Truth in Lending Act

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Truth in Lending Act (1969)

Richard Slottee

The Truth in Lending Act (TILA) (P.L. 90-321, 82 Stat.146) is a federal statute which Congress enacted in 1969 and amended and expanded on numerous occasions after that date. In adopting TILA, the legislature declared:

The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from the awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure the meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.

TILA generally applies to creditors who regularly extend consumer credit that is primarily used for personal, family, or household purposes. The lender must extend the credit to a natural person, and the loan must be repayable with either a finance charge or by written agreement in more than four installments. TILA does not apply to (1) credit transactions in which the total amount financed exceeds $25,000 and which are not secured by real property or personal property used as a dwelling, or (2) loans made pursuant to a student loan program under the Higher Education Act of 1965. To effectuate TILA's goals and policies, the Federal Reserve Board promulgated "Regulation Z," which is found in the Code of Federal Regulation. Contained in the appendices to Regulation Z are a number of model forms for use in lending contracts, and creditors who properly use the forms are deemed to be in compliance with TILA. The United States Supreme Court has held both TILA and Regulation Z constitutional (Mourning v. Family Publications Service, Inc., [1973]).

Congress' primary purpose in adopting TILA was to provide disclosure of credit terms to consumers, and consequently it devoted much of the act to financial disclosure issues. It requires sellers and lenders to inform consumers of terms in a manner that clarifies their meaning and promotes understanding. This enables consumers to easily compare compare the credit terms of various sellers and lenders, which in turn enables them to shop for a contract that most suits their needs.

In addition to credit term disclosure requirements, TILA and Regulation Z also contain provisions governing credit card issuance, liability for unauthorized credit card use, credit card billing error resolution procedures, notice and disclosure requirements for credit card solicitations, disclosure requirements for high-rate mortgages and reverse mortgages, and rescission provisions for various types of transactions in which a security interest is retained in a consumer's principal residence.


TILA applies only to "creditors," a term defined to include natural persons, business organizations, estates, trusts, and governmental units who regularly extend consumer credit and to whom the obligation is initially payable on its face. A person regularly extends consumer credit and so is subject to TILA only if the person extended credit more than twenty-five times in the calendar year immediately preceding the transaction that was subject to TILA and was not secured by the consumer's principal dwelling (unsecured credit. ) A person may also become a creditor by extending consumer credit secured by the consumer's principal dwelling (secured credit ) more than five times in the preceding calendar year. Persons who satisfy either standard are creditors, for both types of transactions. Once a person becomes a creditor in a calendar year, that person is a creditor for all credit transactions in the next calendar year, regardless of the number of transactions that take place. But for the subsequent year, the counting test again comes into play, and a person will not be a creditor until the requisite number of transactions takes place.

Finally, the legislation and accompanying regulations consider the person to whom the obligation is initially payable a creditor subject to TILA. If the creditor assigns the contract to another person, however, that person (called the assignee ) is subject to liability for violations of the act if the assignment was voluntary and if the violations are apparent on the face of the instrument assigned. A violation is considered "apparent" if it involves a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents, or a disclosure which does not use the terms required by the act.


Regarding the disclosure provisions, the TILA applies to both open-end and closed-end extensions of credit. Open-end credit is typified by the conventional credit card plan, and all other types of consumer credit are closed-end transactions. For open-end credit transactions TILA's disclosure requirements include:

  1. general disclosure requirements;
  2. credit and charge card applications and solicitations;
  3. home equity plans;
  4. initial disclosure statements for charge cards; and
  5. periodic billing statements for credit cards.

For purposes of closed-end transactions required disclosures include:

  1. the name of the creditor;
  2. the amount financed;
  3. the payment schedule;
  4. the total of payments;
  5. the total sale price; and
  6. the existence of any security interest.

The two most important disclosures are the finance charge and the annual percentage rate. The finance charge is the term used to reflect the cost of credit as a dollar amount and includes any charge, such as interest, imposed by the creditor as a condition of the extension of credit. The annual percentage rate is the term used to reflect the finance charge as a percentage of the total annual payments made on the debt. Both terms have to be disclosed more conspicuously than any other terms. Sellers and lenders in closed-end transactions must disclose information clearly, conspicuously and in writing and must provide a copy to the consumer. The disclosures must be grouped together, segregated from everything else, and must contain only information directly related to the required disclosures. This requirement has resulted in use of what is commonly called the "Federal Box," a place on the document where all TILA disclosures are grouped together, separating them from all other information.


