Truth In Lending Act

Protect your Credit Report

The Truth in Lending Act (TIL), also known as Title I of the Consumer Credit Protection Act, was enacted to assist consumers in shopping for credit. The law's stated goal is:

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The purpose of TILA is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.

In the past, it was not unusual for credit sellers to advertise misleading or varying credit terms that proved confusing to consumers in practice.

Interest can be calculated in various ways. If one retailer computes simple interest while another uses compound interest, then the former will charge less for the credit. Confusingly, even compound interest can be calculated differently. Compounding can be done on a daily, weekly, or monthly basis. Additionally, the seller can use the highest, lowest, or average monthly balance in computing the interest.

Additionally, unscrupulous sellers could offer a "low ball" interest rate and earn back additional profit by tacking on additional fees. For example, assume that two retailers offer credit terms. One retailer offers credit at 11 percent simple interest. The other retailer offers 10 percent simple interest but unlike the first retailer, also charges certain loan fees to originate the credit transaction.

Assume that a buyer purchases $1,000 of goods from this seller, and repays the balance exactly one year later. In addition to interest, the seller charges the buyer a loan origination fee of $25 and also bills for its standard credit check of $25. In this instance, the buyer will be paying back a total of $1,150 comprised of $1,000 for the goods, $100 of interest at 10 percent, and $50 in fees. If the buyer had purchased the goods from the seller charging 11 percent interest and no fees, the buyer would have only repaid $1,100. The imposition of various processing charges and the confusing use of different credit terms make it extremely difficult for even sophisticated business people to compare credit terms. To remedy this problem, Congress enacted the Truth In Lending Act. The law is implemented by the Federal Reserve Board and under government agencies under a set of rules called "Regulation Z."

Lenders must accurately disclose the terms of their credit offers.

Under TIL, the lender must disclose to the borrower the annual percentage rate (APR). The APR reflects the effective yield on a loan including origination fees and discount points. All fees are considered the income of the lender regardless of any costs they are designed to cover.

BANKRUPTCY STEP-BY-STEP by James John Jurinski. Copyright ©1996 by Barron's Educational Series, Inc. Published by arrangement with Barron's Educational Series, Inc.

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