Have you ever shopped around for the best interest rate on a loan or reviewed multiple credit card offers to make sure you were getting the best deal available? If so, you can thank the Truth In Lending Act for making those comparisons possible.
What Is the Truth in Lending Act?
The Truth In Lending Act, or TILA, is Title I of a larger federal law known as the Consumer Credit Protection Act. Congress passed TILA in 1968, and President Lyndon B. Johnson signed it into law. The following year — on July 1, 1969 — the Federal Reserve Board implemented TILA with a rule called Regulation Z.
A primary goal of TILA is to help consumers understand how much they’ll have to pay when they borrow money. In addition to helping you understand the total cost of credit, the law also discourages shady lending and credit card practices.
TILA applies to open-end credit (also called revolving credit), where you can borrow multiple times on the same account. The law also applies to closed-end credit transactions (aka installment accounts), where you borrow once and repay the lender.
As a result, lenders that issue the following types of financing may have to comply with TILA and Regulation Z requirements:
- Credit Cards
- Home Equity Lines of Credit
- Mortgage Loans
- Auto Loans
- Home Equity Loans
- Personal Loans
- Private Student Loans
TILA is also known as the Consumer Credit Cost Disclosure since it requires lenders to be transparent about how much they charge you. Because of TILA, you can compare the interest rates, fees, and repayment terms of multiple credit cards or loans before you apply to borrow money.
What Are Your Rights Under TILA?
Congress has amended the Truth In Lending Act several times since its initial passage in the late 1960s. Below are some of the rights you can enjoy thanks to TILA and its amendments.
- TILA Disclosures
- The Schumer Box
- Right of Rescission
- The CARD Act of 2009
Before Congress passed TILA, it was difficult for consumers to compare different loan offers. At the time, a lender could present loan information to potential borrowers however it saw fit. Deception and manipulation were commonplace — hurting consumers and putting honest financial institutions at a competitive disadvantage.
Without uniform lending disclosures, it was difficult for consumers to understand credit terms and compare different loan offers in an effort to secure the best deal available. TILA stepped in and required lenders to share the same information (and to use a similar, easy-to-understand format) when disclosing the terms of credit transactions.
Now, lenders and credit card issuers must disclose a uniform set of relevant information before making a new extension of credit. TILA lending disclosures include:
- Total Amount Financed
- Total Sale Price
- Payment Schedule
- Total of Payments
- Annual Percentage Rate (APR)
- Finance Charges
- Late Fees
- Prepayment Penalties
In the case of a home loan application, there are two specific types of mortgage disclosures that a lender must provide you as well — a loan estimate and a closing disclosure.
The Schumer Box
Thanks to TILA, credit card issuers in particular must use a table called a Schumer box to disclose borrowing terms to consumers. The Schumer box ensures that all card issuers present complex credit card terms, rates, and fees in a similar format that’s simple for cardholders to understand and compare.
If you’d like to see what a Schumer box looks like, the Federal Reserve provides a sample Schumer box you can review online.
Right of rescission
With credit agreements that involve a consumer’s principal dwelling as collateral, you now have the right to back out of the deal for a few days after you sign on the dotted line. This option to change your mind is known as “the right of rescission,” and it applies to various real estate transactions including:
- Home Equity Loans
- Home Equity Lines of Credit (HELOCs)
- Mortgage Refinances
The right of rescission, however, does not kick in when you take out a loan to buy a new home.
Note that even if you have the right of rescission on a loan, there are strict limitations. You only have until midnight on the third day after you close on your loan to change your mind (with the exclusion of Sundays and federal holidays).
The CARD act of 2009
One of the most meaningful amendments to TILA, at least for credit card holders, is the Credit Card Accountability Responsibility and Disclosure Act of 2009. It’s called the CARD Act for short.
The CARD Act introduced a number of new provisions that credit card issuers had to follow. Thanks to the CARD Act, your credit card company must:
- Provide a 45-day notice before it adjusts your interest rate. There’s an exception here that applies to changes on variable rate accounts tied to an index like the U.S. federal prime rate.
