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What is the Truth in Lending Act?
The Truth in Lending Act (TILA) is the commonly used name for Title I of the Consumer Credit Protection Act. Passed by Congress in 1968, the consumer protection law specifies which information lenders must share with borrowers before giving them a loan or line of credit. This information includes the annual percentage rate, loan terms, and total cost of the loan.
Before implementation of the TILA, shopping for a loan was confusing for consumers. Lenders used different terms to describe their loan products and services. This made comparison shopping difficult for consumers and benefited the lenders. TILA eliminated this and added additional consumer protections.
Disclosures: TILA forces lenders to provide certain disclosures about the cost of credit extended to borrowers. This disclosure must include the following:
- Annual percentage rate (the cost of the credit listed as a percentage rate).
- Finance charge (the cost of the credit listed in dollars).
- Amount financed (the amount of money the consumer borrows).
- Total of payments (the total amount of money the borrower pays to the lender over the life of the loan, including the principal and interest).
TILA disclosures also include the number of payments the borrower makes over the life of the loan, the monthly payment, late fees, and prepayment information. As of October 2015, the loan estimate had replaced the TILA disclosure for mortgages. This three-page loan contains similar information about the mortgage loan, but is easier to read.
Compensation for loan originators: As a result of the Dodd-Frank Wall Street Reform and Consumer Protect Act, TILA contains rules for compensating loan originators. First, lenders may not use loan terms (other than the loan amount) when calculating compensation for loan originators. Loan originators may not receive dual compensation (that is, payments from both the consumer and a creditor or third party). TILA also prohibits loan originators from suggesting to borrowers loans that increase the loan originator’s compensation unless the loan product benefits the borrower.
Right of rescission: Under the Truth in Lending Act, borrowers have the right of rescission, which is the ability to turn down a loan up to three days after accepting it. This element protects consumers who agree to a loan as the result of high pressure sales tactics and then realize the loan does not meet their needs. The right of rescission applies to any type of loan, including mortgages.
Amendments to the act: Congress updates the Truth in Lending Act to make it relevant to changes in the economy. Some of the most significant amendments include:
- 1970: Prohibit unsolicited credit cards.
- 1988: Addition of adjustable rate mortgage loan disclosure requirements.
- 1994: Extension of information required on reverse mortgage disclosures.
- 1995: Limitation of lender’s liability for disclosure errors.
- 2009: Increase the length of time lenders have to notify consumers before changing credit card terms.
- 2013: Change the limitation on fees charged by credit card companies.
- 2013: Change from truth in lending disclosure to loan estimate document for mortgages.
Truth in Lending Act example
Consumers see the TILA in action every time they apply for loans. The lender presents the disclosure detailing exactly what they pay to borrow the money. If a borrower reviews the documents and decides to back out of the loan, the law lets them do so without penalty, as long as it’s within the first three days of accepting the loan.
Do you want to compare the interest rate listed on your Truth in Lending Act disclosure? Check out Bankrate’s Auto Loan calculator to see how it stacks up against other loans.
Use our calculator to figure out how much your monthly mortgage payment will be.