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The Truth in Lending Act – What Is It?

Enacted in 1968, the Truth in Lending Act, 15 U.S.C. § 1601, et seq. (“TILA”) is a federal statute that aims to promote fair credit billing and credit card practices for consumers. The goal of the law is to provide transparency and protection during the lending process. The TILA protects consumers who deal with lenders and creditors by requiring creditors to provide full disclosure of credit terms and the true cost of credit to their customers.

Pursuant to the TILA, there are certain disclosures that creditors are required to supply consumers with before they enter into a credit transaction. The law also standardizes the way that these disclosures are presented — creditors are required to use the same terminology and expressions of rates. “Truth in Lending” disclosures must be present that provide consumers with information regarding important terms of credit. For example, terms that must be provided in such disclosures include, but are not limited to:

  • The Annual Percentage Rate (“APR”), which is the rate of interest that a consumer will be charged for the loan over the course of a year; and
  • The finance charge, which is the consumer’s cost of borrowing the loan amount, and is comprised of the total amount of interest and any fees that may be charged; and
  • The amount financed, which is the amount of credit that the consumer is borrowing; and
  • The total cost of the loan, which is the sum of all of the payments that a consumer will have made over the lifetime of the loan and is comprised of both the repayment of the principal amount and the finance charges.

Additionally, in their disclosures, creditors should also include other information including the number of payments that a consumer will make, the amount of each monthly payment, the amount of any late fees or penalties, and prepayment information. These disclosures must be presented in a clear and noticeable way and they must be given to a borrower before they are legally bound to the loan. In many cases, these disclosures can be found within a consumer’s contract. In regard to credit card agreements, the TILA requires that said disclosures be contained in an easily legible box called a Schumer Box. While the TILA requires that important disclosures regarding a loan be made, the law does not tell creditors how much interest they should charge or whether they are obligated to offer a loan to a borrower.

Another important provision of the TILA is that it provides consumers with a right of rescission. The right of rescission allows borrowers to have a “cooling-off” period in which they can reconsider the loan in the absence of high-pressure sales tactics. For certain types of loans (for example, refinancing a mortgage, or a home equity loan), this regulation gives consumers the ability to turn down the loan and rescind the transaction without losing money within three business days of accepting the loan. The three-day period only starts once the consumer has signed the credit contract (also known as a Promissory Note), received a Truth in Lending disclosure, and received two copies of a notice that provides information about the right to rescind. In the case that a borrower was not given a Truth in Lending disclosure or a right-to-rescind notice, or that they were provided with incorrect information, it is possible that they can rescind the loan within three years from the closing date.

What is prohibited?

The TILA contains a number of prohibitions that lenders and creditors are subject to. Generally, they are barred from using deceptive lending practices. For example, loan originators are prohibited from enticing consumers to borrow a loan that would result in an increase of the lender’s compensation, unless the loan actually benefits the consumer. Additionally, the TILA prohibits unsolicited credit cards and credit card issuers also cannot charge unreasonably high penalty fees for consumers who make late payments.

Who does the law apply to, and how can consumers sue?

The provisions of the TILA apply to most types of consumer credit. These include open-end credit, like credit cards and a home equity line of credit, as well as closed-end credit, like mortgages and car loans. Under the TILA, consumers are provided with a private right of action where they can bring suit against a creditor that does not abide by the law and recover damages. Consumers are able to bring both individual and class action lawsuits pursuant to the TILA.

What damages are consumers entitled to?

Injured consumers are entitled to receive in individual actions their actual damages, and also statutory damages that are limited to twice the amount of the lender’s finance charges, in an amount capped at between $100 and $1,000.

If an individual lawsuit involves a consumer lease, a consumer would be able to collect 25% of their total amount of monthly payments under the lease, and this sum must fall between $200 and $2,000.

If an individual lawsuit relates to an open-end consumer credit plan that is not secured by real property or a dwelling, the consumer would be able to collect twice the amount of any finance charge in connection with the transaction, and this sum must fall between $500 and $5,000.

If the individual lawsuit relates to a credit transaction that is not under an open-end credit plan and that is secured by real property or a dwelling, the consumer would be able to collect between $400 and $4,000.

If the consumer’s lawsuit pursuant to the TILA is successful, they would also be able to collect reasonable attorney’s fees and costs.

In the case of a class action lawsuit, the total amount of damages that a class would be able to collect from the same creditor would be either $1,000,000 or 1 percent of the creditor’s net worth, whichever is less.

What is the statute of limitations period?

The statute of limitations period is a legal provision that sets forth the maximum amount of time that a party has to initiate legal proceedings in regard to a particular claim for relief; generally starting from the date that an alleged unlawful action accrued. Claims under the TILA have a statute of limitations period of one year. The one-year period starts from the date that the violation occurred. However, certain TILA claims that relate to mortgages may have a three-year statute of limitations period instead.

 Are there exemptions?

The TILA does not apply to loans or credit that are extended for business, agricultural or commercial purposes, or to credit that is greater than the annual exemption threshold given that it is not secured by property or real estate.

Some of the places that a consumer can look to for help or answers to questions:

The law(s) and statute(s) discussed above can change. So, in the state that a consumer resides in, a consumer protection agency, the Office of the Attorney General, and/or a consumer protection attorney who is licensed in a consumer’s respective state can help a consumer in getting help, up to date information and interpretations, and/or with determining the answers to their questions in regard to the aforementioned laws. The Consumer Financial Protection Bureau can assist as well.