Unless you have been operating your finance company from a desert island, you know about the Truth-in-Lending Act (TILA) and Regulation Z’s requirements relating to consumer loans and installment sales. Originally passed in 1968, TILA has continued to evolve over the last 46 years with new amendments, rules, interpretations and guidelines. In 2011, the CFPB took over rulemaking authority under TILA.
In this week’s Federal Law Friday, we highlight TILA for two reasons. First, we remind you that the penalties for non-compliance can be severe. Second, with each new amendment, rule, interpretation and guideline, the number of ways a company can run afoul of the law continue to increase. TILA compliance examination is a fundamental tool in the regulator’s tool box. And, no examination is complete without checking the “Federal box” for non-compliance, including looking for the annual percentage rate (APR) to be outside of permitted tolerance.
Key provisions of TILA and Regulation Z provide:
- The basic rule: A creditor must make disclosures of the principal financial terms of the credit extension, whether a consumer loan or an installment sales contract. The basic disclosure terms required are set forth in Regulation Z Section 18 (which used to be 226.18 in the pre-CFPB days).
- The requirements relating to consumer transactions secured by personal property (as opposed to those secured by residential real property) have remained pretty much the same over the years. However, from time to time with new interpretations and case law developments, they have been tweaked.
- Loans secured by residential real property have taken on a whole new TILA life. Not only are there many new disclosure requirements, but there are many new substantive law limitations as well. There have been literally hundreds of pages added to Regulation Z addressing residential real estate transactions—from the types of loans that may be originated to the manner in which lenders may compensate their employees for such originations. There are now requirements for periodic statements for residential mortgage loans, requirements placed on appraisers, escrow requirements for higher cost loans, and prohibitions on mandatory arbitration, negative amortization and financing credit insurance, among countless others.
- “Ability to repay” is now the predominate term of art in residential mortgage lending in the ever-present quest for making a “qualified mortgage” loan that falls within the safe harbor from attack by the regulators.
- The residential real estate lending requirements go on and on. In fact, the requirements are so numerous and stringent that many consumer finance companies that used to “dabble” in residential mortgage lending have completely vacated that line of business.
In sum, violate TILA if you dare. Compliance is not easy, but it will be one of the first things that an examiner reviews. If you have not reviewed your TILA disclosures recently, it is a good idea to do so.