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What Is TILA? FAQs About The Truth In Lending Act Answered

Victoria Araj5-minute read

December 13, 2022

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The Truth in Lending Act of 1968 (TILA) is a legal mandate that requires loan lenders and credit card providers to provide full transparency on their offerings. TILA is essential for protecting consumers from predatory lending practices. 

So, what is TILA? Keep reading to learn more about TILA, its benefits and how it can protect you and your financial decisions.

Key Takeaways:

  • The Truth in Lending Act protects borrowers from unfair lending practices.
  • TILA regulations apply to most types of consumer credit.
  • Lenders and providers must disclose important information about loan terms and conditions.

Table Of Contents

    How Does TILA Work?

    The Truth in Lending Act does exactly what its name infers – its main purpose is to protect consumers from misleading credit card and lending practices. To do so, it requires lenders and providers to disclose all necessary information, such as finance charges, for borrowers to make informed decisions surrounding loans and credit cards.

    What Does TILA Apply To? Infographic

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    The Truth in Lending Act applies to most consumer credit types, but there are some credit transactions that it doesn’t apply to.

    TILA applies to:

    • Credit cards
    • Mortgages
    • Auto loans

    TILA doesn’t apply to:

    • Student loans
    • Business loans
    • Public utilities
    • Home fuel budget plans

    There are states with variations of TILA, so it’s best to research how your residing state applies TILA.

    TILA Provisions

    According to the Truth in Lending Act, there are several provisions that help protect potential borrowers from predatory lending and credit practices. The most important takeaway of TILA is that it requires lenders to provide digestible outlines of loan terms and fees. Additionally, credit card providers are required to provide important details about interest rates, penalties and other finance charges.

    For example, a mortgage broker isn’t allowed to steer a consumer into a mortgage loan that would provide the broker with higher compensation, unless the loan is the best-case scenario for the consumer.

    Prohibition Of Unreasonable Penalties

    Credit card providers and lenders are prohibited from imposing excessive penalty fees if a borrower is late on making payments. We recommend going to the FTC website if you have more questions on finance charges, credit reporting and requirements.

    Types Of Credit Covered By TILA

    TILA’s provisions cover two types of credit: open-end and closed-end. 

    Next, we’ll dive into Regulation Z and how it’s used by loan providers.

    What Is Regulation Z In The Truth In Lending Act?

    Regulation Z, also known as Title I of the Consumer Credit Protection Act (CCPA), prohibits specified practices related to mortgage and loan payments. Regulation Z and TILA are often used interchangeably, so if your loan provider refers to Regulation Z, they are most likely referring to TILA regulations.

    The Federal Trade Commission (FTC) regulates TILA and Regulation Z. Lenders who wish to provide services to borrowers must disclose any information TILA requires with said borrowers before closing a loan or credit line. 

    With any loans under TILA, the borrower has the right of rescission, which permits a 3-day period in which the borrower may choose to cancel or back out of a loan without penalty.

    Benefits Of The Truth In Lending Act

    4 Ways TILA Improves Consumer Transparency Infographic

    The Truth in Lending Act provides substantial benefits for potential borrowers, including:

    • Better knowledge of loan details
    • Greater transparency in loan terms and fees
    • Awareness of loan comparison and credit card options
    • Protection against deceitful lending practices
    • Capacity to avoid harsh penalties 

    Before TILA, some lenders would use predatory tactics to rope customers into unfair agreements. Now, with TILA, lenders are prohibited from changing the terms and conditions of an agreement once it’s been executed.

    What Information Do TILA Disclosure Statements Provide?

    What's Included In A TILA Disclosure Statement? Infographic

    TILA disclosure statements provide the following information about your loans and credit: 

    • Total of payments: Total of payments is the total amount of money you will pay once all scheduled payments are finalized. The total of payments includes both the repayment of the principal and the loan’s finance charges.
    • Amount financed: The amount financed is the credit amount provided to you or on your behalf. The amount financed is also indicated as the “amount borrowed.”
    • Finance charges: Finance charges are the amount the credit will cost as a dollar amount. Finance charges include the total fees and interest paid via on-time payments during the loan period.
    • Borrowing costs: Borrowing costs are the credit cost at a yearly rate including any costs and fees to create the loan, also known as the annual percentage rate (APR).

    Service charges and fees, interest rates and late payments are all disclosed under TILA.

    TILA FAQ

    Below are commonly asked questions about the Truth in Lending Act.

    What Is A Truth In Lending Agreement?

    A Truth in Lending agreement is a formal disclosure or collection of written disclosures. It provides information about the line of credit’s terms and conditions, financing specifics and APR.

    What Is A TILA Violation?

    TILA violations can occur when the creditor fails to properly disclose the finance charges and APR, total number of payments, the payment schedule, or the application of penalty fees that exceed TILA limits.

    The creditor may also be in violation if they don’t allow the borrower to cancel the contract within the rescission period. Under TILA, a creditor can be held liable for any of the above violations.

    What Is A Truth In Lending Statement?

    A Truth in Lending disclosure statement explains the fees associated with your credit. You’ll receive two Truth in Lending disclosures: the initial disclosure when you apply for a home loan and the final disclosure before you close. The statement form will include details on your mortgage loan.

    The Bottom Line

    The Truth in Lending Act is a significant regulation that offers consumers critical information and protections needed to make important financial choices.

    Interested to learn more about TILA and how it can work for you? Discuss with a Home Loan Expert to learn more about how to best manage your mortgage.

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    Victoria Araj

    Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.