Question:

What is the purpose of the Federal Truth in Lending Act (TILA)?

Answer:

The Federal Truth in Lending Act (TILA) has been in existence since 1968. It is the major US consumer protection law in regard to borrowing. The TILA in its original form, as well as consequent amendments, is designed to protect consumers' interest by requiring correct and sufficient disclosure of lending terms and costs on mortgage loan and credit card borrowing.

It is not meant to restrict consumer credit charges but to ensure that sufficient and reliable information is provided to consumers so that they make an informed decision when shopping for credit. Only charges on certain types of high cost mortgage loans are directly regulated and restricted by the TILA and Regulation Z - the part of TILA, containing most of the specific regulations and requirements.

The TILA has some specific limitations and bans on certain home equity loans and related practices (meaning not only HELs but all loans using a person's dwelling as collateral).

Structure of the Federal Truth-in-Lending Act (TILA)

The TILA and Regulation Z provide:

  • Information and definitions of different finance charges and basic terms (such as Annual Percentage Rate (APR), Total Annual Loan Cost (TALC), etc.);
  • Model disclosures to ensure compliance with the Act;
  • Certain law enforcement agencies.

The Truth in Lending (TIL) law is basically structured the following way in subparts A through E:

A. TILA's subpart A contains generic information about the purpose and organization of the Federal Truth in Lending Act, some basic definitions, the method for cost calculation and certain exempt transactions.

B. Subpart B establishes rules for open-end credit such as Home Equity Lines of Credit (HELOCs).

C. Covers closed-end credit. Basically first and second mortgage and Home Equity Loans (HELs).

D. Contains regulations for oral and other-than-English language disclosures plus older consumer credit protection state laws.

E. This section applies specifically to mortgage transactions. High rate home loans cost and fees limitations are to be found here. Reverse mortgage plans and prohibited lending practices are also discussed here.

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