The Truth in Lending Act: an Overview

Congress enacted The Truth in Lending Act (TILA) in 1968 to help consumers shop for credit in an informed manner, and to prevent inaccurate and unfair credit billing and credit card practices.[1]  Since then, TILA has been amended numerous times, more recently by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  Overall, TILA is designed to protect consumers by requiring certain disclosures about consumer credit terms and costs and by and standardizing how these terms and costs are implemented.

Although the Federal Reserve Board originally regulated TILA, the Dodd-Frank Act transferred rule-making authority for TILA 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 open-end credit.

Open-End Credit: What Is It?

Open-end credit is consumer credit that is extended by a creditor under a plan in which (1) the creditor reasonably contemplates repeated transactions; (2) the creditor may impose a finance charge from time to time on an unpaid balance; and (3) the amount of credit that may be extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid.[4]  In other words, open-end credit has an “open” term, whereas closed-end credit must be repaid in full amount by the end of a specific, “closed” term.  The typical example of open-end credit is a credit card account; whereas closed-end credit includes credit like car loans and home mortgages.

TILA regulates open-end credit primarily through Subpart B of Regulation Z.[5]  Both creditors and consumers should be aware of the numerous requirements for open-end credit.

Required Disclosures

TILA and Regulation Z require creditors to adhere to specific rules about disclosures and other requirements for issuing and maintaining open-end credit accounts.

Summary of Disclosures
TILA and Regulation Z require creditors to disclose certain information to consumers in a “readily noticeable,” tabular format.[6]  A summary of these requirements is provided below:[7]




Creditor must disclose each periodic   rate that may be used to compute finance charge on an outstanding balance; creditor   must give 45 days notice before increasing APR on future transactions.

“Teaser” (Introductory) Rates

Creditor must disclose time period   during which the teaser rate will apply and the rate that will apply when the   introductory period ends.

Variable Rates

If variable-rates are used, creditor   must disclose that rate is variable and how the rate is determined.

Penalty Rates (an increase in initial   APR triggered by specific event like late payment)

Disclosures that refer to penalty rate   must use term “penalty APR.” Creditor must disclose initial rate, penalty   rate that may apply, and specific event or events that may result in imposing   increased rate.  Creditor must provide   45 days notice before imposing penalty rate.

Fees for Issuance or Availability

Creditor must disclose fees imposed   for the issuance or availability of a credit or charge card.

Minimum Finance Charges

Creditor must disclose any minimum or   fixed finance charge that could be imposed for outstanding credit.

Transaction Charges

Creditors must disclose any   transaction charge imposed in connection with use of the card to purchase   goods and services.

Grace Periods

Creditor must disclose date by which,   or period within which, any credit extended under credit card accounts for   the purchase of goods or services must be repaid to avoid incurring finance   charges.

Balance Computation Methods

Creditor must disclose balance   computation method used on account.

Due and Payable Statement

Creditor must disclose that charges   incurred by use of a charge card are payable when cardholder receives the   periodic statement reflecting those charges.

Additional Fees

Creditor must disclose fees for cash   advances, late payments, or exceeding a credit limit.

Timing of Disclosures
TILA requires a creditor to disclose certain terms before the consumer’s first transaction.[8]  Other disclosures must be made in periodic statements.[9]

Other Key Requirements for Open-End Credit
Besides dictating the terms and timing of certain disclosures, TILA also regulates other practices related to the issuance and maintenance of open-end credit.

Billing Error Procedures
A creditor must promptly resolve billing errors upon receiving timely and proper notice from the consumer.  The creditor must reasonably investigate[10] and resolve the billing error within two complete billing cycles or ninety days (whichever is sooner).[11]

Prompt Crediting of Consumer Payments
Open-end creditors must promptly credit payments made by the consumer.[12]

Restrictions on Issuing a Credit Card
A credit card issuer may not issue a credit card, except in response to an explicit request or application for the card (or when renewing a card which the consumer has already accepted).[13]

Credit Card Advertising
Creditors’ advertising[14] must be truthful and may state only those terms that the creditor actually plans to make available.  If the advertiser mentions any specific terms of a credit plan, the advertiser must also disclose certain charges, membership or participation fees, and a variable-rate feature, if relevant.[15]

Restrictions on Offsetting Consumer’s Deposit Account
A creditor cannot take funds out of a deposit account to satisfy a credit card debt, except under an automatic payment plan previously authorized by cardholder in writing.[16]

Consumer’s Liability for Unauthorized Use of a Credit Card
As of 2010, a cardholder can be liable for unauthorized use by a person who has permission to use a card, even if the person is not officially listed as an authorized user.

As outlined in TILA and Regulation Z, both creditors and consumers play a part in preventing irresponsible open-end credit practices.  As the law continues evolving, it will become even more important for consumers and creditors alike to stay abreast of changes in TILA and Regulation Z to keep creditors compliant 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)(20).

[5] Reg Z §§ 226.5 –226.16

[6] Official Staff Commentary 226.5a(a)(1)-3

[7] See 15 U.S.C. § 1637(c)

[8] 15 U.S.C. § 1637(a).

[9] 15 U.S.C. § 1637(b).

[10] Reg. Z §226.13(f).

[11] Reg. Z §226.13(c)(2).

[12] 15 U.S.C. § 1666(c).

[13] 15 U.S.C. § 1642.

[14] Reg. Z § 226.2(a)(2) (advertising defined as a commercial message in any medium that promotes, directly or indirectly, a credit transaction).

[15] See Official Staff Commentary 226.16.

[16] 15 U.S.C. § 1666.