Truth in Lending Act (TILA)

The Truth in Lending Act is the federal statute that requires the cost and terms of consumer credit to be disclosed in a standardized way before the consumer is bound. It is title I of the Consumer Credit Protection Act, Public Law 90-321, signed on 29 May 1968, 82 Stat. 146. Section 101 of that title provides: "This title may be cited as the 'Truth in Lending Act'." Unlike the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, which were later titles bolted onto the same 1968 law, Truth in Lending was in the original Act. It is codified at 15 USC 1601 and following.

The single most useful thing to know about it is what it does not do. Congress set out the purpose in the statute itself, at 15 USC 1601(a): "It is the purpose of this subchapter to assure a 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." Disclosure and billing. There is no rate ceiling in the Act, and there never has been. A rate that looks punitive is a matter for state usury law, for a product-specific federal rule, or for nothing at all; it is not a Truth in Lending problem merely because it is high. What is a Truth in Lending problem is a rate that was not disclosed, or was disclosed inaccurately, or was disclosed in the wrong form.

The statute and Regulation Z are one thing, and almost everything a consumer meets is the regulation. The Act sets the framework; the operative detail sits in Regulation Z, 12 CFR part 1026. That is where the definition of a finance charge is worked out, where the closed-end and open-end disclosure tables come from, where the credit card billing-error procedure lives at 1026.13, where the mortgage forms are prescribed, and where the three-day right to cancel certain home-secured loans sits at 1026.23. Rule-writing authority moved from the Federal Reserve Board to the Consumer Financial Protection Bureau in the Dodd-Frank Act, and Truth in Lending is an enumerated consumer law at 12 USC 5481(12)(O), which is what makes Regulation Z the Bureau's. The Federal Reserve's fingerprints survive in the statutory text: 15 USC 1640(f) still protects a creditor's good-faith reliance on "any rule, regulation, or interpretation thereof by the Bureau or the Federal Reserve System".

The Act's two organizing distinctions. Everything downstream turns on whether credit is open-end or closed-end, and on whether it is secured by real property or a dwelling. Those two axes are what produce four different damage bands, four different disclosure regimes, and the reason a rule that is true of a credit card is often false of a mortgage. The consumer-facing consequence people meet most often is that the annual percentage rate means something different on each side of the closed-end line, because what the regulation requires to be folded into it differs.

Section 1640 is the remedy, and it is entirely unaddressed elsewhere on this site. A creditor that fails to comply is liable under 15 USC 1640(a) for actual damages, plus a statutory amount that depends on the kind of credit:

The residual rule at 1640(a)(2)(A)(i) is simply twice the amount of any finance charge in connection with the transaction, with no floor and no ceiling. That is what applies to an individual action on credit that falls outside the three specific categories below, an unsecured closed-end personal loan or a car loan among them, and it is why a small finance charge on such a loan can yield a small statutory award. On an open-end plan not secured by real property or a dwelling, which is the ordinary credit card case, 1640(a)(2)(A)(iii) gives twice the finance charge in connection with the transaction, "with a minimum of $500 and a maximum of $5,000, or such higher amount as may be appropriate in the case of an established pattern or practice of such failures". On a closed-end transaction secured by real property or a dwelling, 1640(a)(2)(A)(iv) gives "not less than $400 or greater than $4,000". On a consumer lease, 1640(a)(2)(A)(ii) gives 25 percent of the total monthly payments, floored at $200 and capped at $2,000. And in a class action, 1640(a)(2)(B) applies no minimum per class member and caps the total recovery for the same failure by the same creditor at "the lesser of $1,000,000 or 1 per centum of the net worth of the creditor". Costs and a reasonable attorney's fee follow a successful action under 1640(a)(3). None of these figures is indexed; they are statutory literals.

Statutory damages do not attach to every disclosure error, and this is the qualifier most summaries drop. The paragraphs following 1640(a) restrict the statutory amount to a listed subset of requirements. For open-end credit, a creditor has liability under paragraph (2) only for failing to comply with section 1635, section 1637(a), or paragraphs (4) through (13) of section 1637(b). For closed-end credit, only for section 1635 or for specified items of section 1638(a): the amount financed, the finance charge, the annual percentage rate, the total of payments and the payment schedule, among others. The practical effect is reassuring rather than restrictive for most borrowers, because the items a person actually shops on are inside the list. But a disclosure defect outside it leaves only actual damages, which on a paperwork error are frequently nothing.

