April 05, 2019
Author: Ben Halverson
Organization: Lorman Education Service
The Truth in Lending Act (TILA) is the commonly used name for Title I of the Consumer Credit Protection Act. Since its establishment by Congress in 1968, this law has had far reaching effects on the banking and finance industry, as well as the general public.
History of the TILA
Before 1968, prospective borrowers faced the daunting task of navigating various loan terms and rates in order to make the best financial decision for their circumstances. Many lenders would take advantage of the lack of federal regulations to foster confusion in the mind of the general consumer, (for instance, by providing an overload of loan-related information).
Therefore, the intent of the Truth in Lending Act was primarily to protect consumers in their dealings with lenders and creditors. After Congress enacted the law, the Federal Reserve Board began to implement its provisions through a progressive series of regulations.
Over the years, several amendments were added to the TILA, including the following:
- The prohibition of unsolicited credit cards (1970)
- The addition of adjustable rate mortgage loan disclosure requirements (1988)
- An increase to the length of time in which lenders must notify consumers before changing credit card terms (2009)
How Does the TILA Affect Consumers?
Several important aspects of the TILA revolve around provisions to promote transparency in the lending process, and eliminate deceptive or confusing practices which could cause financial harm to the borrower. In general, lenders and financial agencies are required to provide clear, visible, and transparent information to prospective borrowers in order to comply with TILA regulations.
For instance, it is mandatory that the following items are clearly communicated to the borrower before acceptance of a loan or line of credit can be finalized:
- The annual percentage rate (APR) of the loan
- Term (or length) of the loan
- Total costs that the borrower would pay (no hidden fees are allowed)
For credit card terms and conditions, companies are required to provide certain information in a table known as a Schumer box.
Additionally, the TILA limits the changes that a lender can make to a loan agreement. For example, a credit card company that wants to increase certain credit card fees must notify their customers of the change 45 days in advance.
Under the TILA, borrowers also enjoy the right of rescission, or the right to reconsider and back out of a loan agreement within 3 days of closing.
How Does the TILA Affect Lenders?
The TILA reinforces the need for reputable lenders to make their lending practices as transparent to the consumer as possible. In addition, lenders must be careful to comply with all aspects of the TILA regulations.
A Supreme Court case in 2014 demonstrated the consequences of lender non-compliance. A couple refinanced their home in February of 2007, but the loan agency did not specifically notify them of their right of rescission at the time. Exactly 3 years later, the couple wrote a letter to the bank which had acquired the loan company, stating their intent to rescind.
The bank initially told the couple that their rescission was invalid. However, the Supreme Court eventually ruled that because the couple had not been specifically notified of the right of rescission during the initial loan process, their right of rescission expired not 3 days, but 3 years after the loan's closing. In the end, the bank came out the loser.
Knowledge that Drives Success
The above example underscores the need for banking and finance professionals to pursue ongoing education, thereby ensuring that all of their lending and financial practices remain federally compliant and up to date.
For more information on our professional continuing education services, contact us today at Lorman Education Services.
Resources:
https://www.bankrate.com/glossary/t/truth-in-lending-act/
https://www.investopedia.com/terms/t/tila.asp
https://legaldictionary.net/truth-in-lending-act/