The Truth in Lending Act, or TILA, is a federal law passed in 1968 to provide protections for both consumer and lender in credit transactions by requiring proper disclosure of information key to the loan agreement. It also includes provisions regulating what a lender can advertise and say about the benefits of their loans or services.
If you are a total finance nerd, this is also known as Regulation Z, RESPA found in 12CFR Part 226. While it was originally implemented under the Federal Reserve, most of the authority for general rule-making was passed to the newly formed Consumer Financial Protection Bureau in 2011.
What TILA does for you as a consumer is require the lender or creditor to spell out specific terms of a loan prior to signing and how it is to be serviced. As of January 10, 2014 rules will go into place with further documentation and implementation rules meant to clarify exactly how this law is to be followed.
Disclosure Requirements
Lenders are required to tell you before you commit to a mortgage, credit card, or other loan these particular details:
- Annual Percentage Rate (APR): This is not to be confused with the interest rate on the loan. First, it is expressed as an annual rate rather than the loan life rate on your note. Also, it includes in the loan amount the prepaid finance charges. When you shop for a loan, use the APR as a way of comparing loans rather than the simple note rate.
- Terms of the Loan: This includes how long the loan is expected to last before the principal is paid, how often payments must be made, and how many payments will be made over the life of the loan.
- Total Costs to the Borrower: This tells you exactly how much money you will pay for the loan in its entirety. It includes:
- Finance charges: how much the credit itself will cost you in dollars over the life of the loan. In other words, the total amount of money you will pay in interest by paying the loan all the way to the end with no early pay-off.
- The amount financed: the principal and any other charges rolled into the loan.
- Total payment: the total amount you will have paid out to the end of the term in principal and interest.
This information is to be given in a standardized format to enable consumers to easily compare the same loan as it would be offered by different lenders or creditors. The Truth in Lending Act covers both open ended loans (credit cards, home equity loans) and closed ended loans (mortgages, auto loans).
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