The Truth in Lending Act: an Overview
Congress enacted The Truth in Lending Act (TILA) in 1968 to help consumers shop for credit intelligently, and to prevent inaccurate and unfair credit billing and credit card practices.[1] Overall, TILA is designed to protect consumers by requiring certain disclosures about consumer credit terms and costs and by standardizing how these terms and costs are implemented.
The 2010 Dodd-Frank Act transferred rule-making authority for TILA from the Federal Reserve Board to the newly created Consumer Finance Protection Bureau (CFPB).[2] The CFPB implements TILA through Regulation Z, and Regulation Z’s requirements are given controlling weight as long as they are not “arbitrary, capricious, or manifestly contrary” to TILA.[3] TILA and Regulation Z regulate both open-end and closed-end credit. This article will focus primarily on closed-end credit.
Closed-End Credit: What Is It?
Regulation Z defines closed-end credit transactions as “consumer credit other than ‘open-end credit.’”[4] Unlike open-end or “revolving” credit like credit cards, closed-end credit usually involves a loan with a fixed repayment plan as to both the number and amount of payments. Home mortgage loans and car loans are common examples of closed-end credit.
Closed-end credit is regulated throughout TILA and Regulation Z, specifically in Subpart C of Regulation Z.[5] Subpart C dictates disclosure requirements; special requirements for certain mortgage and variable-rate transactions; and regulations concerning the treatment of credit balances, how to determine annual percentage rates, rights of rescission, and advertising.
Required Disclosures
One of the most critical tasks in understanding TILA is becoming familiar with its numerous disclosure requirements. Throughout Subpart C, Regulation Z dictates what, how, and when creditors must disclose information to consumers about closed-end credit.[6]
Before credit is extended, creditors are required to disclose several pieces of information to consumers.[7] The current version of Regulation Z contains approximately twenty required disclosures, including the creditor’s identity, rules about prepayments, the interest rate and payment summary for mortgage transactions, and “no-guarantee-to-refinance” statements. Every item must be disclosed to the extent applicable[8], and violations of any disclosure requirement may invoke a consumer’s rights for actual damages, attorney fees and costs.[9] Some of these disclosure requirements are summarized below.
Disclosure
Requirements
Amount Financed
A creditor must disclose the amount financed, using that term, and a brief description.[10] The Regulation suggests using the description “the amount of credit provided to you or on your behalf.”[11]
Finance Charge
A creditor must disclose the finance charge, which is “the dollar amount the credit will cost you.” The finance charge must be disclosed as a dollar amount and must use the term “finance charge.” Along with the APR, the finance charge disclosure must be more conspicuous than any other required disclosure.[12]
APR
A creditor must disclose the annual percentage rate (APR), using that term, and a brief description. The regulation suggests using the description, “the cost of your credit as a yearly rate.”[13] Along with the finance charge disclosure, the APR must be more conspicuous than any other required disclosure.[14]
Total of Payments
A creditor must disclose the “total of payments,” using that term, and a brief description. The Regulation suggests using description, “the amount you will have paid when you have made all the scheduled payments.”[15]
Security Interests
A security interest is an interest in property that secures performance of a consumer credit obligation and that is recognized by state or federal law. A creditor must disclose whether it has or will acquire a security interest in the property being purchased as part of the transaction, or in other property, identified by item or type.[16]
Besides these initial disclosures, subsequent disclosure requirements may be triggered by special events like refinancings, assumptions, and variable rate adjustments.[17]
Although the required volume and content of these disclosures may be a bit overwhelming, creditors can reduce hassle and also achieve some liability protection by using model disclosure forms from the Consumer Finance Protection Bureau.[18]
Other Key Requirements for Closed-End Credit
Besides regulating closed-end credit disclosures, TILA and Regulation Z also address other closed-end credit requirements. Specifically, Regulation Z dictates the treatment of credit balances[19], how to determine APR[20], rights of rescission[21], and advertising[22].
