explain why credit card companies review a consumer’s income and current debt obligations before deciding whether to approve or deny a consumer’s request for new revolving credit.Other examples of TILA’s provisions include a Regulation Z mandate requiring lenders in many cases to disclose rate changes in adjustable-rate mortgages weeks or months in advance and for credit card account holders to be notified at least 45 days in advance of any rate increases or other significant changes to their credit card account agreements.Recommended: 5 Steps for Checking Your Credit Score
Benefits of the TILA
One of the benefits of the TILA is it makes violations of Regulation Z a civil or criminal offense. Anyone who fails to comply with TILA on purpose may face criminal fines up to $5,000, imprisonment up to one year, or both. Violators of the TILA may also face civil liability.Other benefits of the TILA are it creates an environment for consumers to more easily compare credit cards and loan products. As mentioned earlier, the TILA requires creditors to use the same credit terminology and further requires them to disclose finance charges before consumers take on new debt.
What Violates the TILA?
Creditors failing to comply with any TILA provision violates Regulation Z. For example, a credit card company can violate the TILA by disclosing inaccurate information related to the card’s annual percentage rate or finance charges. The TILA, however, makes a clear distinction between willful violations and unintentional violations of the law.Anyone who fails intentionally to comply with the TILA and misleads consumers in credit transactions may face criminal prosecution and civil liability to the consumers. Creditors who make unintentional mistakes generally may not be held liable for violating the TILA.Any financial institution that violates the TILA can avoid prosecution and civil liability by taking corrective action and notifying impacted consumers of the unintentional error within 60 days of discovery.
Who Enforces the TILA?
The Consumer Financial Protection Bureau, the Federal Trade Commission, and other federal agencies share the responsibility of enforcing key aspects of the TILA.The Consumer Financial Protection Bureau, also known as the CFPB, is an independent bureau within the Federal Reserve System that enforces the TILA to help prevent unfair consumer lending practices.The Federal Trade Commission, also known as the FTC, uses its enforcement powers to help ensure nonbank financial institutions comply with the TILA. The FTC, for example, may enforce the TILA to crack down on predatory lenders who offer payday loans with undisclosed and inflated fees in violation of TILA.Other agencies that enforce aspects of the TILA include:
The Federal Deposit Insurance Corporation (FDIC)
The Federal Reserve Board (FRB)
The National Credit Union Administration (NCUA)
The Office of the Comptroller of the Currency (OCC)
The Department of Transportation (DOT)
The Farm Credit Administration (FCA)
The Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture.
The Board of Governors of the Federal Reserve System issued Regulation Z to implement the TILA, which became effective in July 1969 and has undergone numerous amendments in later years.
Finding the Credit Card That’s Right for You
For consumers with a limited credit history, finding the credit card that’s right for you may start with cards for credit building. The Truth in Lending Act requires lenders to follow certain guidelines of ethical conduct, but borrowers can still shop around to find the best options.Some credit cards may offer 0% promotional interest for up to 18 months. Other credit cards may offer incentive programs or rewards that may provide cardholders with at least 1% cash back on any purchase.You may also consider secured credit cards that can help you build or rebuild credit. The TILA requires creditors to provide certain disclosures that could make it easier for you to find the credit card that’s right for you.
Other Laws That Protect Borrowers
Here are other laws that protect borrowers:
Equal Credit Opportunity Act
The Equal Credit Opportunity Act, also known as the ECOA, prohibits discrimination in any aspect of a credit transaction. This law reinforces the rights of consumers, small businesses, corporations, partnerships, and trusts to enjoy equal access to credit.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Consumer Financial Protection Act of 2010, established the Consumer Financial Protection Bureau to help protect consumers from unfair, deceptive, or abusive practices. This law further demanded new regulations to prohibit unfair lending practices that fuel disparities among consumers of equal creditworthiness but of different race, ethnicity, gender, or age.
Fair Credit Reporting Act
The Fair Credit Reporting Act, also known as the FCRA, gives you the right to know what information your credit report contains, the right to ask for your credit score, and the right to receive a free copy of your credit report file at least every 12 months, among other rights.
Military Lending Act
The Military Lending Act bans creditors from giving members of the U.S. armed forces or their dependents any consumer credit product that charges more than 36% in annual percentage rates of interest. Any creditor who violates the Military Lending Act’s 36% APR cap could face criminal fines and imprisonment up to one year.
The Takeaway
The Truth in Lending Act is one of the many federal laws intended to protect borrowers from unfair and deceptive practices. Creditors under federal law must provide disclosures of their finance charges and shall not engage in misleading advertising.Lantern by SoFi can help you find and compare credit cards for building credit. Lantern presents you with multiple options to consider, and you may apply for a credit card with the creditor of your choice.
Frequently Asked Questions
What does the Truth in Lending Act do?
What violates the Truth in Lending Act?
What is the purpose of the Truth in Lending Act?
Photo credit: iStock/SethCortright
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About the Author
Sulaiman Abdur-Rahman
Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
