The Truth in Lending Act (TILA) is a set of federal laws intended to protect borrowers. Banks and other institutions offering loans must disclose finance charges and other features of credit transactions to borrowers in writing. Lenders must inform borrowers of certain data, such as the annual percentage rate on the loan, any prepayment penalties, payments due dates, late fees, and service or application fees.
Disclosures must be made before a lending transaction can be completed. Lenders are also required to comply with other mandates under the TILA. Advertisements for lending services, for example, must disclose certain information.
The TILA was originally enacted as Title 1 of the Consumer Credit Protection Act. The law covers most kinds of consumer credit lending, including credit cards, home mortgage loans, and home equity lines of credit. Before completing a lending transaction, the borrower should have and consider the information that must be disclosed to him before the credit transaction is completed.
What Unfair Lending Practices Are Covered by TILA?
Lenders have engaged in the following practices that violate the Truth in Lending Act:
- Unfair credit billing;
- Unfair credit card practices;
- High-pressure sales;
- Misrepresentations;
- Failure to disclose necessary information about a loan.
There are several examples of lender misconduct under the TILA, including:
- It is illegal for credit card companies to increase interest rates or change the fee structure of a loan without giving cardholders 45 days’ notice;
- Cardholders must have the option to opt-out of significant changes to their credit accounts and pay off balances under the original terms;
- Statements for credit cards must be provided at least 21 days before payments are due;
- Credit card statements must disclose how long the borrower will take to pay off their balance if they only make minimum payments each month. In addition, statements must state how much consumers would have to pay each month to pay off the entire balance in three years.
As a result of these provisions of the TILA, borrowers have been able to avoid fees for going over their credit card limits and late fees.
How Does the Truth in Lending Act Protect Borrowers?
Borrowers are protected by the Truth in Lending Act in the following ways:
- Disclosure of all loan costs and terms;
- Creating the right to rescission, which allows creditors to back out of loans within a certain period of time;
- Providing alternative dispute resolution methods;
- Requiring creditors to notify borrowers when their mortgage is reassigned;
- Caps on high-cost mortgages and home equity lines of credit;
- Providing better protection for borrowers who use their primary residence as collateral for mortgage loans and home equity lines of credit.
TILA disclosure requirements allow borrowers to compare loan offers and choose the one that’s right for them.
What Types of Credit Does TILA Cover?
TILA applies to the following types of credit:
- Lines of credit secured by home equity;
- A revolving credit line, such as a credit card;
- The mortgage on a home;
- Reverse mortgages;
- Loans for cars.
Additionally, the Truth in Lending Act restricts lenders from making conditional loans that require borrowers to purchase additional investment products. Consequently, a lender cannot force a person to purchase a life insurance policy along with their auto loan.
Suing Under the Truth in Lending Act: The Right of Rescission
Homebuyers have three days to rescind a mortgage loan, but loans violating TILA may be rescinded much later – up to three years after the loan was made.
The TILA allows a person to rescind the loan agreement within three days without incurring any type of penalty if they no longer wish to proceed with the loan. A borrower might sue for money damages and attorney’s fees if the lender failed to disclose any of the above terms.
Additionally, failure to disclose terms extends the right of rescission for three years. It is possible to rescind a mortgage and recover the down payment, interest, and mortgage points in full.
A person’s principal amount of money is deducted from these sums. A person may then offer to pay off the remaining loan balance.
Within 20 days, the bank must accept or reject the offer. The mortgage lender will no longer be able to collect the principal after 20 days, which means the person will own the home free of any mortgage-related liens. Certain types of loans are exempt from this provision of the TILA.
Most courts, such as the federal 9th Circuit Court of Appeals, require borrowers to rescind their loans to prove the TILA violation in court and obtain a court judgment in their favor before rescinding. There is a three-year deadline for borrowers to initiate this lawsuit. Additionally, borrowers must repay the loan principal if they rescind the loan. Interest and fees are refunded only then.
Borrowers have a huge advantage in other courts, including the federal 3rd and 4th Circuit Courts of Appeal, since they do not need to sue banks to prove TILA violations within three years. Further, they may not even have to repay the entire loan principal. They could negotiate a lower payback amount with the letter of rescission and a potential lawsuit as leverage.
What Defenses Does a Creditor Have Against a Truth in Lending Claim?
Truth in lending claims have been filed against creditors many times. Creditors developed several defenses to combat these lawsuits, including:
- A showing of a bona fide clerical error
- Proof of good faith reliance on a rule or regulation
- Voluntary correction of the error within 60 days
- Arbitration clauses
How Can One Show a Bona Fide Clerical Error?
To take advantage of the bona fide error defense, a creditor must show that the error was unintentional and occurred despite reasonable maintenance procedures. In most cases, courts look strictly at maintenance procedures when determining whether an error is clerical in nature.
While advanced technology may not be necessary to prevent clerical errors, a system of double-checking and well-trained employees is essential.
What Is the Best Way to Demonstrate Good Faith Reliance on a Rule or Regulation?
The Federal Reserve Board will only allow this defense if the creditor confirms the Board’s interpretation of a rule that later proved to be a violation. A creditor’s interpretation of a rule is irrelevant, although a misinterpretation of the Federal Reserve Board’s interpretation is possible. This defense cannot be used if a creditor made a unilateral error about a rule in good faith.
What Is a Voluntary Correction of an Error Within 60 Days?
This defense also covers a clerical error in an original disclosure. To use this defense, a creditor must send a corrected disclosure to a consumer stating that the original disclosure was erroneous, and this corrected disclosure must be sent before the consumer files suit or notifies the creditor in writing.
What Is an Arbitration Clause?
An arbitration clause is a section of the initial contract that allows the creditor to choose where claims will be decided and who will decide them. This defense has been used primarily by creditors to avoid class-action lawsuits.
Do I Need an Attorney for My Truth In Lending Claim?
Creditors have become very adept at evading truth in lending claims. If you feel you have been wronged, you need to consult with credit lawyers right away. If you decide to pursue your truth in lending claim in court, an attorney can inform you of your rights under the Truth In Lending Act.
