The Truth In Lending Act


The truth in lending act was put into place in 1968 and then in 1972 became part of the consumer credit protection act.

The topic discussed here is Title one known as the truth in lending act.


The purpose of this act:



The stated purpose of this act is to inform the consumer by way of a meaningful disclosure of credit terms by a lender so as to give the consumer choices of comparisons of credit terms thereby keeping them educated of the different credit terms at their disposal.


Additionally this act protects them from unfair or inaccurate credit billing and credit card practices.

This will also allow an enhanced economic stabilization and strengthen competition among those who regularly extend credit through an informed use of that credit by the consumer.


Implementation



This informed use by the consumer are the disclosures that the lenders are required to provide which has led this to being commonly known as the truth in lending act.

The lender is stating the full truth about the impact of the credit terms and is stating the actual cost resulting at the end with the terms agreed upon.

While this act does not dictate the actual costs of the finance charges or annual percentage rate, it does require lenders to be specific in the costs of the finance terms, how they are computed and what the annual percentage rate is so the consumer may make comparisons and pick what terms are best for them.

This act is implemented by the governors of the federal reserve system's regulation Z.

This act only involves consumer credit and does not apply to credit extended in cases of business, commercial or agricultural applications. Also it does not involve cases where securities or commodities are involved. Loans for higher education are equally not involved in this act unless they are obtained by a private loan.


transactions applied to



The truth in Lending act covers both open and close ended credit. Open being credit card use or any type of lending that does not have a stated end of use. When credit is paid the balance is open to use again.

Close ended being a typical loan with terms and either a date the loan is paid off or installment number being the end of payment.

Finance charges in the open end credit are usually the cost of borrowing. In the closed end credit they can include charges and fees that are usually needed in the transaction and the consumer must pay. This regulation Z defines what is allowable in this case.

The truth in lending act or regulation z also defines who the individuals and businesses that are regulated by this act being..

  • Those who regularly extend credit to their customer more than 25 times per year or 5 times when it is secured by a dwelling.

  • The credit is subject to finance terms with at least 4 installments (in the case of a credit card no installments are needed)

  • The credit is for personal, family or household purposes only


Disclosures must be provided that state the terms of the agreement in a clear and easily understandable language and in a form that the consumer may keep and refer to.


In closed end credit this must include information such as...

  • the amount financed

  • the finance charge

  • the schedule of payments

  • the identity of the creditor

  • the annual percentage rate

  • total of payments

  • any prepayment or late fees

  • total cost of financing 

In a lengthy commitment such as a mortgage, the truth in lending disclosure is an important legal document!


In the open end credit information included is....


  • annual percentage rate

  • how the rate was determined and the balance used

  • any fees such as annual membership

  • statement of billing rights

  • special provisions

  • billing error resolutions




Regardless of whether the credit is open ended or close ended if the transaction is secured by a security interest or by the consumers primary dwelling there is a 3 day right of rescission or cancellation.


Violations of the truth in lending act carry the possible consequence of fines of $100.00- $1000.00 for individuals and much higher for a corporation such as in a class action suit.


Violations found to be willing and known can carry fines as high as $5000.00 and be accompanied by imprisonment.


The Card Act has now required a disclosure on all credit card statements of the truth in lending act that states the full cost of terms if only the minimum balance is paid.




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