Truth in Lending Act (TILA)

Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) is a federal consumer protection law that requires clear, standardized disclosure of key credit terms so consumers can compare and evaluate loan and credit offers. Enacted in 1968 and implemented through Regulation Z, TILA promotes transparency in consumer lending—covering most mortgages, auto loans, credit cards, and other consumer credit—while prohibiting certain unfair practices.

Key takeaways

• Lenders must disclose core loan terms, including the annual percentage rate (APR), finance charges, loan duration, and total costs.
• TILA covers most consumer credit but excludes many business credit transactions and some specialized programs.
• Regulation Z (12 CFR Part 226) enforces TILA provisions and contains rules to prevent steering and unfair loan-originator compensation.
• Consumers have a right of rescission (three business days) for certain transactions secured by a consumer’s principal dwelling.
• TILA regulates disclosure—not interest rates—and enforcement and rulemaking authority now rests with the Consumer Financial Protection Bureau (CFPB).

What TILA requires

TILA’s primary purpose is accurate, easy-to-compare disclosures. Required information typically includes:
* Annual Percentage Rate (APR) — the standardized cost of credit expressed as an annual rate.
Finance charge and total amount financed.
Payment schedule, number of payments, and total payments.
* Specific disclosures for certain products (e.g., adjustable-rate mortgage scenarios).

These disclosures must be provided before the consumer becomes obligated, giving borrowers the information needed to shop and compare offers.

Who and what is covered

TILA applies to most consumer credit transactions, including:
* Closed-end credit (e.g., mortgages, auto loans)
* Open-end credit (e.g., credit cards, home equity lines of credit)

Transactions typically excluded:
* Credit extended to businesses or entities (including many agricultural businesses)
Certain student loan programs
Public utility credit and some home fuel plans

Regulation Z and mortgage lending

Regulation Z implements TILA and adds protections specific to loan originators and mortgage lending:
* Prohibits compensation tied to loan terms (other than the dollar amount financed). Lenders and originators cannot base pay on terms such as interest rates, prepayment penalties, or whether certain provisions are present.
Prohibits steering: originators may not push a borrower into a loan that pays the originator more if it offers no additional benefit to the borrower.
Requires recordkeeping of compensation arrangements for at least two years.
* Offers a “safe harbor” when originators, acting in good faith, present qualifying loan options that include the lowest-rate loan, the loan with lowest origination fees, and the lowest-rate loan for loans with specific provisions.

Consumer protections and benefits

TILA helps consumers by:
* Enabling clear comparison of borrowing costs across lenders.
Preventing deceptive or incomplete disclosures.
Granting a right of rescission for certain transactions (typically a three-business-day period to cancel loans secured by the borrower’s principal dwelling).
* Limiting unreasonable penalty fees and setting disclosure standards for variable-rate loans.

TILA does not set interest rate caps (unless state law provides limits) and does not dictate to whom credit must be extended, except insofar as other laws prohibit discriminatory lending.

Common TILA violations

Examples of violations include:
* Failing to disclose the APR or finance charge accurately.
Misstating payment or loan-duration information.
Incorrectly applying daily interest factors.
Charging penalty fees that exceed what disclosures permitted.
Denying a borrower the statutory right of rescission where applicable.

Statute of limitations: civil violations generally must be brought within one year; criminal violations may have a longer limitation (commonly up to three years).

Enforcement and rulemaking

Following the Dodd‑Frank Act (2010), the Consumer Financial Protection Bureau (CFPB) assumed rulemaking and enforcement responsibilities under TILA (effective July 2011). The CFPB issues implementing rules, supervises compliance by covered entities, and handles consumer complaints and enforcement actions.

Practical example

Credit card issuers provide disclosures required by TILA: APR ranges for purchases, balance transfers, and cash advances; length of the billing cycle; late-payment fees; and any annual fee. These standardized disclosures allow consumers to compare offers on a like-for-like basis.

Bottom line

TILA ensures transparency in consumer lending by requiring clear, consistent disclosure of costs and terms. It helps consumers compare credit offers, protects against certain abusive sales and compensation practices (via Regulation Z), and gives borrowers limited rights—such as a three-day rescission for qualifying transactions. Enforcement is overseen by the CFPB, and violations can carry civil and criminal consequences.

Selected sources

• Truth in Lending Act (15 U.S.C. §§ 1601–1667f)
• Regulation Z: Truth in Lending (12 CFR Part 226)
• Consumer Financial Protection Bureau (CFPB) guidance and materials