The Truth In Lending Act: What Is It?
Passed in 1968, the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (“TILA”) is a federal statute that aims to provide transparency and protection to consumers during the lending process. The TILA protects consumers that deal with lenders and creditors by requiring lenders and creditors to provide full disclosure of credit terms and the true cost of credit to their customers.
While the TILA applies to any company that provides consumer financing options, a main group of lenders that are targeted by the regulations of the TILA are car dealerships and automobile financing companies as many consumers that purchase vehicles often do so via credit. Even though most car dealerships do not directly extend credit to their consumers, they are still considered to be “creditors” because they are the party that initially offers the credit to the consumer. The TILA contains a number of prohibitions that these lenders and creditors are subject to. Generally, they are barred from using any deceptive lending practices. For example, creditors 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. When providing terms of auto loans to their consumers, these lenders must follow the provisions that are laid out in the TILA.
According to the TILA, before a consumer enters into a vehicle loan contract, their creditor must provide them with a Truth in Lending disclosure that contains specific information about the loan. While the TILA requires for disclosures regarding a loan to be made, the law does not tell creditors whether they are obligated to offer a loan to a borrower or how much interest they should charge (i.e. the TILA does not contain any regulations that place limitations on charges, fees, etc.). Rather, the TILA is meant to provide information and transparency to consumers so that they can make informed decisions regarding crediting options. The disclosure requirement of the TILA deters automotive related creditors from luring consumers with appealing financing offers that end up containing hidden fees and costs. Many automobile dealers and creditors violate the TILA by hiding or disguising charges that should have been clearly written out in the disclosure.
The law standardizes the way that these disclosures are presented — creditors are required to use the same terminology and expression of rates in all of their notices. The Truth in Lending disclosure must provide a consumer with information regarding important terms of credit. For example, auto dealers and creditors must include the following information in their disclosures:
- The annual percentage rate (or 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 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 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; and
- The total number of payments; and
- The amount of each monthly payment; and
- The penalty amount for any late fees or charges.
The information in the disclosure must be presented in a clear and conspicuous way. The creditor must give the consumer the disclosure notice before the consumer takes on the obligation of purchasing the vehicle on credit (i.e. before the consumer signs the loan contract). It is possible that the loan contract or the retail installment sales contract will contain the necessary TILA disclosures. If this is the case, the creditor will be in compliance with TILA as long as they give a copy of the contract to the consumer for reviewing purposes. If a consumer does not choose to purchase a vehicle on credit, the creditor is not required to provide a TILA disclosure. By receiving TILA disclosures from auto creditors, consumers are afforded the ability to compare the terms of different loans from different creditors. This way, consumers are able to pursue the loan that best fits their needs.
If an automobile related creditor violates the regulations of the TILA, the injured consumer has the right to take legal action against the creditor. Under the TILA, consumers are provided with a private right of action and they can bring either an individual or a class action lawsuit against an offending creditor.
What damages are consumers entitled to?
If a consumer files a successful claim against an automobile related creditor, they are entitled to receive actual damages and statutory damages limited to two times the amount of the lender’s finance charges. For open-end credit contracts that are not secured by property, the consumer would be able to collect damages between $500 and $5,000. For contracts that are not open-end and are secured by property, the consumer would be able to collect damages between $400 and $4,000. Successful consumers would also be able to collect reasonable attorney’s fees and costs from the creditor.
In the case of a class action, 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?
The statute of limitations is a legal provision that sets forth the maximum period of time that a party involved has to initiate legal proceedings under a law, generally starting from the date of an alleged unlawful action. Claims under the TILA have a statute of limitations period of one year. The one-year period starts from the date that the alleged violation occurred. However, certain 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 credit that is greater than the annual exemption threshold given that it is not secured by property.