Since 1968, American consumers have been entitled to clear disclosure of credit terms and costs in lending agreements. It was in 1968 that Congress passed the Truth in Lending Act. The law applies to many types of personal credit including credit card debt and residential mortgages. It applies to personal consumers who are seeking or applying for credit but it does not apply to business or government borrowers.
The stated purpose of the act is to stabilize the economy and encourage competition amongst financial institutions by having consumers be informed about the terms and conditions of the credit for which they are applying and accepting. At the application stage, disclosure of terms and conditions will allow the consumer to compare credit offers from different financial institutions. At the acceptance stage, full disclosure of terms and conditions will allow the consumer to adequately predict how much the credit arrangement will cost him and whether it is a good financial move.
What Terms are Regulated by the Truth in Lending Act?
Two of the most important terms that are regulated by this Act include finance charges and the annual percentage rate. Both of these terms can be hard for the lay person to understand, can vary widely from lender to lender and, can greatly impact a consumer’s personal finances. The Act explains that the amounts of both the finance charges and the annual percentage rates need to be disclosed and may not vary significantly from the disclosed values. This is important to a consumer’s understanding of the credit terms and ultimate repayment amount.
The Three Day Waiting Period
In an effort to protect consumers from being pressured or coerced into credit arrangements that affect their home, the Truth in Lending Act provides consumers with a three day waiting period when they sign a home equity loan. That means that if consumer is taking a loan against his primary residence, he or she has three business days to rescind that agreement after agreeing to it in writing. The funds are not dispersed until the end of the three day waiting period. However, if there is an emergency for which the homeowner needs the fund sooner than three business days from the time of execution of the agreement, the three day period may be waived.
Violations of the Truth in Lending Act
There are both civil and criminal penalties that are possible for different violations of the Act. Creditors can be liable for violating the disclosure terms of the Act even if the consumer was not hurt by the violation unless the creditor fixes the error within 60 days of notification or proves that the error was made unintentionally.
If a creditor does not comply with the requirements of the Act then the consumer can file a lawsuit within one year of the alleged violation. The court may award the consumer actual damages, attorney’s fees, court costs, statutory damages and more.
Willful violations of the Act could result in criminal charges being brought and sentences of fines and prison time being imposed.
The credit market is an important part of the American economy. Therefore, it is important that consumers understand their individual terms of credit and that creditors are truthful in their disclosures.
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