The Truth in Lending Act requires “meaningful disclosure of credit terms” and reflects a shift in emphasis from “let the buyer beware” to “let the seller disclose.” It is designed to protect consumers against inaccurate and unfair credit billing and credit card practices by requiring complete and meaningful disclosure of all credit terms in simple easy-to-read language. Violations of TILA may entitle you to cash compensation and/or offsets (reductions) of your loan balance.
TILA applies in nearly any situation where you obtain credit, including a vehicle loan, payday loan, title loan or other emergency loan, equity line of credit and other consumer loans. TILA has a short statute of limitations so its important to submit every loan for a free Truth In Lending Act compliance review.
Economic stabilization and competition is strengthened by informed use of credit by consumers.
The Act is in Title I of the Consumer Credit Protection Act and is implemented by the Federal Reserve Board via Regulation Z (12 C.F.R. Part 226).
The Regulation has effect and force of federal law.
TILA is to be liberally construed in favor of consumers, with creditors who fail to comply with TILA in any respect becoming liable to consumer regardless of nature of violation or creditors’ intent.
TILA applies to:
Each individual or business that offers or extends credit when four conditions are met:
- The credit is offered or extended to consumers,
- The offering or extension of credit is done “regularly” [extends credit more than 25 times (or more than 5 times for transactions secured by dwelling) per year],
- The credit is subject to a finance charge or is payable by written agreement in more than four installments, and
- The credit is primarily for personal, family, or household purposes.
If a credit card is involved, however, certain provisions apply even if the credit is not subject to a finance charge or is not payable by agreement in more than four installments, or if the credit card is used for business purposes. Credit card holders are liable for unauthorized use of the card only up to $50. 15 U.S.C. Sec. 1643. (see Fair Credit Billing Act).
Also, certain requirements apply to persons who are not creditors but who provide applications for home equity plans to consumers.
TILA does not apply to:
Creditors who extend credit primarily for business, commercial, agricultural, or organizational purposes or other purposes that are otherwise regulated, such as securities brokers. But rules governing issuing credit cards and liability for unauthorized use apply to all credit cards.
Student Loan Programs. Loans made, insured, or guaranteed pursuant to program authorized by Title IV of the Higher Education Act of 1965.
Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.
Required disclosures must be made:
- “Clearly and conspicuously”
- In meaningful sequence,
- In writing, and
- In a form the consumer may keep.
The Federal Reserve Board promulgates model disclosure forms, but where they would be misleading, lenders should provide tailored notices consistent with TILA.
Closed-end Credit Transactions (includes both sales credit and loans) :
- Credit is advanced for a specific time period.
- The amount financed, the finance charge, and the schedule of payments are agreed upon by the creditor and the consumer.
- Identity of the creditor.
- Amount financed,
- Itemization of amount financed
- Annual percentage rate, including applicable variable-rate disclosures,
- Finance charge,
- Total of payments,
- Payment schedule,
- Prepayment/late payment penalties,
- If applicable to the transaction: (1) Total sales cost, (2) Demand feature, (3) Security interest, (4) Insurance, (5) Required deposit, and (6) Reference to contract.
Open-end Credit Transactions:
Open-end credit includes bank and gas company credit cards, stores’ revolving charge accounts, and cash- advance checking accounts.
- Creditors reasonably expect the consumer to make repeated transactions.
- Creditors may impose finance charges on the unpaid balance.
- As the consumer pays the outstanding balance, the amount of credit is once again available to the consumer.
- Annual percentage rate including applicable variable-rate disclosures,
- Method of determining finance charge and balance upon which finance charge imposed, as explained in 12 C.F.R. Sec. 226.6,
- Amount or method of determining any membership or participation fees,
- Security interests if applicable to transaction, and
- Statement of billing rights.
Other requirements include furnishing consumer with a periodic statement of the account.
Special credit card provisions, including liability of cardholder and assertion of claims and defenses against card issuer (see Fair Credit Billing Act)
Billing error resolution: see Fair Credit Billing Act
Creditors are liable for violation of the disclosure requirements, regardless of whether the consumer was harmed by the nondisclosure, UNLESS:
The creditor corrects the error within 60 days of discovery and prior to written suit or written notice from the consumer , or
The error is the result of bona fide error . The creditor bears the burden of proving by a preponderance of the evidence that:
- The violation was unintentional.
