Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) is a federal law enacted in 1968 to help protect consumers in their dealings with lenders and creditors. The TILA was implemented by the Federal Reserve Board through a series of regulations. Some of the most important aspects of the act concern the information that must be disclosed to a borrower prior to extending credit, such as the annual percentage rate (APR), the term of the loan and the total costs to the borrower. This information must be conspicuous on documents presented to the borrower before signing and in some cases on their periodic billing statements.

The Truth in Lending Act was implemented by the Federal Reserve Board’s Regulation Z (12 CFR Part 226) and has been amended and expanded many times in the decades since. The provisions of the act apply to most types of consumer credit, including closed-end credit, such as home mortgages and car loans, and open-end credit, such as a credit card or home equity line of credit.

The rules are designed to make it easier for consumers to comparison-shop when they want to borrow money or take out a credit card and to guard them against misleading or unfair practices on the part of lenders. Some states have their own variations of a TILA, but the chief feature remains the proper disclosure of key information to protect the consumer, as well the lender, in credit transactions.

The Truth in Lending Act mandates the kind of information lenders must disclose regarding their loans or other services. For example, when would-be borrowers request an application for an adjustable-rate mortgage (ARM) they must be provided with information on how their loan payments could rise in the future under different interest rate scenarios.

The act also outlaws numerous practices. For example, loan officers and mortgage brokers are prohibited from steering a consumer into a loan that will mean more compensation for them, unless the loan is actually in the consumer's best interests. Credit card issuers are prohibited from charging unreasonable penalty fees when consumers are late with their payments.

Additionally, the TILA provides borrowers with a right of rescission for certain types of loans. That gives them a three-day cooling-off period during which they can reconsider their decision and call off the loan without losing money. The right of rescission protects not just borrowers who may simply have changed their minds, but those who were subjected to high-pressure sales tactics by the lender.

The Truth in Lending Act does not govern the interest rates a lender may charge, in most instances. Nor does it tell lenders to whom they can or can't extend credit, as long as they are not violating the laws against discrimination.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 transferred the rule-making authority under the TILA from the Federal Reserve Board to the newly created Consumer Financial Protection Bureau (CFPB), as of July 2011.