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The Truth in Lending Act(TILA) was a positive action made by the federal law in the United States in effort to protect consumers in conducting credit transactions. The requirements state that there must be clear disclosure of the terms of lending costs and arrangements. In doing so, individuals would have the opportunity to cancel credit transactions, have more control of credit card practices, and be able to explore the options for settling credit card billing disputes. While first created in 1968, the TILA was officially implemented by Regulation Z on July 1, 1969 and made it possible for consumers to be more knowledgeable and confident in comparing credit terms. For example, prior to the TILA, loans were seldom presented in the same format and were difficult to compare. Today, creditors all use the same terminology and expressions of rates which makes the process much easier for consumers. In addition to this, there are several other benefits to consumers the TILA focuses on.
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One of the main themes in the Truth in Lending Act is protection for the consumer. As previously described, a significant purpose and benefit of it is protection against inaccurate or unfair credit billing or credit card practices. Lenders must carefully consider several factors when accounting for the TILA or Regulation Z requirements. Another benefit to note is that the act provides consumers with rescission rights. That is, a consumer has the right to cancel a home equity loan or line of credit with a new lender within three days of closing. One may also cancel a refinance transaction done with another lender other than the current mortgagee within the same time frame. The TILA also provides for rate caps on some dwelling-secured loans. That is, lenders must put a rate cap on certain closed-end mortgage loans for consumers. This can be very beneficial to consumers in an economy with rising interest rates. While there may be a rate cap, interest rates are often still variable. Rate caps on variable interest rate products may often be attractive and practically viable financially for individuals(Board of Governors of Federal Reserve.) Relatively, the TILA imposes limitations on home equity lines of credit and some closed-end mortgages. For example, a borrower cannot use the equity they’ve invested in a home as collateral for additional financing with a new lender or loan. If the borrower were halfway through a closed-end mortgage with half their debt paid off, they would still need permission from the original lender and must pay a breakage fee in order to take out a home equity loan. Finally, the TILA provides minimum standards for most dwelling-secured loans and delineates and prohibits unfair or deceptive mortgage lending practices. All of these rules implemented by the TILA are used to, above all else, safeguard the consumer. However, there are certain exemptions to the TILA as well.
Even though the TILA and Regulation Z have requirements regarding annual percentage rates and rate caps, they do not tell financial institutions how much interest they may charge or whether or not to grant a loan to a customer. Credit extended to businesses, commercial or agricultural purposes is exempt from TILA/Regulation Z requirements(Fleming.) Similarly, credit transactions with government agencies or instrumentalities are also exempt. Additionally, credit in excess of the annually adjusted threshold not secured by real or personal property, public utility credit, credit extended by a broker-dealer registered with the Securities Exchange Commission, home fuel budget plans not subject to a finance charge, and certain student loan programs all fall under this exempt category(Board of Governors of Federal Reserve.) However, exempt credit is subject to the requirements that govern the issuance of credit cards. That said, there are regulations to these credit transactions even though they’re not conducted under the TILA or Regulation Z.
