Truth in lending
In 1968, the United States Congress passed a federal law called Truth in lending Act or TILA. The law contains provisions that prevent lenders from taking undue advantage of gullible borrowers or customers. Title I of Consumer Credit Protection Act consists of TILA.
TILA is divided into six subparts, i.e., subpart A to F. Subpart A covers general topics such as who is the issuing authority of the regulations, what is the purpose of these regulations, to whom does the act apply, to which transactions does the act apply, exemptions, administration and enforcement procedures, and liabilities. Subpart B deals specifically with regulations related to Open-End Credit. Suppose a borrower has been granted a credit card limit of $40,000.He uses $30,000 from it, and repays $20,000. Therefore, the credit limit the borrower continues to enjoy is $20,000. If, however, the borrower had repaid the entire $30,000, then he would be once again eligible to use the entire credit limits of $40,000. Open-End Credit, therefore, gives borrower an access to continuous credit, subject to a ceiling.
This subpart B of TILA spells the disclosure requirements, credit and charge card solicitation and application requirements, special credit card related provisions, rules for sending credit statements to the borrower, regulations for identifying the transactions, requirements relating to home equity plans, rules relating to prompt credit payments by the borrower, and crediting of payments by the lender, rules on advertising of such credit, method of calculating annual percentage rate, billing error correction regulations, right to rescission, etc., related to open-end credit. Subpart C deals specifically with regulations related to Closed-End credit.Closed end credit is a credit that the debtor pays in full over a period of time, along with relevant finance charges, and which, once cleared does not entitle him to a fresh credit without a fresh application. Subpart C contains regulations for this form of credit.These regulations relate to disclosures, manner of treating credit balances, rules on advertisement of such credit, calculations of annual percentage rates, right of rescission, and regulations relating to some residential mortgage and variable interest rate transactions.
Subpart D lists the rules for other miscellaneous factors affecting credit availed by individuals, such as oral disclosures and annual percentage rates, limitations on interest rates, disclosures in Spanish, retention of records, State exemptions and limits on interest rates.
Subpart E deals with specific rules on some home mortgage transactions. These cover rules for reverse mortgages, some closed-end home mortgages, and bans on credit obtained on security of homes.Subpart F of TILA is the simplest. It specifies rules for electronic communication of credit transactions.Apart from these subparts, there are appendixes A to L, which provide further clarifications and interpretations of the regulations, including model forms.However, the most important part of TILA is in Regulation Z RESPA, which covers almost all the objectives of TILA. Pursuant to the regulation, lenders are required to provide disclosure statements mentioning cost of credit calculated in a uniform manner.
Such disclosure enables the borrower to compare these costs with those offered by other lenders. Therefore, TILA
- Gives consumers a right to rescind specific credit transactions that entail lien on their residential properties
- Regulates credit card transactions
- Ensures that credit disputes are resolved within reasonable time
- Ensures that consumer is well informed about the cost and terms of the credit, so that he or she can take informed decisions
- Ensures that in home mortgage loans with variable interest rates, the consumer is made aware of the maximum interest rates that can become applicable on the loan
- Ensures that lender calculates annual percentage rate, duly taking into account any prepaid finance charges, so that consumer is aware of the effective interest rate he or she is likely to incur. Therefore, annual percentage rate is almost always higher than the rate of interest on loan being advertised by the lender.
- Ensures that the advertisement does not have any statement based on which the consumer may have acted, only to find that he or she is not eligible for the stated benefits.
Annual percentage rate
The interest rate applicable on loan plus finance charges form annual percentage rate. Therefore, if a borrower took a loan of 10,000 dollars on 10 percent interest, and paid $1,000 towards finance charges, he has received only 9,000 dollars. The interest, however, is calculated at 10 percent on 10,000, thereby increasing the effective interest rate on the loan. Most borrowers do not understand this aspect, and therefore, end up taking costlier loans.
Finance charge
The total interest paid on the loan throughout the loan period, plus mortgage insurance charges, and prepaid finance charges make up the finance charges on the loan.This is required to be disclosed because most borrowers fail to take into account the prepaid finance charges because of window dressing done by the lenders. Similarly, borrowers miss out on the mortgage insurance charges.
Amount financed
When the lender collects finance charges as prepaid charges from the amount loaned, then, effectively, the quantum of loan granted (amount financed) comes down. Interest, however, continues to be calculated on the full loan amount, making the interest costs higher than what they seem.
Payment schedule
Disclosure statements should contain payment schedule of the loan. The payment schedule is comprised on installments that have both principal and interest component.Other Articles
