The Truth in Lending Act (TILA) requires lenders to provide uniform disclosure of credit terms. Initially passed by Congress in 1968, the Truth in Lending Act, amended several times, was designed to increase consumer knowledge and understanding of credit offerings. With uniform disclosure requirements, consumers could compare credit offerings and make better decisions.
Anyone who imposes finance charges or, by agreement, requires payment in more than four installments is subject to the Truth in Lending Act. In most circumstances borrowers have a three-day rescission right to any credit agreement they have signed.
The TILA makes different disclosure requirements depending on the type of credit being offered. For openended credit, one that involves repeated transactions between the same parties, the Truth in Lending Act requires an initial statement and periodic statements, including disclosure of when a finance charge is imposed, the amount of additional charges and method of computing them, the creditor’s security interest in the debtor’s property, and the debtor’s billing rights. For closed-end credit such as a car loan or consumer loan from a finance company, the Truth in Lending Act requires disclosure of the total finance charge, the annual percentage rate (APR), the amount financed, the total number of payments, their due dates and amounts, the total dollar value of all payments, late charges imposed for past-due payments, and any security interest taken by the creditor. Applications and solicitations for credit cards have similar requirements but also force lenders to disclose the grace period for paying without incurring finance charges and the method used for computing the balance on which the finance charge is based.
The Truth in Lending Act also established other important lending/borrowing rules, including regulations with regard to consumer credit advertising, home equity loans, and credit-card holder liability. The act prevents “bait and switch” advertisements and promoting terms not usually made available and requires disclosure of the APR in advertisements. In response to deceptive advertising offering “free money” loans against home equity, the TILA requires detailed disclosures on home equity loans. The act also limits credit-card holders’ liability to $50 for unauthorized used of the card.
Enforcement of the Truth in Lending Act was given to the Federal Trade Commission for most circumstances. Civil actions, including class-action lawsuits are also possible under the act.