The Truth in Lending Act gives a debtor rights and a creditor obligations when both parties enter into a credit agreement, such as that of a loan or credit card. Meant to protect consumers from fraud, predatory lending and misrepresentation of terms by creditors, the act requires a creditor to clearly disclose important terms to the debtor; the creditor must also recognize the debtor's right to cancel within the time frame allowed by the law.
Truth-in-lending laws require the creditor to give various disclosures in writing to the debtor, but the creditor must issue five specific disclosures when issuing a loan to avoid giving the debtor additional cancellation rights. The creditor must hand the debtor a written statement showing the finance charges, including interest and other costs associated with obtaining credit, such as legal document costs. A creditor must give a debtor written notice of the annual percentage rate of the credit, along with the total amount financed, number of payments and payment schedule, including payment due dates and amounts over the loan term.
Credit Card Disclosures
Credit card creditors can't disclose the total finance charges or payment amounts because the credit is revolving or doesn't have a specific term or end. Credit card creditors must disclose any annual fee amounts and the frequency of payments, as well as other fees, such as monthly charges for inactivity. Debtors must receive written notice of the period of time the debtor has to pay off the balance on the card before the creditor applies a finance charge, if any.
High-Cost Home Loans
Homeowners who receive a subprime or "high cost" mortgage have additional disclosure rights under the act and must receive these disclosures at least three business days before completing the paperwork. A creditor must give the homeowner the annual percentage rate, payment amount and a statement taken directly from the act's text reflecting the danger of the loan in writing. A creditor issuing a high-cost mortgage with a variable interest rate must provide the debtor with a notice that states the interest rate may change and that includes the highest possible mortgage payment under the loan terms.
Right to Cancel
The Truth in Lending Act requires a creditor to cancel a credit transaction at the debtor's written request if the cancellation occurs within three business days of completion. The transaction is complete if the debtor signed the loan or credit contract and received material disclosures in writing and two notices of the right to cancel under law. Sundays and legal holidays don't count as a business day; the day after the debtor completes the transaction is considered day one. The debtor may have up to three years to cancel the contract if the creditor failed to give him the written disclosures and the notices of his right to cancel.