As one may notice, credit transactions are exempt when they are not for consumer purchases. How do creditors determine whether the credit is for consumers or not? There are several factors to be considered in making this decision. For example, they must consider the statements consumers make when they describe what the proceeds will be used for. If the consumer states that the credit will be used for a car to drive to college, then the creditor could indicate that the proceeds are being used for consumer credit purposes. On the other hand, a consumer may describe his or her intentions in a way that sounds mixed or has multiple purposes involving consumer and business. There must be sufficient evidence showing whether or not one’s purpose is entirely business or consumer related(Board of Governors of Federal Reserve.) The consumer’s main occupation is also relevant in determining the purpose of the proceeds; it’s very likely that the loan has a business purpose if there’s a strong correlation between the occupation and the property purchased. Creditors must also consider the way consumers manage the assets purchased from the proceeds of the loan(Fleming.) Generally, the less involvement the consumer has in managing the investment, the lesser chance of the loan having business purposes. This sounds rather transparent but can often be more difficult to determine than one would imagine. The size of the transaction is also an important factor in the determination process. The larger the transaction, the more likely the loan will have a business purpose. For example, if the loan were $750,000.00 for real estate, it is likely that the purchase was made for business. Last, the amount of income that results from the property acquired with loan in, compared to the borrower’s total income, also must be considered. If the borrower has an $80,000.00 annual salary and receives $700 in dividends from the property purchased, it is likely that the loan is for consumer purposes. All of these factors must be carefully evaluated before the lender can decide whether or not to include disclosures, as required under the TILA(Board of Governors of Federal Reserve.) The institution may furnish disclosures regardless, but that doesn’t mean the transaction will be covered. Conclusively, there is no one single factor that is sufficient enough by itself to determine whether the loan is for consumer or business purposes. Therefore, all five factors must be explored in every case.
Another significant element to understand of the Truth in Lending Act regards the determination of finance charges and disclosures of such. The requirements and details of these are between open-end and closed-end credit. Under TILA and Regulation Z, it must be determined whether a charge associated with an extension of credit should be included in or excluded from the disclosed finance charge. For both types, the finance charge does not include any charge of a type payable in a comparable cash transaction. The comparable cash transactions may include taxes, title, license fees, or registration fees. The finance charge on a loan always includes any interest charges and often times, other charges(Fleming.) For open-end credit, under TILA and Regulation Z, finance charge disclosures must be 100% accurate; there is no tolerance for finance charge errors in this scenario. However, there are multiple finance charge accuracy tolerances for closed-end credit. These tolerances are generally $5.00 if the amount is less than or equal to $1000.00. The tolerance changes to $10.00 if the amount financed exceeds $1000.00. There are a few other tolerances for certain transactions in credit secured by real property or a dwelling, rescission rights after the three-business-day period, and rescission rates in foreclosure. The Federal Reserve has established a small chart that briefly summarizes the rules for tolerances that consumers may refer to as well; this is open to the public online.
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Finally, it’s important to be aware that the Truth in Lending Act has been reformed many times since its initial implementation in 1968. The first time was in 1970 to prohibit unsolicited credit cards; the Fair Credit Billing Act built on the 1970 reform in 1974 and as did the Consumer Leasing Act of 1976(Fleming.) The Truth in Lending Simplification and Reform Act of 1980, air Credit and Charge Card Disclosure Act of 1988, and the Home Equity Loan Consumer Protection Act of 1988 all also stemmed off of the initial 1970 reform. The Competitive Equality Banking Act of 1987-88 implemented adjustable rate mortgage loan disclosures. In 1994, the Home Ownership and Equity Protection Act imposed new disclosure requirements and limitations on certain closed-end mortgage loans with rates above a certain percentage. There were additional reforms from 1995-96 which focused primarily on real estate secured credit. Relatively, Regulation Z was amended several times during these periods and in the early 2000’s, but TILA wasn’t directly reformed until 2009 with the Helping Families Save Their Homes Act. This established a new requirement for notifying consumers of the sale or transfer of their mortgage loans. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act included provisions to TILA involving protection of the integrity of the appraisal process when a consumer’s home is securing the loan. It is safe to assume that there may continue to be more reforms and provisions in the future made to the TILA when necessary.
Putting it all together, it is evident that the Truth in Lending Act was very much needed when it was created and continues to be needed today. Upon research, one may see that there have been many positive outcomes from the regulations put into place under TILA guidelines. All in all, the main theme of the TILA is protection. That is protection for the consumer and all secondary parties involved. Since it was first implemented, there have been many additional acts that have played roles in reforming the TILA into what it is today. The history and understanding of this financial milestone in our country is very significant to all consumers; it’s without question that we educate ourselves on such matters and utilize the benefits that have derived directly from the Truth in Lending Act.
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