Regulation Z: The Truth in Lending Act

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TILA: What is the Truth in Lending Act?

The Truth in Lending Act, also known as TILA or Regulation Z, is a federal statute enacted in 1968. Congress initially implemented TILA as part of the Consumer Credit Protection Act, aiming to protect consumers from unfair credit practices. Since its initial adoption, TILA has been amended many times, adding new compliance requirements for lenders, and expanding the types of credit that are covered. This has made compliance with TILA’s provisions complicated, requiring lenders to maintain knowledge of its requirements and to carefully determine which transactions TILA applies to before extending credit.

TILA intends to simplify credit practices and provide consumers with clear, easy-to-understand credit information to allow them to make informed decisions. TILA focuses on promoting transparency and fairness in lending practices by requiring lenders to provide certain disclosures to consumers, such as interest fees, allowing consumers the right to rescind loans under certain circumstances, and regulating to prevent false or misleading advertisements of credit products. TILA regulates many credit types, including open-end and closed-end credits ranging from home mortgages to auto loans and credit cards to home equity lines of credit. TILA has specific provisions that each target different types of credit.

Who does TILA apply to?

TILA’s regulations generally apply to any lender who extends credit to consumers for personal, family, or household purposes. There are two parts to this. The first part is that the credit must be extended to a consumer. Consumers can be a human being or a trust. This means that credit extended to business entities, such as limited liability companies, corporations, and partnerships, are generally excluded from TILA’s requirements. The second part focuses on the purpose of the credit extended. Credit extended for personal, family, or household purposes are regulated under TILA’s provisions. Some examples of personal, family, or household purposes include credit offered for purchases of a primary residence or an auto loan for a personal vehicle. Determining who the credit is offered to and for what purpose is essential to ascertain whether TILA’s provisions apply to a loan transaction.

Why are business purpose loans exempt from TILA?

TILA provides for various exemptions from its regulations. Among these include an exemption for credit extended to business entities and credit extended for business, commercial, or agricultural purposes. Credit offered to corporations, limited liability companies, partnerships, and other business entities generally do not have to comply with TILA’s strict requirements. Further, credit offered for business, commercial, or agricultural purposes are also exempt. Loan transactions can be exempt from TILA if the purpose of the loan is commercial in nature, even if the credit extends to a consumer. One example is a loan made to a person and secured by their personal residence, but the proceeds finance that person’s business. This type of transaction would generally be exempt from TILA’s provisions since the proceeds are for business purposes. Another example would be the purchase of residential real estate with the intent to make repairs and either rent out the property for rental income or resell the property at a profit.

While determining whether a credit transaction is covered by TILA can be difficult, here at Geraci, we are dedicated to assisting lenders with diverse loan portfolios to determine whether these regulations apply to their transactions and the best way to comply with any requirements.

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