Three further limits on that remedy that decide most real cases. First, 1640(b) lets a creditor escape liability entirely by self-correcting within sixty days of discovering an error, provided it acts before suit is brought and before it receives written notice of the error from the borrower. That is a strong incentive to notify in writing rather than by telephone, because a written notice closes the escape hatch. Second, 1640(c) gives a bona fide error defense for an unintentional violation despite reasonable procedures, listing clerical, calculation, computer and printing errors as examples, "except that an error of legal judgment with respect to a person's obligations under this subchapter is not a bona fide error." Getting the law wrong is not a defense; getting the arithmetic wrong may be. Third, 1640(f) shields good-faith reliance on a Bureau rule or interpretation even if the rule is later invalidated.

The deadline is one year, and the exception to it is worth more than the rule. Section 1640(e) gives one year from the occurrence of the violation for most claims, and three years for violations of the high-cost and mortgage-underwriting provisions at sections 1639, 1639b and 1639c, with state attorneys general also getting three years on those. Then the sentence that matters to a borrower who discovers the problem late: the subsection "does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law." So a borrower being sued on the debt years later may still raise the disclosure failure defensively to reduce what is owed, subject to state law on recoupment. Losing the right to sue is not the same as losing the point.

What sits next to the Act rather than inside it. The three-day right to cancel certain home-secured credit is a Truth in Lending right, at 15 USC 1635 and 12 CFR 1026.23, and it runs the opposite way from most people's intuition, which is treated in depth on the pages about home equity borrowing and refinancing. The $50 ceiling on liability for unauthorized credit card use is 15 USC 1643, and the billing-error procedure is 12 CFR 1026.13; both belong to the credit card material. Consumer leases come in through part E of the same subchapter. And the separate right to raise a seller's breach against the card issuer is 15 USC 1666i, which behaves quite differently from a billing error.

A creditor extending consumer credit must give prescribed disclosures at prescribed times, in the form Regulation Z sets. For a mortgage that means the Loan Estimate and the Closing Disclosure; for a card it means the account-opening table and the periodic statement; for a closed-end loan it means the finance charge, the annual percentage rate, the amount financed, the total of payments and the payment schedule. If a disclosure is missing, late or wrong, the consumer's remedy is section 1640, on the clock described above, with statutory damages available where the failure is one of the listed requirements and actual damages otherwise.

A hypothetical example of how the damage bands work, because the arithmetic is the whole point. Two borrowers each have an understated finance charge on a closed-end loan secured by their home, so both fall in the 1640(a)(2)(A)(iv) band of "not less than $400 or greater than $4,000".

Lucía's loan carries a finance charge of $9,300. Twice that is $18,600, which is far above the band's ceiling, so her statutory recovery is capped at $4,000. Teo's loan is small and carries a finance charge of $150. Twice that is $300, which falls below the band's floor, so his statutory recovery is lifted to $400. Both figures sit on top of whatever actual damages either can prove, plus costs and fees under 1640(a)(3). The band is doing all the work in both directions, which is why "twice the finance charge" on its own is a misleading summary.

Now the class-action cap. Suppose the same failure affected 4,000 borrowers of a creditor whose net worth is $62,000,000. Under 1640(a)(2)(B) there is no per-member minimum, and the total is capped at the lesser of $1,000,000 or one percent of net worth. One percent of $62,000,000 is $620,000, which is less than $1,000,000, so $620,000 is the ceiling for the whole class, or $155 a head before fees ($620,000 divided by 4,000). Against the individual band, that is the trade-off the statute makes.

Pros

• It makes credit terms comparable by prescribing the form as well as the content, which is what lets two offers be held side by side at all.
• Statutory damages with a floor mean a technical violation that caused no measurable loss is still actionable.
• Costs and reasonable attorney's fees are recoverable, which is usually what makes a small individual claim possible.
• An error of legal judgment is expressly excluded from the bona fide error defense, so a creditor cannot escape by having misread the rule.
• A borrower sued on the debt years later can still raise the violation defensively by recoupment, subject to state law.

Cons

• It says nothing about how much credit may cost, so it is no help against a rate a borrower considers unfair.
• The statutory damage bands are un-indexed literals, so their real value falls every year and the ceilings bind more often over time.
• A creditor that finds its own error can self-correct within sixty days and avoid liability altogether, which rewards discovering the problem before the borrower does.
• One year is a short clock for a defect buried in paperwork, and the recoupment exception only helps if someone sues you.
• Almost all the operative detail is in Regulation Z rather than the statute, so reading the Act alone will not answer a practical question.
• The rules differ by product, so a fact learned about a credit card is frequently wrong about a mortgage and the other way round.