1968 US law making credit practices more transparent
Truth in Lending Act
Long title
An Act to safeguard the consumer in connection with the utilization of credit by requiring full disclosure of the terms and conditions of finance charges in credit transactions or in offers to extend credit; by restricting the garnishment of wages; and by creating the National Commission on Consumer Finance to study and make recommendations on the need for further regulation of the consumer finance industry; and for other purposes.
The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit by requiring standardized disclosures about credit cost and terms.[1][2][3]
TILA grants consumers a rescission right for certain home-secured loans, regulates several credit card practices, and sets procedures for resolving billing disputes. With limited exceptions for high-cost mortgages, the law does not cap rates or fees.[3][4] Instead it mandates uniform disclosures so borrowers can compare options.[5] These requirements are implemented through Regulation Z, codified at 12CFR1026.[6] The regulation also limits practices in home-equity plans (12CFR1026.40) and “higher-priced” mortgage loans (12CFR1026.35).[7][8][9][10][11]
The regulation prohibits certain acts or practices — most connected to lender compensation — in connection with credit secured by a consumer's principal dwelling.[12]
History
The Truth in Lending Act was originally Title I of the Consumer Credit Protection Act, Pub. L.90–321, 82Stat.146, enacted May 29, 1968.[2] The regulations implementing the statute, which are known as "Regulation Z", were historically codified at 12CFR226 and, following the transfer of rulemaking authority, are codified at 12CFR1026.[13][14] Most of the specific requirements imposed by TILA are found in Regulation Z, so a reference to the requirements of TILA usually refers to the requirements contained in Regulation Z, as well as the statute itself.[3]
From TILA's inception, the authority to implement the statute by issuing regulations was given to the Federal Reserve Board. Effective July 21, 2011, TILA's general rulemaking authority was transferred to the Consumer Financial Protection Bureau pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act.[13] The Board retains limited rulemaking authority under TILA for loans made by certain motor vehicle dealers covered by section 1029(a) of the Dodd–Frank Act, and the Board's Regulation Z continues to apply to those entities.[15]
TILA introduced the annual percentage rate (APR) calculation that consumer lenders must disclose.[16][17] In the auto market, manufacturers and their captive finance companies have long used promotional financing offers, such as 0 percent APR loans or cash rebates, which interact with TILA's definitions of "finance charge" and "amount financed." The choice between a low promotional rate and a cash rebate changes the total cost of credit and depends on vehicle price, rebate size, and term.[18][19][20]
Subpart B relates to open-end credit lines (revolving credit accounts), which includes credit card accounts and home-equity lines of credit (HELOCs).[3]
Subpart C relates to closed-end credit, such as home-purchase loans and motor vehicle loans with a fixed loan term. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission, and advertising.[3]
Subpart D contains rules on oral disclosures, disclosures in languages other than English, record retention, effect on state laws, state exemptions that apply in limited circumstances, and rate limitations.[21][22] Prior to revisions finalized in 2001, the language provision referenced Spanish language disclosures in Puerto Rico; the rule now permits disclosures in any language if English versions are available on request, except for advertisements.[23]
Subpart E contains special rules for mortgage transactions.[3]
§ 1026.32 frames the requirements for certain closed-end home mortgages classified as high-cost.[4]
§ 1026.33 sets requirements for reverse mortgage transactions, including total annual loan cost rate disclosures.[21]
§ 1026.34 prohibits acts or practices in connection with high-cost mortgages.[24]
§ 1026.35 establishes requirements for "higher-priced" mortgage loans (HPMLs).[8]
§ 1026.36 prohibits certain acts or practices in connection with credit secured by a dwelling.[12]
§ 1026.39 sets mortgage transfer disclosure guidelines.[25]
§ 1026.40 sets the requirements for home equity plans.[7]
Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures that, if used properly, will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.[3]
Right of rescission
For certain transactions secured by a borrower's principal dwelling, TILA grants a three-business-day right of rescission following loan consummation. The rescission period runs from the last of three events, consummation of the transaction, delivery of all material disclosures, or delivery of the required rescission notice.[9][27] Each consumer with an ownership interest in the property may exercise the right to rescind until midnight of the third business day after the triggering event.[9]
If the required notice or material TILA disclosures are inaccurate or not delivered, the right to rescind may be extended for up to three years after consummation under the statute and regulation.[9][27]
When a borrower rescinds, the security interest becomes void and the borrower is not liable for any amount, including finance charges. Within 20 calendar days after receiving a rescission notice, the creditor must return any money or property given in connection with the transaction and take action to reflect termination of the security interest.[28][27] Until the rescission period ends, the creditor may not disburse funds other than into a valid escrow account, perform services, or deliver materials.[29]
The right of rescission does not apply to loans used to purchase or construct the consumer's principal dwelling, nor does it apply to a refinancing or consolidation with the same creditor of a loan already secured by the consumer's principal dwelling, except to the extent that new funds beyond the existing balance are advanced.[30][27]
Exemptions
TILA requirements do not apply to the following types of loans or credit:[31]
Credit extended primarily for business, agricultural, or commercial purposes.
Credit extended to an entity rather than a natural person, with limited exceptions for certain trusts.
Credit in excess of an annually adjusted threshold, not secured by real estate or by personal property used or expected to be used as a principal dwelling. The Bureau and the Board publish the updated dollar-amount threshold each year.[32]
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