Disclosure Rules and Remedies Under the Truth in Lending Act
| Jurisdiction | United States,Federal |
| Citation | Vol. 10 No. 9 Pg. 12 |
| Pages | 12 |
| Publication year | 1997 |
Brian W. Jones, J.
The amount of outstanding consumer debt has exploded since 1990. Consumer loans made just by the banking industry increased 37% from early 1990 through 1995.[1] Credit card lending to the consumer by banks increased 77% during the same period.[2] Given the increasing use (some would argue abuse) of consumer credit, Congress and the various banking regulators have recently given increased attention to the laws governing the extension of consumer credit. The primary vehicle through which Congress has regulated the consumer lending business has been the Truth in Lending Act (TILA or Act) (15 U.S.C.A. § 1601 et. seq.) This article examines disclosure of the finance charge as required by the TILA and the remedies offered by the TILA for improper disclosure.
THE ACT
The TILA consists of the first five chapters of the Consumer Credit Protection Act and was first enacted by Congress in 1968 but has been amended several times since; most recently in September 1995. In Mourning v. Family Publications Service, 411 U.S. 356 (1973), the Supreme Court noted that the TILA was initially proposed because Congress perceived that consumers were "ignorant of the nature of their credit obligation and of the costs of deferring payment." (Footnote omitted). Congress enacted the TILA and stated that its purpose was "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." (15 U.S.C.A. § 1601(a)). To accomplish this purpose, the TILA requires that creditors provide uniform disclosure of credit terms and provides consumers with specific remedies against creditors that fail to meet the disclosure standards prescribed by the TILA.
THE REGULATION
Congress granted authority to the Federal Reserve Board (FRB) to issue regulations implementing the TILA.[3] The result is Regulation Z.[4] Regulation Z prescribes the form, timing, and content of the disclosures required by the TILA. The FRB has also issued official commentary on Reg. Z.[5] The requirements of the regulation are deemed requirements of the Act[6] and creditors acting in good faith may rely on the FRB's official commentary and official interpretations to avoid civil and criminal penalties under the Act.[7] In response to the 1995 amendments to the TILA, the FRB adopted revisions to Reg. Z in September 1996[8] and issued additional official commentary pertaining to the revisions in March 1997.[9]
SCOPE
The TILA requires creditors, as defined in the Act,[10] to disclose the cost of credit as a dollar amount (referred to in the Act as the "finance charge[11] and as an annual I percentage rate (APR).[12] Although TILA applies to virtually all creditors, it does not apply to all credit transactions. The TILA only applies to consumer credit transactions. A consumer credit transaction is one in which a creditor extends credit to a natural person and the loan proceeds are to be used by the consumer primarily for personal, family, or household purposes.[13] Loans to be used primarily for business purposes are exempt from the provisions of the TILA.[14]
The Act covers only creditors who offer or extend credit regularly[15] and it covers only transactions subject to a finance charge or payable in more than four installments.[16] Loans greater than $25,000 are exempt from the provisions of the Act unless the loan is secured by real property or a dwelling.[17] Credit that involves public utilities is exempt,[18] as is credit extended for securities or commodities accounts,[19] for home fuel budget plans,[20] and for certain student loan programs.[21] Both the TILA and Reg. Z contain provisions governing disclosure, advertising,[22] billing,[23] and remedies.[24] Only the disclosure rules and remedies will be discussed here.
DISCLOSURE RULES
Congress instructed the FRB to publish model disclosure forms that creditors may use for common transactions.[25] A creditor that properly uses these forms is deemed in compliance with the disclosure requirements of the Act,[26] except with respect to numerical disclosures.[27] Creditors may alter the forms to suit their own needs, so long as the changes do not alter the substance or clarity of the disclosures.[28] Although not required to do so, most creditors use the model forms and make few, if any, modifications. Therefore, issues most commonly arise with respect to how creditors calculate and disclose the numerical portions of the model forms. Properly disclosing the numerical disclosures depends almost entirely on how a creditor calculates the finance charge.
