The Truth in Lending Act

The Truth in Lending Act is a US Federal Law Protecting Consumers in Credit Transactions

The primary purpose of this federal legislation, enacted in 1968, is to make the borrower aware of exactly how much a loan will cost. There was a time when lenders could simply advertise “8 percent interest.” Unless the borrower carefully examined the exact terms of the loan — often written in difficult-to-understand legal terminology — he or she was unlikely to realize that “add-ons” might effectively double the interest being charged. Such tactics are now illegal. Today a borrower must be provided with information, written in terms that a layman can understand, which includes the following facts:

• The finance charge: All lenders — except those lending mortgage money — must state clearly in their contracts the total amount the loan (or line of credit) is going to cost the borrower. This amount may include sums other than interest: there may also be points, handling, appraisal, loan and/or insurance fees and similar expenses.
• The annual percentage rate (APR): All lenders must disclose their cost of credit as a yearly rate. Unless the information is given in these terms, consumers can end up paying considerably more for either closed or open-ended loans than they expected. If, for example, you borrow $1,200 for a year at 10 percent interest with the understanding that you will repay the total sum plus interest at the end of the year, you will have had the use of the full $1200 at a cost of $120. But most consumer loans are repaid in monthly installments. You therefore do not have the use of the money in full, and the interest rate is thus increased. For instance, $1320 paid back in 12 equal installments of $110 a month represents an 18 percent annual rate of interest.
• Late payment penalties: In order to assure themselves of an adequate profit, most lenders levy penalties on borrowers who are tardy in making scheduled payments. This practice is entirely legal, but under Truth in Lending, institutions that engage in it must disclose that fact, and must also disclose the terms of the penalties.

In addition to the general disclosure requirements of the Truth in Lending law, there are others that relate specifically to closed and open-ended loans. Closed-end loan agreements, for example, must include the following information:

• The date on which each payment for the loan is due.
• The total amount the borrower will have paid out once his or her obligation has been fulfilled.
• Whether or not a prepayment penalty — a percentage of the money still outstanding — will be levied against borrowers who pay their loans in full before the due date; and if it is levied, the amount.
• If the interest rate is variable, the circumstances under which it changes and on what basis the rate is determined.
• The total number of payments to be made.
• Whether or not the loan contains a demand feature and, if it does, the terms.
• An accurate description of any property that may have been used to secure the loan and the terms under which that property may be forfeited.

Open-ended loan agreements must include the following information:

• Whether or not borrowers can avoid interest charges, and if so, how. Most credit card companies do not charge interest on bills that are paid in full, and under Truth in Lending, the holders of such cards must be given at least two weeks from the opening of the billing period to make their payments.
• The differences — if any — in interest rates for different kinds of loans. Credit card companies often charge a higher rate of interest for cash advances than for purchases; if they do, this information must be given in the credit agreement. Similarly, if there is a variable rate of interest, the circumstances under which the rate may vary and the limits on the amount by which it can vary must be disclosed. Finally, any changes in interest rates must be reported to card holders, and transactions completed before the rate change is in effect must be billed at the earlier rate.
• The lender must send the borrower a monthly statement detailing the following: previous balance; payment received; amount owed; interest; principal and date or time by which the new balance or a portion of it must be paid to avoid additional charges. The statement must also itemize all purchases made during the billing period.

Failure on the part of a lender to make the disclosures required by the Truth in Lending law gives a borrower grounds for legal action — a suit for damages, plus double the finance charges up to a maximum of $1,000. If the suit is successful, the defendant will be required to pay court costs and the plaintiff’s legal fees.

If you think any bank has violated the terms of the Truth in Lending Act, get in touch with your state banking commission; if your complaint concerns a credit card company or some other lender, report it to your state attorney general’s office.

Advertising Restrictions. The Truth in Lending Act also imposes restrictions on those who advertise credit. A bank, for example, may advertise that credit is available to “qualified customers,” but if it goes beyond that to mention specific credit terms, it must describe other basic requirements. An ad for a new home, for example, cannot merely advertise” 12 percent credit” unless it also mentions the annual percentage rate. Nor can the ad state the amount of finance charge without also stating the amount of the down payment, if any, the terms of repayment and the APR.

• The Perils of Cosigning
• Protections For Users of Credit
• Equal Credit Opportunity