There has always been a lot of lending in the United States. There hasn’t always been a lot of truth.
Lenders could obscure information on interest rates, finance charges and other items of interest. Consumers were often unaware of what they’d signed up for when they got a mortgage or a credit card.
Congress tried to stop the runaround in 1968 when it passed the Truth in Lending Act (TILA), which required lenders to disclose loan particulars in simpler, standardized terms.
The goal was to make sure consumers had a clear understanding of the conditions they’d agreed to. TILA has helped, but the battle for truth in lending is never over.
Lenders have to provide borrowers a Truth in Lending disclosure statement. It has handy information like the loan amount, the annual percentage rate (APR), finance charges, late fees, prepayment penalties, payment schedule and the total amount you’ll pay.
The law also established a “right of recession” for certain types of home loans. It’s basically a cooling-off period that gives consumers three days to cancel their loans without any financial penalty.
TILA does not require institutions to loan money to specific applicants or regulate the interest rates they can charge. It just requires banks, credit unions and other lenders to clearly lay out what the terms of the loan will be.
The law covers most forms of consumer loans, whether they are closed-end or open-end credit. Closed-end loans mean you get a set amount of money when the loan closes and have to pay it back (with interest, of course). Think mortgages or auto loans.
Open-end is money you can draw repeatedly, up to a pre-approved amount. Think credit cards and lines of credit.
Though TILA does not regulate interest rates, it does prohibit lenders from imposing excessive penalties if a borrower is late making a payment.
These loans are covered under TILA:
These loans are not covered:
Regulation Z prohibits certain loan practices, like steering customers to inferior loans because the lender would make more money from it. The term “Regulation Z” came out of the Consumer Credit Protection Act (CCPA) and is used often interchangeably with “TILA.”
Both have been amended on a regular basis since 1968 as the lending and credit-card industries evolved. A major change gave the Consumer Financial Protection Bureau (CFPB) rulemaking authority.
The CFPB gradually expanded its role, issuing rules for ability-to-repay requirements for mortgages, refined loan originator compensation rules and other things that only a federal bureaucrat could find interesting.
The CARD stands for Credit Card Accountability Responsibility and Disclosure Act. Let it never be said federal bureaucrats can’t come up with catchy acronyms.
The bill was passed in 2009 and strengthened consumer protections in lending.
The highlighted changes from that amendment include:
A 2015 study by the CFPB found that the CARD Act helped reduce over-the-limit fees by $9 billion and late fees by $7 billion.
The lending business is always evolving. TILA has added the following acts to protect consumers:
Sir Francis Bacon didn’t have a credit card when he coined the phrase “Knowledge is Power” in 1597, but the English statesmen’s words certainly apply here.
TILA gives consumers knowledge about borrowing and empowers them to deal with lenders. Among the benefits:
There is no question that it’s a lot easier for borrowers to avoid getting the runaround than it was in 1968. There’s also no question TILA has been far from a magic bullet that eliminated all lending monkey business.
As soon as a rule passed, lenders tried to find ways around it. That’s led to more rules, bureaucratic expansion, and a process that gets more unwieldy by the day.
The mountain of oversight and regulations did not prevent the subprime mortgage fiasco of 2008. There will always be lenders looking to game the system to their advantage.
Expect more amendments, rules and acronyms until consumers stop needing to borrow money, which will never happen. Agencies like the Consumer Financial Protection Bureau will play the role of watchdog, but it’s ultimately up to consumers to understand the ins and outs of loans and credit cards.
Understanding those ins and outs can be a pain, but consumers don’t have to go it alone. Government programs, nonprofits and credit counseling agencies are by your side.
If the governmental gobbledygook has you confused, credit counseling from a nonprofit agency can help you understand the lending process and rights that TILA provides.