The Truth In Lending Act - Credit Repair F.A.Q.s

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In the beginning, credit cards were just charge accounts, offered by individual stores and only usable at those stores. The first credit card that could be used at multiple locations was offered by The Diner's Club in 1950. (full story)

Get familiar with credit terminology

The Truth in Lending Act (TILA) (P.L. 90-321, 82 Stat.146) is a federal statute which Congress enacted in 1969 and amended and expanded on numerous occasions after that date. In adopting TILA, the legislature declared:

The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from the awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure the meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.

TILA generally applies to creditors who regularly extend consumer credit that is primarily used for personal, family, or household purposes. The lender must extend the credit to a natural person, and the loan must be repayable with either a finance charge or by written agreement in more than four installments. TILA does not apply to (1) credit transactions in which the total amount financed exceeds $25,000 and which are not secured by real property or personal property used as a dwelling, or (2) loans made pursuant to a student loan program under the Higher Education Act of 1965. To effectuate TILA's goals and policies, the Federal Reserve Board promulgated "Regulation Z," which is found in the Code of Federal Regulation. Contained in the appendices to Regulation Z are a number of model forms for use in lending contracts, and creditors who properly use the forms are deemed to be in compliance with TILA. The United States Supreme Court has held both TILA and Regulation Z constitutional (Mourning v. Family Publications Service, Inc., [1973]).

Congress' primary purpose in adopting TILA was to provide disclosure of credit terms to consumers, and consequently it devoted much of the act to financial disclosure issues. It requires sellers and lenders to inform consumers of terms in a manner that clarifies their meaning and promotes understanding. This enables consumers to easily compare compare the credit terms of various sellers and lenders, which in turn enables them to shop for a contract that most suits their needs.

In addition to credit term disclosure requirements, TILA and Regulation Z also contain provisions governing credit card issuance, liability for unauthorized credit card use, credit card billing error resolution procedures, notice and disclosure requirements for credit card solicitations, disclosure requirements for high-rate mortgages and reverse mortgages, and rescission provisions for various types of transactions in which a security interest is retained in a consumer's principal residence.

"The Definition of Creditor"

TILA applies only to "creditors," a term defined to include natural persons, business organizations, estates, trusts, and governmental units who regularly extend consumer credit and to whom the obligation is initially payable on its face.

A person regularly extends consumer credit and so is subject to TILA only if the person extended credit more than twenty-five times in the calendar year immediately preceding the transaction that was subject to TILA and was not secured by the consumer's principal dwelling (unsecured credit.) A person may also become a creditor by extending consumer credit secured by the consumer's principal dwelling (secured credit) more than five times in the preceding calendar year. Persons who satisfy either standard are creditors, for both types of transactions. Once a person becomes a creditor in a calendar year, that person is a creditor for all credit transactions in the next calendar year, regardless of the number of transactions that take place. But for the subsequent year, the counting test again comes into play, and a person will not be a creditor until the requisite number of transactions takes place.

Finally, the legislation and accompanying regulations consider the person to whom the obligation is initially payable a creditor subject to TILA. If the creditor assigns the contract to another person, however, that person (called the assignee) is subject to liability for violations of the act if the assignment was voluntary and if the violations are apparent on the face of the instrument assigned. A violation is considered "apparent" if it involves a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents, or a disclosure which does not use the terms required by the act.

Disclosure Requirement

Regarding the disclosure provisions, the TILA applies to both open-end and closed-end extensions of credit. Open-end credit is typified by the conventional credit card plan, and all other types of consumer credit are closed-end transactions. For open-end credit transactions TILA's disclosure requirements include:

general disclosure requirements;
credit and charge card applications and solicitations;
home equity plans;
initial disclosure statements for charge cards;
periodic billing statements for credit cards.

For purposes of closed-end transactions required disclosures include:

the name of the creditor;
the amount financed;
the payment schedule;
the total of payments;
the total sale price;
the existence of any security interest.

The two most important disclosures are the finance charge and the annual percentage rate. The finance charge is the term used to reflect the cost of credit as a dollar amount and includes any charge, such as interest, imposed by the creditor as a condition of the extension of credit. The annual percentage rate is the term used to reflect the finance charge as a percentage of the total annual payments made on the debt. Both terms have to be disclosed more conspicuously than any other terms. Sellers and lenders in closed-end transactions must disclose information clearly, conspicuously and in writing and must provide a copy to the consumer. The disclosures must be grouped together, segregated from everything else, and must contain only information directly related to the required disclosures. This requirement has resulted in use of what is commonly called the "Federal Box," a place on the document where all TILA disclosures are grouped together, separating them from all other information.

Legal Disputes Under Tila

TILA prohibits a card issuer from issuing unsolicited credit cards to either businesses or consumers. It also allows a consumer to assert against the card issuer any claims or defenses that the consumer has against a seller, provided the dispute involved a sale of more than fifty dollars and occurred either in the same state as the consumer's residence address or within 100 miles of the address. Finally, consumers may dispute any errors which appear on a credit card statement, and TILA requires the card issuer to promptly investigate the dispute and correct any errors.

If a creditor takes a security interest in the consumer's principal dwelling as part of a transaction, TILA allows the consumer three business days to rescind, or cancel, the transaction. The creditor must provide the consumer with a notice of this rescission right when the contract is consummated, and cannot loan any money or provide any services until the expiration of the three business days. If the creditor fails to make the appropriate disclosure of the rescission right or certain other material disclosures, the right of rescission continues until three years after the contract is signed, the transfer of all of the consumer's interest in the property, or the sale of the property, whichever occurs first.

A violation of TILA renders the creditor liable for actual damages, and statutory damages of twice the amount of the finance charge, with a minimum recovery of $100 and a maximum recovery of $1,000. If the violation involves a transaction with a security interest in the consumer's principal dwelling, the creditor may be liable for minimum damages of $200 and maximum damages of $2,000.

A creditor may avoid TILA liability for a violation if within sixty days of discovery of the disclosure error, and prior to the litigation or receipt of written notice of the error, the creditor notifies the consumer of the error and makes the necessary adjustments to ensure that the consumer will not pay a charge in excess of the annual percentage rate actually disclosed. A creditor may also avoid liability if it shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid the error. Examples of a bona fide error include clerical, calculation, computer malfunction and printing errors. An error in legal judgment in regard to the, requirements of TILA is not a bona fide error, even if made in good faith.

A consumer may file an action under the TILA in any United States District Court, regardless of the amount in controversy, or in any state court of competent jurisdiction. In an affirmative action for damages, the litigation must commence within one year of the date of the violation, and because disclosures must be made at the time the parties consummate the transaction, the date of the violation is the date of the transaction.