Truth in Lending Information
The Truth in Lending Act is a federal law that regulates and sets guidelines for consumer credit, such as credit cards, home loans and student loans. The act helps reduce confusion by requiring lenders to disclose certain information to consumers so they can make informed financial decisions. The act was established in 1968 and is implemented by Regulation Z, which contains the rules to carry out the act.
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Purpose of the Act
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The Truth in Lending Act establishes a uniform way of providing disclosures to consumers who are seeking credit. The act also sets rules for loan and credit card issuers to protect consumers from unfair billing practices. It gives a consumer certain rights to cancel, or rescind, a loan he's unhappy with. The act also establishes rules for loans related to a consumer's home, such as home equity lines of credit and closed-end mortgages, and makes certain lending practices illegal.
Finance Charges and APR
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Finance charges and the annual percentage rate, or APR, are the two key disclosures required by the act. Finance charges are fees or charges a consumer pays to a lender for credit, such as interest charges, points, loan fees and credit report fees. The APR is an annual rate that represents the total cost of credit. It takes into account all factors related to a credit transaction, such as finance charges, loan amount, and the amount and timing of repayment, to provide a uniform number that can be compared to the APR of other transactions.
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Types of Credit Covered
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A lender must determine if its credit products require Truth in Lending disclosures and are subject to Regulation Z rules. Failure to comply could subject a lender to damages, fines or criminal liability. The Truth in Lending Act covers open-end credit, such as credit cards and home equity lines of credit. Types of closed-end credit include bank loans, installment credit, car loans and residential mortgages. There are also special regulations established for private student loans and certain mortgages, such as reverse mortgages and mortgages with above-average interest rates and costs.
Types of Credit Not Covered
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Certain types of credit aren't covered by the Truth in Lending Act. Any business, commercial or agricultural credit is exempt from the act. An amount of credit that's more than $25,000 and isn't secured by a consumer's primary residence doesn't fall under the act. The act doesn't cover credit for securities or commodities accounts that's given by broker-dealers registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission. Public utility credit, home-fuel budget plans and certain student loan programs are also exempt.
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References
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