The Truth in Lending Act, or TILA for short, was passed 50 years ago to ensure protection and transparency for consumers in their interactions with creditors and lenders. Today, it is part of the more encompassing Consumer Credit Protection Act, but its echoes can be felt in the measures taken to help consumers avoid a financial crisis by understanding the credit rates and terms offered to them.
In the beginning
Before the Truth in Lending Act was enacted, consumers had no real means of comparing various loans because the presentations and even terms varied from one company to the next. Other complications included:
- Lenders could legally change the interest rate at any time during the term of a loan without letting the consumer know in advance.
- Closing costs were impossible to know in advance, as lenders could change or modify them.
With such a lack of transparency, it was easy for a consumer to get into financial difficulties that eventually led to Chapter 7 or 13 bankruptcy. Today, the Truth in Lending Act dictates what information lenders disclose to them and how.
How TILA has changed the lending process
Today, thanks to the Truth in Lending Act, the fine print that defines most transactions between consumers and their bank or lending institution is no longer a jumble of lender-specific terms and formatting.
When a borrower applies for a mortgage, the Truth in Lending Act imposes a mandatory waiting period of seven days before they can close on it. The lender must also provide the consumer with a copy of the Act to review and understand.
There is also a waiting period involved when interest rates change. Any time that the rate quoted to a consumer changes, a three-day waiting period results, allowing the borrower to consider any effects of the higher APR before they decide to go ahead with the transaction. If the interest changes by more than 1/8%, then the lender must notify the applicant in writing.
Another positive change is the obligation lenders now have to provide a good faith estimate on closing costs within three days of the consumer applying for a loan. Failure to do so is illegal under the Truth in Lending Act. These estimates benefit consumers because they understand all of the costs involved with a mortgage and makes it easier for them to shop around for the best deal.
Other protections include:
- Borrowers can walk away from certain types of loans up to three business days after they sign the agreement.
- Mortgages with compensation based on the presence of certain terms and conditions in the loan paperwork are illegal.
- Lenders cannot limit borrowers only to loan products that benefit the lender financially.
Financial transactions like car loans, mortgages, and other forms of credit may still be mysterious to some of us, but the Truth in Lending Act ensures that our lack of familiarity does not cost us later financially.
If you are in debt and are seeking a fresh financial start, then contact Jayson Lutzky. Mr. Lutzky is a Bronx attorney who handles personal bankruptcy cases. Call 718-329-9500 or 800-660-5299 to set up a free in-person initial consultation to learn more about the bankruptcy process and to determine if it is right for you.