- Give you the chance to opt out of certain changes to your credit card terms (like interest rate increases). However, if you opt out the card issuer can close your account and speed up the payback process on your debt.
- List interest charges and fees separate from purchases on your credit card statement. In the past, these financing costs were easier to overlook.
- Limit the practice of “universal default.” Now, you must be seriously delinquent on your credit card bill before a card issuer can increase the interest rate on your existing balance. Your interest rate on future charges, however, can increase at any time with a 45-day notice. (Note: There’s a built-in exemption from most rate hikes during the first 12 months after you open your account.)
- Require new applicants under 21 years of age to show proof that they can independently pay their credit card debt. Otherwise, under-21 applicants need a co-signer to open a credit card account in their name.
- Cap late fees at $25 for a first offense. Repeat late fees can climb to $35 or more per occurrence. But after six months without late payments, the initial late fee limit resets to $25.
There are several other important consumer protection laws that can help you when it comes to credit and lending. It’s a good idea to become familiar with these laws so you can protect yourself.
Who Enforces the Truth in Lending Act?
The Federal Trade Commission (FTC) is the government agency in charge of enforcement where TILA is concerned. However, the FTC does coordinate some law enforcement duties, rule making, and other activities with the Consumer Financial Protection Bureau (CFPB).
If you believe a financial institution has violated your rights under TILA, you can submit complaint to the Federal Reserve. The Federal Reserve will review your report and forward it to the regulator best suited to help you. You can also talk to an attorney who specializes in consumer protection laws if you have questions or feel like you need legal representation.
Why the Truth in Lending Act Is Important
It’s a big deal to be able to shop around for the best deal when you borrow money. Prior to 1968, this wasn’t something that consumers could do easily. When our grandparents wanted to take out a loan, they didn’t have the advantage of the uniform lending disclosures that we enjoy today.
Comparing interest rates, fees, and other borrowing terms can help you save a lot of money. Sometimes, a lower interest rate can help you save thousands of dollars or more over the course of just a few years.
Example Savings: Credit Card
Here’s an example that may help you understand why TILA is such a meaningful law for consumers. You can take a hypothetical look below at how much money you might save by shopping around for a lower interest rate on your credit card.
|Credit Card Savings Example|
|Credit Card Balance||$15,000||$15,000|
|Annual Percentage Rate||16.5%||18%|
|Monthly Payment Size||$300||$300|
|Total Interest Costs||$10,552||$12,934|
|Expected Pay Off Time||86 Months||94 Months|
By securing an interest rate that’s just 1.5% lower, you could save $2,382 in total interest costs. That lower APR could also help you pay off your credit card balance eight months earlier in the scenario above.
Note that our savings example assumes you’re paying just the minimum payment on your credit card debt. Of course, this isn’t a good way to manage your credit cards. Your best bet is to pay your statement balance in full each month so that you can avoid paying even one cent of credit card interest, regardless of your APR.
Example Savings: Mortgage
Finding the best rate and terms can be even more important when you borrow larger sums of money. Take home mortgages, for example. Rate shopping might save you tens of thousands of dollars when you finance a house.
Here’s another hypothetical look at the potential loan costs you could reduce by comparing offers from multiple lenders.
|Mortgage Savings Example|
|Loan Type||30-Year Fixed||30-Year Fixed|
|Annual Percentage Rate||2.59%||2.99%|
|Monthly Payment Size||$1,400||$1,474|
|Total Interest Costs||$153,834||$180,542|
In the example above, the difference in the two APRs is a mere 0.40%. Yet by securing a rate that’s less than half a percent lower, you could save $74 per month and $26,708 in loan costs over the life of the loan.
The Truth In Lending Act protects you from unfair and abusive lending practices. It also empowers you to compare rates from multiple lenders in a clear and digestible way. Without this important federal law, you might miss out on significant savings.
Anyone planning to open new credit cards, car loans, or other types of financing should be sure to take advantage of the benefits TILA affords. When you rush and don’t compare multiple loan or credit card offers upfront, you risk costing yourself a lot of extra money.