What is the Truth In Lending Act?
Introduced by Senator William Proxmire and enacted on June 29, 1968, the Truth in Lending Act (TILA) was designed to help consumers better understand the credit terms and rates offered to them by lending institutions.
As part of the broader Consumer Credit Protection Act, TILA ensures that all creditors use the same terminology and expression of rates. Despite being nearly 50 years old, TILA still holds a lot of relevance today. Learn more about how it can help protect you.
The History of the Truth In Lending Act
Before TILA, it was nearly impossible for consumers to compare loans, rates, and conditions because they weren’t presented in the same format and often used different definitions.
This made it incredibly difficult for consumers to compare credit terms easily and caused confusion when trying to understand different loan offers.
Rescission Rights
In addition to creating uniform rules for disclosures, this federal law also grants other consumer rights and protections. Consumers can exercise rescission rights, giving you the right to rescind, or walk away, from certain types of loans up to three business days after signing.
TILA also imposes limitations on home equity loans and certain closed home mortgages. It demands consumer protections against unfair or inaccurate billing practices as well as unfair or deceptive mortgage lending practices.
The Fine Print
In layman’s terms, the Truth In Lending Act outlines and defines the fine print. Banks and other lending institutions can no longer cloud their contracts in a haze of unique terminology and formatting.
Mortgage loans, auto loans, and other lines of credit may still be confusing to most people, but thanks to the TILA we’re now all speaking the same language.
Regulation Z
The implementation of the law falls under the purview of the Federal Reserve Bank, which also created a series of rules called Regulation Z. This regulation not only standardizes disclosures but also what must be included in them.
This is why you now easily can see things like your Annual Percentage Rate (APR) and the total interest amount incurred by the loan. These rules have been amended by law many times since their inception in the late 1960s.
Evolution of the Truth in Lending Act
The original Truth in Lending Act was never meant to be the last word on consumer protection when it came to the disclosure of loan details. In fact, there have been many amendments to the law over the years.
Historical amendments include the prohibition of unsolicited credit cards in 1970 and the Competitive Quality Banking Act of 1987, which requires certain adjustable-rate mortgage disclosures. In the mid-1990s, new laws imposed additional disclosure requirements and increased limitations on closed mortgages.
Loan Estimate & Closing Disclosure
Today, an initial Truth in Lending Disclosure is called a Loan Estimate. It’s the three-page form you receive when applying for a mortgage. The final Truth in Lending Disclosure is called a Closing Disclosure.
This form, required to be presented to you three days before signing a loan, allows you to compare the actual terms of the loan with the initial Loan Estimate provided by your bank. These disclosures are required when applying for a reverse mortgage, home equity line of credit, and other housing-related loans.
Dozens of new laws and amendments have been created over the decade as lenders tried to skirt around current legislation or create novel ways of distorting the terms of certain loans. However, some of the most significant changes to TILA have come in recent years.
These changes are a direct result of the housing crisis in the mid-2000s as well as the recession that followed. They have a direct impact on you when it comes to mortgages and credit cards.
The Mortgage Disclosure Improvement Act of 2008 (MDIA)
President George W. Bush signed the Housing and Economic Recovery Act of 2008 into law as a direct response to the housing crisis created by toxic loan sales throughout the early 2000s. Included in the bill was the Mortgage Disclosure Improvement Act of 2008.
This federal law requires lenders to state whether a loan’s interest rate is variable and to provide examples of loan payment totals and interests rates under different, possible percentages.
Good Faith Estimates
It also requires lenders to make good faith estimates on interest rates and disclose significant changes in those rates to consumers in a timely manner.
Additionally, these amendments to Regulation Z create a buffer for consumers by giving them three business days to review loan offers before being required to sign them. However, there is language giving the consumer the ability to waive this delay if the loan is required in a more timely manner.
Rate Hikes
In short, banks can no longer hide significant rate hikes embedded into loans while coaxing you to sign on the dotted line before thoroughly reading or understanding your mortgage.
These practices, ubiquitous in the early 2000s, led to thousands of toxic mortgages that acted like time bombs when the interest rates increased. Such actions led to a worldwide recession whose effects are still being felt today.
