What was the 'Truth In Lending Act - TILA'

The Truth in Lending Act (TILA) was a federal law enacted in 1968 to protect consumers in their dealings with lenders and creditors. The TILA was implemented by the Federal Reserve Board through a series of regulations. The most important aspects of the act concern the pieces of information that must be disclosed to a borrower prior to extending credit: annual percentage rate (APR), term of the loan and total costs to the borrower. This information must be conspicuous on documents presented to the consumer before signing, and also possibly on periodic billing statements.

BREAKING DOWN 'Truth In Lending Act - TILA'

The TILA was implemented by the Federal Reserve Board’s enactment of Regulation Z (12 CFR Part 226). The terms within the TILA apply to most types of credit, including closed-end credit, more commonly referred to as an installment loan, and open-ended revolving credit, such as a credit card or line of credit. The regulations are designed to guard consumers against inaccurate or unfair practices on the part of the lender. Different states and industries have their own variations of TILA, but the chief feature remains the proper disclosure of key information to protect both the consumer and the lender in credit transactions.

Consumer Protections under the Truth in Lending Act

The act regulates what companies can advertise and say about the benefits of their loans or services. For example, borrowers considering an adjustable-rate mortgage must be offered specific reading materials from the Federal Reserve Board to ensure they understand the parameters of an ARM. The TILA prevents loan originators from receiving compensation for issuing mortgages where the compensation is based on the existence of certain terms and conditions within the loan documents. The TILA also forbids lenders from steering potential buyers to loans that financially benefit the lender. Instead, lenders must show potential borrowers all available, applicable loans.

Additionally, the TILA provides the right of rescission. This gives borrowers a three-day period where they can reconsider their decision and decide not to take the loan without any risk of loss to personal funds. The right of rescission allows borrowers who were subjected to high-pressure tactics to cease the proceedings. This right can be applied to any loan a consumer may pursue.

Items Not Governed by the Truth in Lending Act

The TILA does not regulate the interest rates a lender may charge for services. Additionally, the act does not dictate to whom credit can be extended beyond standard laws against discrimination.

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