Understand the Truth in Lending Act (TILA)

What you should know about your rights under the Truth in Lending Act (TILA)

Editor’s Note: FairShake is not an attorney, law firm, or financial advisor. Our content team conducts research to the best of our ability to ensure this content is accurate, but it does not replace professional financial or legal advice.

In this article

• What is the Truth in Lending Act?
• When does TILA apply?
• What does TILA not cover?
• What disclosures are required under TILA?
• What other rights does TILA provide?
• What fine print should you look for when looking for a loan?
• How can you file suit under the Truth in Lending Act?

What is the Truth in Lending Act?

The Truth in Lending Act (TILA) is federal law designed to protect consumers from unfair credit billing practices. Under the Truth in Lending Act lenders must provide clear information when offering loans.

The law is aimed at preventing predatory lending. TILA requires meaningful disclosure of credit terms so consumers can shop loans and make an informed decision. All financial institutions must use standard credit terminology and rate calculations to make comparison possible.

TILA was passed in 1969 and has been expanded several times. The group of regulations implementing the provisions of TILA is known as Regulation Z.

Also from FairShake:

• Ten Consumer Protection Laws to Know About
• How to Report Unfair Banking Practices
• Understand the Fair Debt Collection Practices Act
• Understand the Fair Credit Reporting Act
• Understand the Telephone Consumer Protection Act

When does TILA apply?

TILA applies to consumer transactions that meet all of the following characteristics:

• The lender is a business that offers credit either by directly loaning money, or by selling something or providing a service upon a promise of future payment.
• The debtor is a person.
• A finance charge may be imposed.
• The credit obtained is primarily for personal, family, household, or non commercial agricultural purposes.

It’s worth understanding how TILA treats open-end credit and closed-end credit differently:

Open-ended credit is when a consumer borrows with a revolving balance, like a credit card or home-equity line of credit.

• For open-ended credit accounts, TILA limits the fees a consumer can be charged in their first year, and applies restrictions to further fees and to APR increases.

Closed-end credit means one-time installment loans such as a car loan or mortgage.

• For closed-end credit accounts, TILA requirements include specifying a timeline for disclosing terms of mortgage transactions, and what must be included in disclosures, such as rates and payment schedules.

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What does TILA not cover?

Unfortunately, some categories of debt are not covered by TILA, including:

• Credit extended primarily for business, commercial agricultural, or other commercial purposes.
• Credit extended to an entity—like a corporation—rather than a person (with some exceptions like when the entity is a trust used for estate planning).
• Certain credit products like reverse mortgages may be excluded from TILA.

What disclosures are required under TILA?

Under TILA, before a lender offers credit, they must disclose the following:

• Amount financed: The amount of money you will borrow.
• Annual percentage rate (APR): The borrowing cost you’ll pay each year as a percentage of the loan balance.
• Finance charge: The total dollar amount you’ll pay over the course of the loan, including interest and other fees (and excluding principal repayment).
• Total payments: The total dollar amount you will end up paying the lender by the end of the loan term, including both principal repayment and finance charges (assuming you pay everything on time).
• Other terms: These include the monthly payment amount, the number of payments over the term of the loan, and whether early payment of the loan would incur a prepayment penalty, among others.

What other rights does TILA provide?

In addition to disclosure requirements, TILA provides the following:

• Offers a right of rescission for certain loans, allowing the borrower to back out up to 3 days after signing.
• Protects consumer against inaccurate billing and other unfair practices by credit card companies and other lenders.
• Provides rate caps and minimum standards on some dwelling-secured loans.
• Limits home equity lines of credit and some closed-end home loans.
• Prohibits unfair or deceptive lending practices.

And TILA (Truth in Lending Act) allows you to file suit against a lender if a lender did not provide necessary disclosures to you. Civil remedies for violation of TILA (the amount you’re allowed to sure for) include an amount twice the amount of finance charges, plus attorneys fees.

What fine print should you look for when looking for a loan?

Try to look for, ask about, and understand all of the following when shopping for a loan:

• APR (Annual Percentage Rate)
• Interest rate, including whether it’s variable vs fixed
• Repayment terms, including any Prepayment penalties
• Finance charges
• Service or carrying charges
• Loan fee
• Premiums
• Broker fees
• Appraisal fees
• Collateral requirements — is the loan secured vs unsecured?
• Balloon payments

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