- The error occurred notwithstanding compliance with procedures reasonably adapted to avoid such error. (Error of legal judgment with respect to creditor’s TILA obligations not a bona fide error.)
Civil remedies for failure to comply with TILA requirements :
Action may be brought in any U.S. district court or in any other competent court within one year from the date on which the violation occurred. This limitation does not apply when TILA violations are asserted as a defense, set-off, or counterclaim, except as otherwise provided by state law.
Private remedies – applicable to violations of provisions regarding credit transactions, credit billing, and consumer leases.
- Actual damages in all cases.
- Attorneys’ fees and court costs for successful enforcement and rescission actions.
- Statutory damages.
- (1) For individual actions, double the correctly calculated finance charge but not less than $100 or more than $1,000 for individual actions.
- For class actions, an amount allowed by the court with no required minimum recovery per class member to a maximum of $500,000 or 1% of the creditor’s net worth, whichever is less.
- Can be imposed on creditors who fail to comply with specified TILA disclosure requirements, with the right of rescission, with the provisions concerning credit cards, or with the fair credit billing requirements.
Enforcement by administrative agencies.
The enforcement scheme for banks includes the Federal Reserve System, the Federal Deposit Insurance Corporation, and other agencies. The enforcement agency responsible for creditors not subject to the authority of any specific enforcement agency is the Federal Trade Commission. Nine separate agencies currently have enforcement responsibilities.
Enforcement agencies can:
Issue cease and desist orders or hold hearings pursuant to which creditors are required to adjust debtors’ accounts to ensure that the debtor is not required to pay a finance charge in excess of the finance charge actually disclosed or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.
If the FTC determines in a cease and desist proceeding against a particular individual or firm that a given practice is “unfair or deceptive,” it may proceed against any other individual or firm for knowingly engaging in the forbidden practice, even if that entity was not involved in the previous proceeding.
Criminal penalties – Willful and knowing violations of TILA permit imposition of a fine of $5,000, imprisonment for up to one year, or both.
In addition to remedies described above, consumers who enter home equity loans may also have rescission rights . Under TILA, a consumer may rescind a consumer credit transaction involving a non-purchase-money security interest in the consumer’s principal dwelling
Within 3 business days if all TILA disclosure requirements met, or
During an extended statutory period for TILA disclosure violations such as:
Failure to give adequate notice of right to rescind,
Failure to give adequate TILA credit term disclosures.
Rescission voids the security interest in the principal dwelling. Consumer must have ownership interest in dwelling that is encumbered by creditor’s security interest. Consumer need not be a signatory to the credit agreement. TILA rescission rights do not apply to business credit transactions, even if secured by consumer’s principal dwelling.
- Right to rescind
- Time to Exercise Right to Rescind.
- Extended right to rescind.
- Waiver of the Right to Rescind.
- Delay of Performance.
- Rescission Process.
- Particular Types of Transactions.
A consumer can have only one principal dwelling at a time (includes mobile homes, trailers, houseboats, if used as principal dwelling).
- A vacation or other second home is not a principal dwelling.
- A transaction secured by a second home cannot be rescinded, even if the consumer plans to reside there in the future.
Right to rescind until midnight of third business day following the later of:
Consummation of transaction,
In the case of closed-end credit, when the credit agreement is signed.
a. In the case of open-end credit, the occurrence giving rise to the right to rescind:
- Opening the plan,
- Each credit extension above previously established credit limit,
- Increasing the credit limit,
- Adding to an existing account a security interest in the consumer’s principal dwelling, and
- Increasing the dollar amount of the security interest taken in the dwelling to secure the plan.
b. Delivery of the required rescission right notice, or
c. Delivery of all material disclosures.
Continuing right to rescind if required disclosures not made or made incorrectly, but
- There is statutory cut-off of extended right to rescind at three years after consummation.
- Will be cut off earlier by transfer of all consumer’s interest in the property (including involuntary transfer such as foreclosure), or sale of the property.
Violations giving rise to an extended three-tear right to rescind.
a. Failure to give proper rescission notice.
Creditors are required to deliver two copies of the right to rescind to each consumer entitled to rescind.
