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If you’ve recently started to look into applying for loans or credit, you may have seen the term “TILA” come up. But what is the TILA, and how does it help you? Explained simply, the Truth in Lending Act, or TILA, protects consumers from unfair practices by credit lenders.
Having an understanding of what the TILA is can be very beneficial so you can protect yourself when applying for credit.
What Is the Truth in Lending Act?
The Truth in Lending Act or “TILA”is a federal law that was enacted in 1968. The law aims to protect consumers from unfair and incorrect credit billing and credit card practices and requires lenders to provide the true cost of borrowing credit.
This is where the act gets its name—there must be truth from the creditors when extending lending to consumers. Lenders must disclose the terms and costs related to borrowing credit in an easily understood manner so that consumers can efficiently comparison-shop between lending options.
The act was initially implemented by the Federal Reserve Board’s Regulation Z. Essentially, Regulation Z is another name for the Truth in Lending Act, and the two terms are often used interchangeably. Since its initial implementation in 1968, the act has been amended many times to keep up with the changing credit industry. The first amendment came in 1970 with the prohibition of unsolicited credit cards.
One of the most significant changes to the act was when the Consumer Financial Protection Bureau (CFPB) received the authority to make additional rules under the TILA. Since being given this duty, the CFPB has initiated many changes. Some of these changes include:
- Clarifying rules around loan originator compensation
- Applying limits on the points and fees that apply to qualified mortgages
- Creating rules around the ability-to-repay requirements for mortgages
How Does the TILA Work?
Creditors and lenders are aware of the TILA rules they must adhere to. All borrowers must receive a written disclosure that states all the critical terms of borrowing the credit before they’re legally bound to start paying the loan. The details that need to be provided include:
- annual percentage rate (APR)
- The finance charge, the total amount of interest and fees the borrower will pay over the full span of the loan term if they make every payment on time
- The total amount of the loan or credit provided to the borrower (i.e., the amount the consumer is borrowing)
- The total of payments the borrower will make, including the principal amount, interest and fees
- The total numbers of payments for the loan term
- Any late fees that can apply
- Restrictions around prepayment of the loan (i.e., if there is a fee for prepayment)
- Any other important terms
Truth in Lending disclosures are often written into the lending contract, so you must read the entire agreement to find these details.
TILA Exemptions
There are a few TILA exemptions all borrowers should be aware of. The Truth in Lending Act does not apply to the following situations:
- Agricultural, business or organizational (business) credit
- Non-owner-occupied rental property or owner-occupied rental property that the owner will occupy within one year; both of these are considered lending credit for business purposes and therefore not applicable for TILA
- Business credit that is later refinanced
- Credit card renewal
- Trusts
- Credit over the applicable threshold amount
- Public utility credit
- Commodities or securities accounts
- Home fuel budget plans
- Student loan programs
- Certain types of mortgages
What Other Acts Are Included in the TILA?
There are several other acts included within the TILA.
CARD Act
In 2009, the TILA implemented a significant amendment known as the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). This act introduced new rules about what a lender has to disclose when issuing a new credit card. After the CARD Act, financial institutions had to disclose:
Besides rules around disclosure, credit card companies had additional rules they had to follow. Some of the most significant changes included:
FCBA
The Fair Credit Billing Act (FCBA) was originally introduced as an amendment to the TILA in 1974. This act looks to provide consumers with a way to address any errors in their bills. This can include mistakes related to charges on the wrong date, math errors, charges for the wrong amount, unauthorized charges, missing payments and statements that were mailed to the incorrect address.
After a consumer sends a dispute about a billing error, the creditor has 30 days to respond and a maximum of 90 days to investigate the claim.
FCCCDA
The Fair Credit and Charge Card Disclosure Act (FCCCDA) was passed into law in 1988. This act mandates that all businesses and financial institutions share relevant and important details when they issue a new credit card to a borrower. Some of the information they must reveal includes:
HELCPA
Also in 1988, the Home Equity Loan Consumer Protection Act (HELCPA) was introduced as an amendment to the TILA. This amendment states that all lenders need to share the details and terms of a home equity loan before the loan’s first transaction. The details that need to be disclosed include:
If any of these details change between the time the loan is finalized and the first transaction, the consumer has the right to refuse the loan and receive a full refund of all application fees.
Additionally, the HELCPA stops creditors from changing or closing a home equity plan after it’s been opened, although there are some exceptions to this rule.
HOEPA
Almost a decade after the HELCPA was introduced, the Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994. This amendment protects consumers who are in a difficult financial situation from falling victim to predatory lending.
Lenders cannot use predatory lending practices such as lying, manipulation, tricking people with little financial knowledge or coercion. This stops lenders from adding clauses to a home loan that can benefit them unfairly.
HOEPA hopes to distinguish between valid lenders and those with predatory intentions. For example, it stops the practice of frequently refinancing a home loan to charge and collect additional fees. It also prevents lenders from offering a loan to a person in an amount they don’t think the person can repay.
What If Your TILA Rights Are Violated?
The TILA is meant to protect consumers, but it does require the consumer to be aware of their rights in the first place. Unfortunately, this is easier said than done, as the TILA has been amended so often and is quite a complicated act now.
Ultimately, if your TILA rights are violated, you may be entitled to compensation—but you will probably need legal help if speaking to your lender doesn’t fix the problem. You first need to clarify if your rights were actually violated and what you can do about it.
As many lawyers offer a free initial consultation, it may be worth your time to bring your case to an attorney who has experience in the area and can let you know if you have a case worth pursuing.
Always Read the Fine Print
When signing for a new financial product, it can be easy to get caught up in the moment and forget to do your due diligence. However, you must always stop and read the fine print. Now that you know what the TILA is, you also have a better understanding of the information your creditor needs to provide you in its documentation.
Your credit score has a significant impact on what you’re able to do—whether it’s getting a mortgage, being approved for a rental or getting a new car loan. You can protect your credit (and your credit score) by having a comprehensive understanding of the credit details you’re signing up for. Always make payments on time, be aware of fees and try to avoid paying interest when you can.
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