The advertising rules, in particular, are somewhat extensive. In general, though, advertisements must be clear, conspicuous, and not misleading. Creditors should be cautious when using “triggering terms” in advertisements, such as the term “payment amount.” The use of some triggering terms in advertisements requires the creditor to disclose additional details about the term. Among other advertising requirements, a creditor also must comply with a number of specific rules about making advertisements for dwelling-secured credit. [23]
Recent Updates to TILA
TILA and Regulation Z are frequently updated, so it is important for both creditors and consumers to stay abreast of changes. The CFPB recently issued three final rules amending TILA’s closed-end credit requirements.
– Amendments to the ability-to repay rule (effective January 10, 2014) exempt certain nonprofit and community-based lenders from some Ability-to-Repay requirements (which restrict lenders from making loans to individuals who are financially unable to repay the loans). The purpose of the final rule is to help low- and moderate-income consumers obtain affordable housing, facilitate lending by small creditors, and establish how to calculate loan origination compensation.[24]
– Amendments modifying escrow account rules (effective June 1, 2013) require higher-priced mortgage escrow accounts for the payment of taxes and insurance to be maintained for five years (instead of one year). [25]
– High-cost mortgage and homeownership counseling amendments to the Truth in Lending Act (effective January 10, 2014) expand Home Ownership and Equity Protection Act of 1994 (HOEPA) coverage to include purchase-money mortgages, refinances, closed-end home equity loans and open-end credit plans. Implements Dodd-Frank revisions to the HOEPA coverage threshold tests and adds additional restrictions on balloon payments, prepayment penalties, and late charges.[26]
Conclusion
As outlined in TILA and Regulation Z, both creditors and consumers play a part in preventing irresponsible closed-end credit practices. As the law continues evolving, it will become even more important to keep up with changes in TILA and Regulation Z to ensure compliance and to promote financial security.
[1] 15 U.S.C. § 1601 et seq.
[2] Pub. L. No. 111-203, §§ 1001–1100.
[3] Household Credit Servs. v. Pfennig, 541 U.S. 232 (2004).
[4] Reg. Z § 226.2(a)(10).
[5] Reg. Z § 226.17-24.
[6] Reg. Z.
[7] 15 U.S.C. § 1638(b)(1), page 9.
[8] 15 U.S.C. § 1638.
[9] 15 U.S.C. § 1640(a)(1).
[10]15 U.S.C. § 1638(a)(2)(A); Reg. Z § 226.18(b).
[11] Reg. Z § 226.18(b).
[12] 15 U.S.C. § 1632(a); Reg. Z § 226.17(a)(2).
[13] 15 U.S.C. § 1638(a)(4); Reg. Z § 226.18(e).
[14] 15 U.S.C. § 1632(a); Reg. Z § 226.17(a)(2).
[15] Reg. Z § 226.18(h).
[16] 15 U.S.C. § 1638(a)(9).; Reg. Z § 226.18(h)-3.
[17] Reg. Z § 226.20.
[18] 15 U.S.C. § 1604(b).
[19] Reg. Z § 226.21 (a creditor must appropriately credit consumer for overpayments and other amounts owed to or held for benefit of consumer).
[20] Reg. Z § 226.22 (provides standardized rules for calculating annual percentage rate).
[21] Reg. Z § 226.23 (under some circumstances, allows a consumer to rescind transaction in which security interest is principal dwelling).
[22] Reg. Z § 226.24.
[23] Reg. Z § 226.24(i) (for example, advertisers should avoid making misleading advertisements about “fixed” rates and payments, making misleading comparisons in advertisements, and misrepresenting government endorsement of credit.
[24] Press Release: CFPB Finalizes Amendments to Ability-to-Repay Rule. May 29, 2013. http://www.consumerfinance.gov/pressreleases/cfpb-finalizes-amendments-to-ability-to-repay-rule/
[25] The CFPB’s First Three Rules of 2013. Origination News 22.6 (Mar 2013): 4.
[26] Id.