Truth-In-Lending Act

By Daisy Rogozinsky
/
June 28, 2022

The Truth-In-Lending Act aims to protect consumers from predatory loan practices. In this article, we’ll explain what the Truth-In-Lending Act is and what is included in it. 

Key Takeaways

  • The Truth-In-Lending Act (TILA) was created in 1968 to protect consumers dealing with lenders and creditors
  • Before the TILA, lenders often misled and manipulated borrowers
  • Some of the provisions of the TILA include preventing lenders from making changes to the terms of a contract once it is executed, allowing consumers to rescind a contract that is not in their best interest, and creating rules for the disclosure of information to a borrower

What Is the Truth-In-Lending Act?

The Truth in Lending Act, abbreviated as TILA, is a United States federal law enacted in 1968 and implemented by the Federal Reserve through a series of regulations. It was created for the purpose of protecting consumers in their dealings with lenders and creditors. The provisions of the TILA apply to most types of consumer credit, including car loans, home mortgages, and credit cards. 

The goal of the TILA is to help consumers shop for and make educated decisions about credit, preventing lenders from hiding important information. Without the TILA, lenders could (and did) hide terms and rates or presented them in a way that was difficult to understand. 

Provisions of the Truth-In-Lending Act

With the TILA, lenders cannot make certain changes to the terms and conditions of a credit agreement once it is executed or prey on vulnerable populations. Additionally, consumers can rescind a contract within three days if its terms are not in their best interest. 

Most prominently, the TILA created rules for the disclosure of information to a borrower. Because of the TILA, creditors must clearly state the APR rate, the term loan, and the total costs to the borrower on documents presented to the borrower before signing, as well as on periodic billing statements. 

The TILA prohibits creditors from issuing compensation to closed-end consumer loan originators when such compensation is based on any term other than the credit amount. As such, creditors cannot base compensation on whether a term or condition is present, increased, decreased, or eliminated. 

Regulation Z (another name for the TILA) also prohibits loan originators from something called steering, which is encouraging a customer to take out a certain loan that offers them no additional benefit but gives more compensation to the lender. 

If the consumer compensated the loan originator directly, no other party who knows about that compensation may compensate the loan originator for the same transaction. Creditors who compensate loan originators must keep records for at least two years.

Finally, Regulation Z provides a safe harbor when the loan originator provides loan options for each type of loan the consumer is interested in good faith if the options satisfy the following criteria:

  • Including a loan with the lowest interest rate
  • Including a loan with the lowest origination fees
  • Including a loan with the lowest rate for loans with certain provisions, such as loans with no negative amortization or prepayment penalties
  • The loan originator must procure offers from lenders with whom they regularly work with

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