What is the Truth in Lending Act?
The Truth in Lending Act (TILA), passed in 1968, is a federal law that regulates the credit market and sets minimum standards for the information that a creditor must provide in an installment credit contract. The Truth in Lending Act applies when businesses or individuals extend credit to consumers, when the credit is payable by written agreement in more than four installments, and when credit is subject to a finance charge. It also applies when the line of credit is to be used for personal or household purposes and the total loan is either secured by an interest in real property or a total value of $25,000 or more.
Purpose of the Truth in Lending Act
As part of the Consumer Protection Act, the purpose behind the Truth in Lending Act is to provide uniform disclosures to make it easier for the consumer to shop for the right credit line, as well as to help ensure that the consumer understands the financial risks associated with a credit line. For example, the Truth in Lending Act limits the amount that a consumer can be charged for the unauthorized use of their credit cards. TILA also regulates the advertising of credit by requiring disclosures and other specified information. These disclosures include the sum being financed, the amount of the required minimum monthly payment, the total number of monthly payments, and the Annual Percentage Rate, or APR.
The Truth in Lending Act specifies how disclosures have to be made within written materials. This information is usually in bold print or separated from the other printed materials within a border or box. TILA also puts limits on a bank’s solicitation of credit cards. For instance, while a bank is allowed to send you information about a card in an attempt to entice you to sign up, they may not send you an already-issued credit card in the mail.
The Truth in Lending Act sets limitations on certain types of home equity loans and establishes a maximum interest rate for certain mortgages. Further, TILA governs the consumers right to rescind on certain transactions. For example, the Truth in Lending Act authorizes consumers to rescind on a transaction based on a security interest in their principal dwelling within three days of the consummation of the transaction. Notice of rescission can be given by any means of communication. Most importantly, TILA was aimed at protecting consumers. This means that when applied in court, the Truth in Lending Act regulations will be construed in favor of the consumer—not the creditor.