The Credit Card Accountability Responsibility and Disclosure Act (CARD) of 2009
The CARD Act was signed into law by President Barack Obama to enact comprehensive credit card reform. It codified into law pending rule changes to Regulation Z by the Federal Reserve. Regulation Z was then amended and the Credit Card Holders Bill of Rights was created.
Credit card companies are now required to give you 21 days to pay your bill from the time it is mailed. They can’t change payment dates on a monthly basis or trick you into missing a payment by having the billing date fall on the weekend or in the middle of the day.
Credit card issuers may also no longer change the terms of your contract within a year of you signing it. Additionally, they must give you 45 days’ notice if they are planning to make a change.
One of the biggest changes made is the way that payments are applied to the amount you owe. Some credit cards have different interest rates depending on how the money was borrowed. A cash advance, for instance, usually carries a higher rate than a purchase.
The banks used to apply payments made by you to the amount of money with the lowest interest rate, ensuring they accrued more interest in the process. The CARD Act stipulates that banks must now apply your payments to the amount with the highest rate, allowing you to pay that amount off first.
More Protections Under the CARD Act
The CARD Act also protects consumers with less-than-perfect credit by restricting the amount of credit card fees that can be charged for low-balance cards. Specifically, it bans companies from charging fees that exceed 25% of your credit card limits.
The Consumer Financial Protection Bureau (CFPB) has been using this amendment to fine and order restitution from “fee harvesters” who charge outrageous upfront fees on credit cards with low limits.
Aggressive Marketing Tactics
Finally, the CARD ACT moves to protect young people from aggressive marketing practices. It prohibits them from giving away items like pizza or t-shirts at college-sponsored events if they sign up for credit cards.
They cannot mail offers to anyone under the age of 21 unless that person chooses to allow it, and the law eliminates excessive marketing. Tightening restrictions on credit cards for young adults helps keep them out of trouble before they truly understand the implications of their actions.
Remember, the primary goal of the Truth in Lending Act is transparency. These laws aren’t designed to tell lenders who they can loan money to or what an interest rate should be.
They are, however, here to make sure that you know what is being sold to you. Loans are products and it’s your right to understand what you’re buying. Bread has an expiration date for the same reason: to keep you informed and to keep you safe.
The Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010 (Dodd-Frank Act)
Among many of the protections granted by Dodd-Frank was the creation of the CFPB. This agency was created to protect consumers and to oversee banks, credit unions, mortgage companies, and other financial institutions.
It was created in direct response to the bursting of the housing bubble and the recession that followed. Lawmakers, recognizing a gap from the repeal of laws such as Glass Steagall, charged the agency with enforcing the TILA and the provisions of the rules under Regulation Z.
Consumer Financial Protection Bureau
The CFPB is designed to consolidate the role of several federal bodies, including the Federal Trade Commission, the Department of Housing and Urban Development, and others.
It regulates financial products from several industries, and the laws enacted under the Truth in Lending Act now fall under its purview. They made many rule changes within Regulation Z to implement new laws enacted by the Dodd-Frank Act.
These include rules forcing banks to make good faith determinations of a customer’s ability to pay off a loan. One of the main issues during the housing crisis was banks backing housing sales on homes wildly outside the budget of the purchaser.
This rule now places the onus on banks not to sell you a loan you can’t afford. The CFPB is not just implementing new rules, but also re-interpreting ones that are already on the books.
The Legacy of the Truth in Lending Act
It’s impossible to comprehensively review all the changes and advancements that the TILA has gone through over the decades.
What started as a law to establish guidelines for lending terms has morphed into something much more extensive and all-encompassing. The CFPB website is full of tools, resources, and data to help you fully understand your rights and the law.
Most helpful, however, is the establishment of one of their core principles, that financial institutions adopt plain language in their writing. That means all communications are designed for you to be able to understand what you’re reading.
Final Thoughts
The CFPB ensures that its publications are accessible to the public in both locations and in writing. While many government organizations can seem walled off, the CFPB appears to actively engage the public and value their input.
Controversy may seem to stem from every government agency these days, but the CFPB does appear to be on the side of the people.
Take advantage of the CFPB’s resources and the rest of the benefits provided by TILA and its successors to ensure you fully understand the implications of any financial products and services you may be interested in. By doing so, you can save yourself a lot of headaches, and potentially, money in the long run.
