The Truth in Lending Act of 1968 - Research Paper Example

?The effectiveness of the Truth in Lending Act (TILA) Introduction The Truth in Lending Act of 1968 (TILA) was designed to provide the consumers withinformation regarding the actual cost of credit. Before TILA, the stated rate of interest over a loan was calculated by the lenders in different ways. The TILA made it obligatory for all lenders to state the annual percentage rate (APR) which would be consistently calculated so that the consumers may be enabled to compared the rates and calculate the cost of borrowing themselves. However, “the law's critics contend that a mismatch between the required disclosures and the information that the consumer needs to compare loans prevents this outcome” (LoanPage.com, 2010). Over the passage of time, lenders including the banks looked for and retrieved different kinds of exceptions that put them in a position where they could charge the consumers the fees that were not part of the APR or were not disclosed through the APR to the consumers. The egregiousness of this practice can be estimated from the fact that a lender in the case between NCAS of Delaware and the Pennsylvania Department of Banking could legally claim a certain percentage of the APR while the actual percentage of the cost of loan was considerably higher. An in-depth analysis of the TILA suggests that it has failed as an act to provide the Americans with protection against the deceptive lending practices. Case Study: Pennsylvania Department of Banking v. NCAS of Delaware This case started in Pennsylvania’s Commonwealth Court. The opinion of the trial court was taken on 31 July 2007. The opinion of the trial court did not follow a bench trial and included a decision over the pretrial motions of the defendant and the plaintiff. The plaintiff had moved for an injunction and summary judgment thus requiring the defendant to desist while the defendant decided to go for the summary judgment. On 20 March 2008, Pennsylvania’s Supreme Court gave its decision over the case between Pennsylvania Department of Banking and the NCAS of Delaware. This case includes a payday loans lender. Payday loans can be defined as short term loans that are given usually in small amounts but the interest rates charged on them are substantially high. In this case, the APR advertised by the lender was 5.98 per cent that was indeed, the loan’s APR’s accurate calculation by law (McGingley, 2013). Although this was a low rate and was reasonable, the company added an additional monthly participation fee to the rate worth $149.50 on monthly basis. Although this fee of participation does not have to be included in the APR’s calculation, yet the usury law of Pennsylvania’s Section 3A prohibits such forms from charging fees that sum up to over 6 per cent. Nevertheless, the true borrowing cost in this case was nearly 368 per cent. Analysis and discussion The finance charge’s centrality imparts the need for accurate reflection of the loan’s true total cost by this amount. It is important that all lenders uniformly calculate this amount so that the fundamental objective of the TILA of offering a simple method of drawing a comparison between the loan costs to the consumers can be achieved. Unfortunately, however, the integrity of the APR and the finance charge has been challenged in the USA. Paradoxically, certain provisions within the TILA have played a role in challenging the integrity of the finance charge and the APR, though the actions of the Federal Reserve Board also contributed to the weakening of the system. The TILA provides for the exceptions by a limited number; excluded charges which may not necessarily be disclosed or made part of the stated charge of finance. This is inclusive of the fees for the preparation of documents, carrying out the surveys of property, appraisals, escrow and notary fees, insurance, and credit reports. The TILA authorized the Federal Reserve Board to develop more exceptions as it deems necessary in order to effectuate the TILA’s purposes. The Regulation Z issued by the Federal Reserve Board created more exceptions to the charge of finance. It added a range of fees including the fees of credit application, late fees, periodic or annual fees for participation in the loans’ credit plan without a fixed term, and fees for exceeding the limit of the credit. These additional fees have the tendency to distort the credit’s true cost as is evident from the case study of Pennsylvania Department of Banking v. NCAS of Delaware. A lender in this case laid the description of a loan as inclusive of a 5.98 per cent of APR. This loan also included the fee of participation per month worth $149.50. The percentage of the APR would have been 368 had the fee of participation been included in the APR. The Federal Reserve Board developed even more exceptions that include but are not limited to the fees of participation and of the credit report even for mortgages that are fixed term loans. The effectiveness of the APR is reduced because of such exceptions to the charge of finance. Role of the TILA in the current economic crisis The failure of the TILA to offer the tools to the mortgage borrowers that would help them determine their ability to meet their loan obligations was one of the factors that contributed to the development of the current economic crisis in the USA. As a result of this failure on the part of the TILA, many borrowers took loans that they could not repay and thus became defaulters. The disclosures for the mortgages of adjustable rates that the consumers used for the subprime loans misled the borrowers with respect to their monthly payments. According to Sovern (2010), in a survey of the mortgage brokers carried out in July 2009, the brokers were found to report almost unanimously that the borrowers did not withdraw from a loan after they had read the final disclosures of the TILA at closing, and accordingly, did not use the disclosures for their intended purpose of drawing a comparison of shopping over the loans. “In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans” (Sovern, 2010). Presently, governmental entities mandate the disclosures. These governmental entities have no participation in the transaction of loan. This limits their control over the way of presentation of the disclosures offered by the lenders with no stake in promoting the understanding of the disclosures in the consumers and received by the consumers with no reasons to appreciate them. In order to solve the issues discussed in this paper, a switch from the disclosure regime of the TILA to a comprehension regime is required which would oblige the lenders to promote the understanding the terms of loans among the borrowers. Alternatively, lenders may be obliged to assess the borrowers’ proportion that understands the terms of their loan and have those figures disclosed to create competition among the lenders for better scores of comprehension. Either way, the lender would develop a stake in promoting the understanding of terms of loan in the borrowers. If such an incentive is created, lenders might reduce distractions to the consumers that read forms of disclosure, enhance the loan terms’ intelligibility, and lead to an abandonment of the terms of loan that cannot be understood by the consumers. Conclusion The TILA itself does not provide for a large number of exceptions to the fees excluded from the charge of finance or in the APR. Issuance of the Regulation Z by the Federal Reserve Board only aggravated the problem because this led to the creation of additional exceptions. Regulation Z added different kinds of fees and created still more exceptions. As a result of this, difficulties were experienced like those in the case between the NCAS of Delaware and Pennsylvania Department of Banking in which a monthly participation fee’s exclusion led to a substantial difference between the legally calculated APR percentage and the loan’s true cost. This leads to the conclusion that presently, true cost of borrowing is not reflected by the APR. One way to solve this problem is the inclusion of all fees, costs, and charges associated with a loan in the finance charge as well as in the APR. The conclusion reached by the Pennsylvania Supreme Court was that the monthly participation fee of the firm was sham interest and needed to be included in the loan interest’s proper calculation. This example should be followed by the congress and the TILA should be revised in order to include all charges associated with the loan in the finance charge and the APR. There is a need to make the APR comprehensive so that the true cost of credit may be conveyed as was the Congress’s intent while enacting the TILA. The TILA can be made useful by including all borrowing costs in the finance charge and the APR. References: LoanPage.com. (2010). TRUTH IN LENDING LAW. Retrieved from http://www.loanpage.com/glossary/truth-in-lending-law.aspx. McGingley. (2013). Pennsylvania Department of Banking v. NCAS of Delaware LLC. Commonwealth Court of Pennsylvania. Retrieved from http://caselaw.findlaw.com/pa-commonwealth-court/1521105.html. Sovern, J. (2010). Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers. Ohio State Law Journal. 71, 761. Read More