Notice must disclose the following:
- The retention or acquisition of a security interest in the consumer’s principal dwelling,
- The consumer’s right to rescind,
- How to exercise the right to rescind, with a form for that purpose, setting forth the creditor’s business address,
- The effects of rescission, and
- The date the rescission period expires.
b. Failure to disclose credit terms of the transaction in accordance with TILA (i.e., interest, payment terms, etc.).
Consumers may modify or waive right to rescind credit transaction if extension of credit is needed to meet bona fide personal financial emergency before end of rescission period.
Consumer must provide creditor with dated written statement describing emergency,
- Specifically modifying or waiving right, and
- Signed by all consumers entitled to rescind.
Borrower’s waiver because foreclosure imminent ineffective because under terms of mortgage, foreclosure could not occur before two months at time of waiver and thus, there was no bona fide emergency. Borrower’s may not falsely claim an emergency.
Unless the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded, the creditor must not, either directly or through a third party,
Disburse advances to the consumer,
Begin performing services for the consumer, or
Deliver materials to the consumer.
During the delay period, a creditor may
Prepare cash advance check (or loan check in the case of open-end credit),
Perfect the security interest and/or
Accrue finance charges,
In the case of open-end credit, prepare to discount or assign the contract to a third party.
Delay beyond rescission period.
Creditor must wait until he/she is reasonably satisfied consumer has not rescinded.
May do this by
Waiting reasonable time after expiration of period to allow for mail delivery, or
Obtaining written statement from all eligible consumers that right not exercised.
When consumer rescinds, the security interest becomes void and consumer is not liable for any amount, including finance charges.
- Within 20 calendar days after receiving notice of rescission, creditor must return any property or money given to anyone in connection with the transaction, and take whatever steps necessary to reflect termination for the security interest.
- When creditor meets its obligations, consumer must tender the money or property to creditor, or if tender not practicable, its reasonable value.
- If creditor fails to take possession of tendered money or property within 20 days, consumer may keep it without further obligation.
Court has power to exercise equitable discretion and condition rescission of a loan upon the return of the loan proceeds.
Refinancing and Consolidation.
Rescission rights do not apply to refinancing or consolidation by same creditor of an extension of credit already secured by consumer’s principal dwelling.
Rescission rights do apply to extent new amount exceeds unpaid balance, any earned unpaid finance charges on existing debt, and amounts attributed solely to costs of refinancing or consolidation.
Open-end line of credit secured by home used to pay off loan not originally secured by home requires complete rescission rights.
When home solicitation sale is financed with second mortgage loan, consumer may be entitled to two separate rights to cancel when the transactions are independent.
When consumer offers to obtain his/her own financing independent of assistance or referral from seller, sale and financing are separate transactions.
When there are separate transactions,
FTC Rule (Cooling Off Period for Door-to-Door Sales) – Requires sellers to give buyers three days in which to cancel a home solicitation sale, and notice of this cancellation right.
TILA requires a three-day rescission period (unless extended for TILA violation).
Seller bound by consumer’s timely cancellation regardless of which party receives notice of cancellation.
For single transactions (seller arranged financing), look to state home solicitation law to determine whether transaction still covered by state’s home solicitations statute three-day cooling off period.
When seller finances or arranges financing with second mortgage, this is considered a single transaction.
When there is a single transaction, TILA rescission rights apply, but not FTC Rule three-day cooling off period.
- FTC Rule does not apply to transactions in which there is a TILA right to rescind (i.e., second home mortgage transactions).
- Therefore, consumer has only TILA right to rescind and not the additional three-day cooling off period rights under FTC Rule.
But, state cooling off periods may apply even when TILA rescission rights are available.
- State home solicitation law may not have exemption like FTC Rule does.
- Three-day right to cancel begins on date credit contract is signed (when validity of contract is dependent of obtaining independent, acceptable financing) and consumer is given TILA disclosures (to include rescission rights notice).
- Seller must give notice of the transaction date, and, of the deadline for exercising right to cancel.
Learn whether your TILA rights have been violated by calling 888-332-7252 (toll free) for a free TILA consultation and case review or complete this online TILA form.
You may be able to settle your outstanding loans and other debts for less than the full balances by enforcing TILA and other consumer financial protection laws, call 888-332-7252 for a free case review and learn how!