TILA prohibits a card issuer from issuing unsolicited credit cards to either businesses or consumers. It also allows a consumer to assert against the card issuer any claims or defenses that the consumer has against a seller, provided the dispute involved a sale of more than fifty dollars and occurred either in the same state as the consumer's residence address or within 100 miles of the address. Finally, consumers may dispute any errors which appear on a credit card statement, and TILA requires the card issuer to promptly investigate the dispute and correct any errors.

If a creditor takes a security interest in the consumer's principal dwelling as part of a transaction, TILA allows the consumer three business days to rescind, or cancel, the transaction. The creditor must provide the consumer with a notice of this rescission right when the contract is consummated, and cannot loan any money or provide any services until the expiration of the three business days. If the creditor fails to make the appropriate disclosure of the rescission right or certain other material disclosures, the right of rescission continues until three years after the contract is signed, the transfer of all of the consumer's interest in the property, or the sale of the property, whichever occurs first.

A violation of TILA renders the creditor liable for actual damages, and statutory damages of twice the amount of the finance charge, with a minimum recovery of $100 and a maximum recovery of $1,000. If the violation involves a transaction with a security interest in the consumer's principal dwelling, the creditor may be liable for minimum damages of $200 and maximum damages of $2,000.

A creditor may avoid TILA liability for a violation if within sixty days of discovery of the disclosure error, and prior to the litigation or receipt of written notice of the error, the creditor notifies the consumer of the error and makes the necessary adjustments to ensure that the consumer will not pay a charge in excess of the annual percentage rate actually disclosed. A creditor may also avoid liability if it shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid the error. Examples of a bona fide error include clerical, calculation, computer malfunction and printing errors. An error in legal judgment in regard to the, requirements of TILA is not a bona fide error, even if made in good faith.

A consumer may file an action under the TILA in any United States District Court, regardless of the amount in controversy, or in any state court of competent jurisdiction. In an affirmative action for damages, the litigation must commence within one year of the date of the violation, and because disclosures must be made at the time the parties consummate the transaction, the date of the violation is the date of the transaction.


Clontz, Ralph, Jr. Truth-in-Lending Manual, 6th ed. 1995.

Fonesca, J. Consumer Credit Compliance Manual, 2nd ed. 1984.

Reverse Mortgages

A reverse mortgage is a type of loan used by older homeowners to tap the equity they have in their homes. Borrowers can receive three types of payments: a lump sum, a line of credit to be used as need arises, or a monthly payment for a fixed amount of time or as long as the homeowner lives. The borrower continues to hold the title to the home, and the loan does not have to be repaid until he or she moves out or diesin the latter case, the borrower's heirs usually sell or refinance the home to pay off the debt. There are only two requirements for eligibility: the borrower must own his or her own home and be at least sixty-two years old. There are no restrictions on how the payments may be used.

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Legislation contained in Title I of the Consumer Credit Protection Act (15 U.S.C.A. §1601 et seq.), which is designed to assure that every customer who needs consumer credit is given meaningful information concerning the cost of such credit.

Koons Buick Pontiac GMC, Inc. v. Nigh

The federal Truth in Lending Act (TILA), 15 U.S.C.A. §1601 et seq., promotes the full disclosure of terms for consumer credit transactions. Congress permitted consumers to sue creditors for violations of the act and imposed minimum and maximum amounts of statutory damages for such violations. Since its enactment in 1968, Congress has amended the TILA several times. However, the 1995 amendment of a statutory damages provision was poorly drafted and created confusion in the federal courts . This led the U.S. Court of Appeals for the Fourth Circuit to conclude that there was no cap on statutory damages involving personal property loans, a result that deeply concerned the banking and credit industries. The U.S. Supreme Court, in Koons Buick Pontiac GMC, Inc. v. Nigh, __U.S. __, 125 S.Ct. 460, 160 L.Ed.2d 389 (2004), resolved the issue, ruling that despite the poor drafting, Congress did not intend to erase statutory damages caps.

