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8 Things To Know About The Truth in Lending Act
Also known as the Federal Consumer Credit Protection Act, the truth in lending act (TIL) commenced in 1969 to set certain standards towards consumer credit operations.
This was due to the industry of credit starting to resemble the wild west.
Consumers were being lured into loans and facilities without fully knowing what was to come. And lenders were thriving with marketing gimmicks that were very effective in acquiring new customers.
But as with all new legislature, there are bound to be loopholes and a lack of clarity.
So in October of 1982, congress passed the Truth-in-Lending Simplification and Reform Act (TILSRA), while the Federal Reserve Board issued a Revised Regulation Z (RRZ).
For the layman, TILSRA is like an amended truth in landing act. While RRZ is like the rule book of TILSRA.
Here are some of the key things to know about this piece of legislature.
No matter what the industry you are in, including real estate, TIL applies to you as long as there is a mention of financial terms in the advert.
This will ensure that all general consumers are protected from numbers and figures that can sometimes be hard to comprehend.
Making this nationwide also ensures that traditional businesses that have a financial arm like furniture stores offering installments do not get a free pass.
2) Annual percentage rate
In the financial and banking world, there can be various types of interest structures on loans.
Some of them include simple interest, flat rate, reducing rate, adjustable rate, etc.
As one cannot expect general consumers to intuitively understand these terms, lenders are required to use the annual percentage rate (APR) to disclose a rate.
APR makes up the interest costs including other associated costs of a loan. When a percentage is calculated with this real total cost of borrowing, consumers will be better able to compare between different products and lenders.
A consumer can be misguided when attempting to compare between two competing lenders. But is actually comparing apples to oranges without knowing.
Failure to adhere to the requirements of TIL can result in harsh penalties.
If the Federal Trade Commission (FTC) finds that a lender has extended credit without meeting the disclosure guidelines, the lender might get a fine or even a prison sentence.
4) Exempted transactions
As with every law, there are bound to be exemptions. This helps to take into account cases of extraordinary circumstances.
One of which is credit meant for commercial purposes. Including the purchase of real estate made up of five or more dwelling units for rental purposes.
Another of which is credit facilities above $25,000 secured by personal property which is not the principal residence of the borrower.
Do read up the TIL if you are keen to know all about these exemptions.
5) Lending disclosures
A lender must make 14 disclosures to the customer. And it must be delivered to the applicant within 3 business days after application.
This means that these disclosures must be made even before any credit facility is approved, accepted or disbursed.
Of the 14 disclosures, 4 of the most prominent ones are:
- Amount being financed
- Charge of financing
- Annual percentage rate
- Total payments
In the event of a legal case, a consumer can legitimately gain an advantage if he can prove that none of these disclosures were made in the first place. Or that they were made more than 3 business days after application.
6) Right to rescission
The right to rescission is basically a right to cancel a transaction. And is commonly used in mortgages when borrowers decide to backtrack after signing an acceptance.
Borrowers typically have 3 business days after signing the agreement and acceptance of a loan to change their minds without suffering any penalties.
7) Trigger terms
When certain information is contained in an advertisement, then certain disclosures must be contained in the ad as well.
Trigger terms include:
- Amount of down payment (e.g. $0 down)
- Amount of any payment (e.g. just $8.80/month)
- Number of payments (e.g. 6 monthly payments of $299)
- Period of repayment (e.g. 20 year fixed rate)
- Dollar amount of finance charge (e.g. $888 financing) or stating that there’s no charge for credit card (e.g. enjoy interest free)
When any of the above items are mentioned in an ad, then the following has to be disclosed.
- Total amount of loan or the actual cash price
- Actual amount of down payment or a declaration that none is required
- Frequency, number, and amount of repayments
- Actual interest rate in annual percentage
- Total required payments or deferred payments
The requirement to include these details helps to make financial products and the marketing activities associated with them to be more transparent.
8) Who are supposed to comply?
TIL applies to any individual or entity that extends credit with a finance charge, or payable in more than 4 installments.
Compliance is mandatory.
A key element to note is that middlemen and brokers are not creditors by definition.