What is Adequate Notice
The term adequate notice refers to a written document that specifies in detail the terms and conditions of a loan or extension of credit to a consumer. Adequate notice requires the consumer to be informed of key details of the credit arrangement, such as the annual percentage rate, grace period, annual fee, etc.
Understanding Adequate Notice
The Truth in Lending Act (TILA) requires lenders to disclose key terms of a credit arrangement to borrowers before they sign the agreement. The concept of adequate notice is designed to protect the consumer by ensuring they are made aware of all the key details of a proposed credit arrangement. The purpose of requiring adequate notice under the TILA is to strengthen the economy by facilitating the educated use of credit among consumers.
- Adequate notice specifies the terms and conditions of a loan or extension of credit by businesses or individuals to a consumer or customer.
- Adequate notices must be made in writing.
- Adequate notices must adhere to specifications outlined in the Truth in Lending Act (TILA).
Who Must Give Adequate Notice under the TILA
Under the TILA, any business or individual who meets the following four criteria must give adequate notice to borrowers of the terms and conditions of the credit agreement:
- They extend or offer credit to customers;
- They do this regularly (i.e., more than 25 times per year for revolving credit or credit secured by personal property other than a dwelling, and more than five times per year for credit secured by a dwelling);
- The credit is subject to a finance charge or payable in more than four installments; and
- The credit is to be used for household, personal, or family purposes.
However, if the extension of credit involves a credit card, the TILA dictates that issuers must give adequate notice even if the card is not payable in more than four installments, or is not subject to a finance charge, or is used for a business purpose.
What Adequate Notice Must Look Like
Adequate notice under the TILA is required to be given in writing. It must be made “clearly and conspicuously,” in a way that is meaningful, and in a form that the customer can take home and keep. It must not be misleading.
Adequate notice for a closed-end credit agreement must include:
- The term of the credit agreement, or the time period for which the credit is advanced;
- The amount financed, including an itemization of the amount;
- The finance charge;
- The schedule of payments;
- The total of those payments;
- The identity of the creditor;
- Penalties for prepayment or late payments;
- And, where applicable, deposits required, total sales costs, demand features, insurance, references to contracts, and security interests.
Adequate notice for an open-end credit transaction includes:
- Finance charges, including annual percentage rates and variable-rate disclosures;
- The method of determining the finance charge;
- Any expectation by the creditor that the borrower make repeated transactions;
- The restoration of credit to the consumer as they pay off the balance;
- The method and amount of membership or participation fees;
- Statement of billing rights; and
- Security interests, where applicable.
Example of Adequate Notice
Susan's application for a credit card from her bank is approved. Along with her card, she receives an adequate notice from her bank detailing the terms and fees applicable to her account. When she logs into her account website, a privacy notice relating to the use of her financial data is displayed.