The Truth in Lending Act law (TILA) is a body of federal laws that protect borrowers. It does this by requiring banks and other institutions that offer loans to make appropriate disclosures to borrowers in writing about finance charges and other features of credit transactions. For example, among the data of which a lender must inform a borrower are the annual percentage rate on the loan, whether there are prepayment penalties, due dates for payments, late charges for late payments and service or application fees.
The required disclosures must be made before the lending transaction is concluded. The TILA also requires lenders to comply with other mandates. For example, it requires advertisements for lending services to include certain disclosures of information.
Originally enacted as Title 1 of the Consumer Credit Protection Act, the TILA is designed to protect consumers from unfair lending practices. The law covers most kinds of consumer credit lending including credit cards, home mortgage loans and home equity lines of credit. The information that must be disclosed to the borrower before the credit transaction is completed is information that a borrower should have and consider before completing a lending transaction.
What Unfair Lending Practices Are Covered by TILA?
Truth in Lending Act violations include the following practices on the part of lenders:
- Unfair credit billing;
- Unfair credit card practices;
- High-pressure sales;
- Failure to disclose necessary information about a loan.
TILA violation examples of lender misconduct under the TILA are the following:
- Credit card companies are not allowed to increase interest rates or make significant changes to the fee structure of a loan without giving cardholders notice at least 45 days before the change takes effect;
- Credit card companies must allow cardholders to opt out of significant changes to the terms of their credit account and pay off balances under the original terms;
- Credit card companies must provide their statements for credit accounts at least 21 days before payments are due;
- Monthly card statements of credit card balances must disclose how long it would take the borrower to pay off their balance if they make only minimum payments monthly. Also, statements must disclose how much consumers would have to pay every month in order to pay the entire balance in three years.
These provisions of the TILA were enacted in order to help borrowers avoid fees for being over the limit on their cards and late fees; they have been successful in this regard.
How Does the Truth in Lending Act Protect Borrowers?
The Truth in Lending Act protects borrowers by:
- Requiring full disclosure of loan costs and terms;
- Creating the right of rescission, which means creditors can back out of loans within a certain period of time after the loan is made;
- Providing the means for alternative dispute resolution;
- Directing creditors to notify borrowers when their mortgage is reassigned;
- Placing caps on high cost mortgages and some types of home equity lines of credit;
- Providing better protections for borrowers whose primary residences are security for mortgage loans and home equity lines of credit.
The disclosure requirements of the TILA help borrowers compare loan offers and choose the one that best fits their needs.
What Types of Credit Does TILA Cover?
Some of the kinds of credit to which TILA applies are as follows:
- Home equity lines of credit;
- Revolving lines of credit, such as a credit cards;
- Home mortgages;
- Reverse mortgages;
- Auto loans.
The Truth in Lending Act also restricts lenders’ conditional loans that require borrowers to purchase additional investment products when they make a loan. So, for example, a lender cannot compel a person to purchase a life insurance policy in addition to their auto loan.
The Right of Rescission: Suing Under the Truth in Lending Act
While homebuyers have three days to rescind a mortgage loan, under federal law, other loans violating TILA may be rescinded much later— up to as much as three years after the loan is made.
If for any reason a person decides that they no longer wish to proceed with the loan, the TILA allows them to rescind the loan agreement within three days without any type of penalty for doing so. In the event that the lender failed to disclose any of the required terms listed above, the borrower has grounds to sue for money damages and attorney’s fees.
In addition, failure to disclose terms extends the right of rescission for three years. By rescinding, a person can recover the full amount of their down payment, as well as money they paid in the form of interest and mortgage points. These sums are set off against the principal amount of money issued to the person. The person may then offer to pay off the remaining balance of the loan.
The bank must either accept or reject the offer within 20 days. After 20 days, the right to collect the principal is waived, meaning that the person will then own the home free of any lien from the mortgage lender. This provision of the TILA only applies to certain types of loans
A majority of courts, including the federal 9th Circuit Court of Appeals, require borrowers rescinding their loans first to prove the TILA violation in court and obtain a court judgment in their favor. Borrowers must initiate this lawsuit within a three year deadline. Furthermore, if borrowers rescind the loan, they must pay back the loan principal. Only then do borrowers receive a refund of interest and fees.
Other courts, such as the federal 3rd and 4th Circuit Courts of Appeal, give borrowers a huge advantage, because they do not require borrowers to sue banks to prove TILA violations within the three year deadline. Moreover, they may not even have to pay back the entire loan principal. They would be able to use the letter of rescission and a potential lawsuit as leverage to negotiate for a lower payback amount.
Do You Have a TILA Claim?
The Truth in Lending Act may be triggered in a number of ways. Here are examples of when a person may have a claim under the TILA:
- Their lender changed the terms of the person’s home equity line of credit, e.g. the interest rate on the loan without their knowledge and consent;
- A lender did not provide a person with an accurate and truthful annual percentage rate calculation before the loan was completed;
- A person is charged hidden or other inappropriate fees that their lender failed to disclose before the loan was completed.
If a person has a claim under TILA, they may bring an individual lawsuit or file a counterclaim if their lender is suing them. In some limited circumstances a class action lawsuit might be possible.
When to Seek Legal Advice
If you have been a victim of unfair lending practices or high-pressure sales tactics in lending, you should consult an experienced credit lawyer. An attorney can help you fully understand your rights under the Truth in Lending Act and knows the procedures for pursuing damages and other remedies to which you may be entitled.