The Truth About The Truth In Lending Act

Reading the fine print when you apply for credit can be tedious and time consuming. Take your time, though, because understanding the details will allow you to compare your options and make good credit decisions.

Put on Your Magnifying Glasses

It may be in small print, but credit information has become increasingly more understandable. This is due primarily to theTruth in Lending Act (TILA) which was enacted to ensure that creditors disclose specific information about finance charges and other credit matters, and that the information is presented in a consistent fashion. Covering personal, family, and household debts, it ensures, for example, that the information on your monthly statements is understandable and easy to read.

The Legislation in Action

But what else does TILA do? As it pertains to credit cards and other open-ended accounts, such as overdraft protection on your checking account, TILA requires that:

• Finance charge and interest rate information is provided to you before you fill out an application

• You receive sufficient advance notice of changes to the terms of your agreement

• Your risk is limited to $50 if your credit card is lost or stolen and then used fraudulently

There was a time when you could have received a brand new credit card in the mail even though you didn't apply for it. Not anymore. Creditors are prohibited from sending you a credit card you didn't request.

TILA also applies to closed-ended accounts like installment loans (loans for a specific amount of money with a specific payoff time frame). Provisions of the regulation include:

• The ability to change your mind within three business days after signing a contract where you have used your house as collateral, commonly known as the right of rescission.

• The requirement that home mortgage contracts must list precise information about annual percentage rate, points, fees, and finance charges.

Home Ownership and Equity Protection Act

Your financial situation may require you to apply for a high-rate or a high-fee loan because you cannot get one with better terms. An amendment to TILA, the 1994 Home Ownership and Equity Protection Act (HOEPA) may give you additional rights under TILA if you are applying for:

• A home equity loan

• A second mortgage

• A refinancing loan secured by your home

Talk with your lender for more information on this type of loan. It's important that you know your rights under the law. These types of loans can be difficult to manage because the payments can be very high. Given the increased risk to this type of loan, additional safeguards are in place to protect you. For example:

• A lender cannot give you a high-rate or high-fee loan without considering your ability to pay.

• You cannot be penalized for prepayment in most cases.

• Your interest rate cannot be increased if you default on the loan.

For more information about your rights under HOEPA, see the FTC factsheet High-Rate, High-Fee Loans. Also see the consumer-action.org brochure How to Avoid Home Equity Loan Fraud. The bottom line of the Truth in Lending Act is that you have a right to be fully informed. Be sure to read all of the information carefully. If you don't understand something, ask questions.

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Related Credit Protection Law Articles:

• What is a Credit Score and How is it Used? A credit score tells a lender how much of a projected risk you will be should they lend you money. The lower your score, the riskier you will be considered, and the less desirable terms you'll receive (higher interest rate, shorter loan term, etc.). Knowing how a score is basically calculated will help you in choosing what accounts to apply for, how to pay for them, and how to pay them off to keep lenders competing for your business instead of turning you down.

• Federal Trade Commission--Know Your Rights as a Consumer - The FTC helps consumers who feel their consumer rights have been violated by credit repair agencies, creditors, debt collectors, and the like. Know your rights to protect yourself from harassing phone calls, refusal to remove inaccurate information, overbilling, and other actions that occur to consumers every day.

• Credit Repair Organizations Act: Your Defense Against Credit Scams - Credit repair agencies make claims that are false. Knowing what they can and cannot do on your behalf will protect you from paying them to commit illegal acts with no results, and what you can do by yourself without paying an agency at all. If you do decide to use an agency, read the contract carefully, including the fine print, to ensure that the agency doesn't harm your debt management and credit repair efforts.