Truth in Lending Act

ON MAY 29, 1968, the U.S. Congress passed the Truth in Lending Act (TILA), Public Law 96-32. TILA was designed to promote economy stability by protecting the credit rights of consumers. Provisions of the act apply to individuals and businesses that on a regular basis offer and extend credit involving finance charges to individuals, families, or households. Credit extended for business and commercial activity and to security and commodities accounts are not covered by TILA. Loans in excess of $25,000 and public utility tariffs are excluded.

The bill came in response to lobbying by consumer groups and the realization that consumers were spending millions of dollars every year in unsuccessful efforts to deal with unfair credit practices. It was understood that in their quest for ever-increasing profits, creditors often ignored the concept of consumer rights. The Federal Reserve and the Federal Trade Commission (FTC) were given the power to enforce provisions of TILA. At the urging of consumer advocate Ralph Nader, Congress created the Consumer Protection Agency in 1971. This agency has the authority to oversee all activities concerned with protecting the rights of consumers. In addition to federal regulations, each state retains the right to establish laws and restrictions concerning interest rates and credit conditions.

Terms of the Truth in Lending Act require timely public disclosure of credit terms in language that consumers can understand. Before the TILA was passed, it was common practice for terms of credit to be placed in fine print and/or in highly legal terms that obscured the real terms of extending credit. The result was often high interest rates and unexpected finance charges for the consumer. Section 106 A of TILA mandates that the amount of finance charges shall be determined as the sum of all charges paid by the consumer. These charges include interest rates, time price differentials, point discount amounts, and other charges included in the loan. Service and carrying charges, finder's fees, credit report charges, and insurance payments are also covered by TILA disclosure requirements.

The Truth in Lending Act spells out specifically what must be included in information given to the consumer at the initial transaction and with each billing. Initially, the creditor must explain all finance charges, dates of accrual, billing cycles, conditions of charges, and use of additional charges. TILA also requires that the consumer be given a statement of consumer rights and information about resolving disputes. In periodic statements, the creditor must inform the consumer of the outstanding balance at the beginning of the billing cycle, amounts, and dates of any additional transactions, the total amount credited through payment or billing errors, itemized explanation of all finance charges, and the balance at the end of the billing cycle.

Credit extended through the use of credit cards is also restricted by TILA. In that instance, the creditor must detail the liability to the consumer for any unauthorized use of the credit card. Fraudulent use of credit cards in excess of $5,000 is punishable by fines up to $10,000 and imprisonment for up to five years or both.

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