In 2000, Bradley Nigh tried to purchase a used 1997 Chevrolet Blazer from Koons Buick Pontiac GMC, a dealership located in Marlow Heights, Maryland. Nigh traded in his old truck and made a down payment of $4,000. Pontiac GMC could not find a lender to purchase an assignment of the payments owed under the sales contract, so a representative called Nigh three weeks later and asked him to restructure the deal to require an additional down payment amount of $2,000. Nigh did not have the additional money and asked for his old truck back. The dealership told him that it had been sold, which turned out to be false. Nigh then signed a new contract and an IOU for the $2,000. When Koons Buick Pontiac GMC still could not find a lender, it demanded that Nigh sign another agreement with a higher finance charge . Nigh complied but then discovered that the dealership had charged him for a car alarm system that he had not ordered. He returned the truck and sued Koons Pontiac GMC on a number of theories, including the violation of the TILA. He sought, and received from a jury, $24,000 on the TILA claim, which was twice the amount of the finance charge. Koons Buick Pontiac GMC argued that TILA capped damages at $1,000 but the district court rejected this claim.

On appeal, the Fourth Circuit upheld the district court's interpretation of the TILA The appeals court examined the legislative history and applicable provisions of the TILA that governed the award of damages for TILA violations. Prior to the 1995 amendment, the TILA's liability provision had been read to limit violations involving consumer financing transactions—whether a lease or a loan—to twice the amount of the finance charge in connection with the transaction. This double-damages provision was modified so that liability was given a $100 minimum and a $1,000 maximum. In 1995, Congress added a clause iii to §1640(a)(2)(A), which limited damages concerning closed-ended mortgages to $200 and imposed a $2,000 cap. In doing so, Congress simply moved the word "or" from between clauses i and ii, and placed it after clause ii, but it did not change the language of clause ii, which capped the damages for the whole subparagraph to a $100 minimum and a $1,000 maximum. By moving the word "or" and by adding clause iii, the $100 minimum and the $1,000 maximum that had been applied to the whole subparagraph were rendered ineffective, because, if read literally, they would negate the new clause iii. Therefore, the Fourth Circuit interpreted the new language to mean that damages to personal-property loans should be twice the amount of the finance charge with no limitation, while closed-ended mortgages were subject to a $200 minimum and a $2,000 maximum.

The Supreme Court, in an 8-1 decision, reversed the Fourth Circuit's reading of the TILA provisions. Justice Ruth Bader Ginsburg, in her majority opinion, noted that statutory interpretation was a "holistic endeavor." Statutory provisions that appeared to be ambiguous should not be read in isolation but should be put in the proper context with the surrounding text. In this case, Ginsburg reviewed the history of the way in which the subparagraph had been interpreted and examined the congressional definition of the subparagraph. The Court concluded that because the language of clause ii had been applied to clause i, Congress had intended clause ii to continue to apply to clause i, even though this was contrary to the language of the subparagraph. Ginsburg found that it did not make sense to interpret the statute to cap recovery for closed-ended real-property-secured loans at an amount substantially lower than the recovery available when a TILA violation occurred concerning a loan secured by personal property or an open-ended, real-property-secured loan. Therefore, the Court ruled that the $100 minimum and the $1,000 maximum continued to apply to clauses i and ii of subparagraph 1640(a)(2)(A), and that the $200 minimum and the $2,000 maximum applied to clause iii. As a result, Nigh's recovery for the TILA violation was reduced from $24,000 to $1,000.

Justice Antonin Scalia, in a dissenting opinion, contended that it was up to Congress, and not the Supreme Court, to correct a mistake in legislative drafting.

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The Truth in Lending Act is contained in Title I of the consumer credit protection act (15 U.S.C.A. § 1601 et seq.). The CCPA is designed to assure that every customer who needs consumer credit is given meaningful information concerning the cost of such credit. The Truth in Lending Act requires that the terms in transactions involving consumer credit be fully explained to the prospective debtors. It sets forth three basic rules: (1) a creditor cannot advertise a deal that ordinarily is not available to anyone except a preferred borrower; (2) advertisements must contain either all of the terms of a credit transaction or none of them; and (3) if the credit is to be repaid in more than four payments, the agreement must indicate, in clear and conspicuous print, that "the cost of credit is included in the price quoted for the goods and services." This law does not impose regulations upon the advertising media, only upon the prospective creditor.


Consumer Protection.