FINANCE CHARGE
A creditor must disclose the finance charge in any credit transaction subject to the TILA.[29] The finance charge is the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.[30] It does not include charges of the type that would be payable in a comparable cash transaction.[31] The 1995 amendments to the TILA and subsequent amendments to Reg. Z clarified the finance charge rules by specifying whether certain items should or should not be included in the finance charge.
ITEMS INCLUDED IN THE FINANCE CHARGE
Regulation Z includes a list of certain types of charges that, if imposed, are always included in the finance charge calculation. These are interest charges,[32] transaction fees,[33] points and origination fees paid by the consumer,[34] credit guarantee insurance premiums,[35] loan purchase charges,[36] cash discounts for the purpose of inducing payment by a means other than via credit,[37] and fees related to the preparation of the Truth in Lending disclosure.[38]
Other charges must always be included unless certain conditions are met by the creditor. Premiums and fees for credit life, accident, debt cancellation[39] and other types of insurance must be included in the finance charge unless the coverage is optional to the consumer, the creditor discloses that fact in writing, the fee and terms of the coverage are disclosed, and the consumer signs or initials an affirmative request for coverage after receiving the disclosure.[40] Property and liability insurance premiums, including those for collateral protection (also known as vehicle single interest) insurance[41]must be included in the finance charge unless the creditor discloses to the consumer that the consumer may obtain this type of insurance from a person of the consumer's choice,[42] and, if the insurance is obtained from or through the creditor, the premium for the initial term of the insurance is disclosed to the consumer.[43] Fees and taxes paid for perfection of security interest or insurance in lieu of perfection must be included in the finance charge unless these charges are disclosed and itemized for the consumer.[44]
Recent amendments to Reg. Z clarified the proper treatment of certain fees charged by third parties. Appraisal and credit report fees must be included in the finance charge unless they are charged to all applicants as non-refundable application fees[45] or are charged as part of a loan secured by real estate.[46]Fees such as those charged for mortgage insurance premiums must be included in the finance charge if the creditor requires use of the third party ! as a condition of, or incident to, the extension of credit. If the services are required, the fees should be included whether or not the consumer may choose the party who will render the service. They should also be included if the creditor retains a portion of the third-party charge.[47] Fees charged by third party closing agents (including attorneys) must also be included in the finance charge when the creditor requires the particular services, requires imposition of the charge, or retains any portion of the charge.[48] The revised FRB official commentary explains that the third party closing agent fees may be excluded from the finance charge if those services are of the type otherwise excludable.[49] Charges such as those that would be paid in a comparable cash transaction (excludable under 12 C.F.R. §226.4(a)), or a lump-sum fee charged for real estate closing costs (excludable under 12 C.F.R. §226.4(c)(7)), are examples of charges that may otherwise be excludable.[50]
SPECIAL RULES FOR RESIDENTIAL MORTGAGE AND REAL PROPERTY LOANS
If the loan is to be secured by an interest in real property, certain charges may be excluded from the finance charge if various conditions are met by the creditor. If the charges are bona fide and reasonable in amount, the creditor can exclude fees for title examinations and insurance, surveys, and similar services,[51] fees charged for preparing loan-related documents,[52] notary and credit report fees,[53] appraisal and inspection fees (including fees charged for pest inspections and flood hazard determinations),[54] and amounts to be paid into escrow so long as those amounts would not otherwise be included in the finance ] charge.[55] Mortgage broker fees must always be disclosed and included in the finance charge.[56] However, certain charges imposed by the mortgage broker that could be excluded by the creditor may be excluded from the mortgage broker fee disclosed to the consumer.[57] For example, an application fee charged by the mortgage broker that would be excludable by the creditor need not be included in the finance charge when imposed as part of a mortgage broker fee.
CHARGES THATARE ALWAYS EXCLUDED FROM THE FINANCE CHARGE
Charges that the creditor imposes that would be payable by the consumer in a comparable cash...
To continue reading
Request your trial