Truth in Lending Act (TILA)
Definition
The Truth in Lending Act (TILA) is a U.S. federal law enacted as part of the Consumer Credit Protection Act in 1968. The primary purpose of TILA is to promote informed use of consumer credit by requiring disclosures about its terms and cost. TILA seeks to enhance consumer protection in the credit process by ensuring borrowers receive clear and consistent information about credit transactions. Under this law, lenders must disclose the dollar amount of interest charges and the annual percentage rate (APR) using a specified formula, and borrowers using real property as collateral are given a three-day period to rescind the transaction.
Examples
- Consumer Loan: When a borrower takes out a personal loan, the lender must provide a disclosure statement detailing the APR, total finance charges, and repayment schedule.
- Mortgage: In a mortgage transaction, the lender must disclose the total amount financed, APR, total interest to be paid, and all fees associated with the loan.
- Credit Card Agreement: When a consumer opens a new credit card account, the card issuer must inform them of the APR for purchases, balance transfers, and cash advances, as well as any annual fees and other costs.
Frequently Asked Questions (FAQs)
Q1: What is Regulation Z in relation to TILA? A1: Regulation Z is the set of rules issued by the Federal Reserve to implement the Truth in Lending Act. It outlines the specific disclosure requirements, calculation methods for APR, and other provisions that lenders must follow.
Q2: Who enforces the Truth in Lending Act? A2: The Consumer Financial Protection Bureau (CFPB) primarily enforces TILA, though other regulatory bodies like the Federal Reserve also have enforcement authority for specific institutions.
Q3: What happens if a lender fails to comply with TILA? A3: Non-compliance with TILA can result in civil penalties, fines, the consumer’s right to sue for damages, and, in some cases, the potential rescission of the loan.
Q4: Does TILA apply to all types of loans? A4: TILA mainly applies to personal, family, and household credit transactions. It generally excludes business, commercial, and agricultural loans.
Q5: Can borrowers waive the three-day rescission period? A5: Yes, in situations where there is a personal financial emergency, the borrower can waive the three-day right of rescission by providing a written statement describing the emergency.
Related Terms
- Annual Percentage Rate (APR): The annual rate charged for borrowing or earned through an investment, reflecting the cost of funds over the term of the loan, expressed as a percentage.
- Finance Charge: The total amount of interest and other fees that a borrower pays to get a loan.
- Consumer Credit Protection Act: An act passed in 1968 that was part of the federal government’s effort to protect consumers in credit transactions.
- Disclosure Statement: A document provided by a lender detailing the cost and terms of a loan product.
- Rescission: The right of a borrower to cancel a credit transaction for which their primary residence is used as collateral, typically within three business days.
Online References
- Consumer Financial Protection Bureau (CFPB)
- Federal Reserve: Truth in Lending (Regulation Z)
- U.S. Government Publishing Office: TILA
Suggested Books for Further Studies
- Consumer Credit and the American Economy by Thomas A. Durkin, Gregory Elliehausen, et al.
- Truth in Lending by Ralph J. Rohner and Fred H. Miller
- Federal Consumer Credit Protection Act (Fifth Edition) by Jacob Shelly
Fundamentals of Truth in Lending Act: Consumer Finance Basics Quiz
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