Truth in Lending Act was designed to protect borrowers

On the Money
From the July 7, 2006 print edition

As a nation, we just celebrated our 230th birthday. That’s approximately 9.2 generations of families in the United States since 1776. Our political great-great-great-great (well, you get the picture) grandfather George Washington is famous for saying “I cannot tell a lie.”

He was referring to a cherry tree and a hatchet. Our legislators have tried to carve out and cut down the amount of prevarication in our lending systems for many years.

The foundation of the modern, fiscal “I cannot tell a lie,” was created just 38 years ago in the form of the Truth in Lending Act.

Congress enacted it in 1968 as part of the Consumer Protection Act. The law is designed to protect consumers in credit transactions by requiring clear disclosure of key terms in lending arrangements and every cost. The law was simplified and reformed as a part the Depository Institutions Deregulations and Monetary Control Act of 1980.

The Federal Reserve Board has implemented the law through Regulation Z, which explains how to comply with the consumer credit parts of the law. Regulation Z applies to each individual or business that offers or extends consumer credit if four conditions are met:

• The credit is offered to consumers.
• Credit is offered on a regular basis.
• The credit is subject to a finance charge (i.e. interest) or must be paid in more than four installments, according to a written agreement.
• The credit is primarily for personal, family or household purposes.However, Regulation Z doesn’t apply to business, commercial or agricultural loans.

  Here are the key points (and some noteworthy warnings) of this regulation to remember when dealing with potentially dishonest lenders.

• Know the word “disclosure” and what it means. The lender is required to disclose, meaning to tell the “whole truth” about any matter the other party should know. In most cases, failing to disclose is under penalty of perjury for “knowingly falsifying or concealing any significant fact.” Disclosure is generally required before credit is extended.

Under Regulation Z, disclosure must be made of important credit terms. The four most important are:

1. Finance charge — This is the amount charged to the consumer for the credit. It’s not the interest rate. It’s a dollar amount that might include items not generally thought of as finance charges, such as discount, fees, origination charges and charges by third parties. It might even include additional principal if the structure of the loan results in negative amortization.
2. Annual percentage rate — This is the cost-of-credit measure, which must be disclosed as a yearly percentage. It’s not the stated interest rate for the loan.  This disclosure is calculated using a complex formula that measures the money coming in and going out over time, which yields the annualized “internal rate of return” (IRR) for the life of the loan.If you’re a frequent borrower, you may wish to learn more about calculating IRR by exploring this calculation in popular computer spreadsheet programs.
3. Amount financed — This is the stated amount being borrowed in a consumer loan transaction. Be aware that this disclosure doesn’t contemplate additions to principal over time as an increase to the amount financed. This “negative amortization” becomes part of the finance charge.
4. Total of payments — This sets forth the total number and amounts of the periodic payments by the borrower. The magnitude and timing of payments is significant to the IRR calculation above. It sets the time interval between payments for that calculation. Simply remember that the more frequent the payments, the less costly the loan.

Evidence of compliance with the Truth in Lending requirements must be retained for at least two years after the date of disclosure.

Disclosures must be clear and conspicuous, and must appear on a document the consumer may keep.

You may find complete copies of these regulations and example forms at most public libraries and law school libraries. Regulation Z is in the Code of Federal Regulations at 12 C. F. R. Part 226. This regulation and many others are available on the Web atwww.fdic.gov/regulations.

The penalties for failure to comply with the Truth in Lending Act can be substantial. A creditor who violates the disclosure requirements may be sued for twice the amount of the finance charge. Consumers must begin any lawsuit within a year of the violation.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.