TRUTH IN LENDING ACT FOR AUTO LOANS – EFFECTS ON LENDERS

Passed in 1968, the Truth in Lending Act encourages accuracy among consumer lenders by requiring they disclose certain terms when offering a loan. Modern lending platforms can support an auto lender’s compliance with this act and associated regulations. Though technology can’t and shouldn’t replace the human element in determining how this law is applied, it provides a valuable complement to a lender’s legal counsel when it comes to regulatory compliance. This is especially so should an auto lender’s lending practices be audited, as cloud-based technology ensures that the reasoning behind every decision is well-documented.

The mandates included in the Truth in Lending Act require that consumer lenders divulge the annual percentage rate (APR), the length of the loan, and information on total costs, while also giving borrowers a three-day grace period during which they can back out. The act also gave authority to the Federal Reserve Board on how to apply these regulations. However, this authority has since been transferred to the Consumer Financial Protection Bureau (CFPB) via the 2011 passing of the Dodd-Frank Act, which further protects consumers against abusive lending practices.

With this federal law, auto loans must present their terms clearly to borrowers, while lenders who fail to do so may even risk fraud charges. This especially concerns the interest rate charged and APR of an auto loan, as these are important factors that help consumers determine the entire cost of a loan. Informing the consumer about these details also allows borrowers to compare loan offers more efficiently while ensuring that auto lenders comply with the Truth in Lending Act. Auto loan offers can then be better evaluated by consumers to determine the full pricing structure, and the use of technology by lenders in this process makes maintaining compliance easier.

How the Truth in Lending Act Works for Auto Loans & Leases

The title of the Truth in Lending Act is apt, as it requires that lenders tell the truth about the loans and respective terms being offered. The act has since been amended and expanded, with its provisions now covering most types of credit offered to consumers, including auto loans. The act allows consumers to shop around for auto loans with different lenders while also safeguarding borrowers from unfair or deceptive lending practices. Key to these protections are the disclosures a lender must make to consumers concerning the loan being offered, especially pertaining to the terms of the loan agreement.

With the Truth in Lending Act, auto loans must include these disclosures and requirements:

• APR: The yearly interest rate as a percentage, which helps indicate the total cost of the loan.
• Finance charges: This includes specific fees to be paid over the life of the loan, along with the overall amount of interest charged.
• Loan amount: The total amount of credit extended to the borrower.
• Number of payments: Total sum of payments to be made through to the end of the loan, which includes payments of all finance charges, along with the principle.
• Regulation Z: Implemented by the Federal Reserve Board, it prevents lenders from steering borrowers towards unfavorable loan terms that result in higher profits and providing compensation to loan originators for anything other than the loan amount extended.

According to the Truth in Lending Act, auto loans can also be terminated by the borrower when terms are deemed unfavorable. This allows borrowers to make well-informed decisions and shop around for the best loan terms. Lenders are also required by law to clearly disclose specific information and details about their financial products and services. Requirements include information on late fees, the total number of payments, any penalties due for prepaying the loan, and monthly payment amounts, along with other terms.

What Can Happen When Auto Lenders Violate the Law

Before the Truth in Lending Act passed, auto loans could be advertised as having a certain interest rate, though agreements would often contain complex legal jargon that made the exact terms murky. This enabled lenders to charge various fees that could, in practice, increase interest rates by as much as double those advertised. Current federal law now requires that terminology is easily understandable to borrowers while also making lenders liable should federal laws be broken.

Though lenders won’t necessarily be held accountable for any violations done unintentionally, they still must correct their mistakes. Also, though lenders can stave off sanctions for errors corrected within sixty days, this doesn’t apply if a lawsuit has already been filed. Additionally, it’s lenders that bear the burden of proof with any potential violations of the Truth in Lending Act. Auto loans offered by a lender must thus be free of any computer errors, clerical mistakes, miscalculations, or other inaccuracies.

When a violation occurs, consumers can take auto lenders to state or federal court to enforce an action under the Truth in Lending Act. Auto loans made by lenders that don’t comply with the law’s protections can end up as civil lawsuits. This, in turn, may result in a ruling to reimburse borrowers for past debt payments and penalties, along with paying damages and lawyer fees should the loan provider lose. For these reasons, it’s absolutely imperative that auto lenders do their best to comply with this and other federal (and state) legislation.

Using defi SOLUTIONS to Comply With the Truth in Lending Act

Even if an error in a loan agreement wasn’t made intentionally, lenders must still prove that they complied with all mandated rules and regulations under the Truth in Lending Act. Auto loans that comply with federal regulations offer a better return on investment in the long run than those that don’t, as they don’t present the risk of fines or other punishments. Through the use of technology, compliance doesn’t need to be a burden but can instead contribute to providing additional lending opportunities.

Technologies that can help lenders maintain compliance include:

• Analytics software: While such tools help improve a lender’s performance, analytics software can also be used to confirm compliance with legislative rules and regulations through constant monitoring of lending decisions.
• Automated decision-making: Using automation during the origination process enables the application of decision rules so lenders can ensure compliance with all legislation and regulations while also revealing instances of noncompliance.
• Digital documentation: By eliminating the costs and time associated with paper documentation, lenders make compliance with federal legislation like the Truth in Lending Act easier. Digitizing documents also ensures they don’t get lost, as copies of loan approvals, denials, contracts, applications, and other documents are always available in the cloud.
• Integrated software: An important tool to maintain compliance,  integrated software enables lenders to inexpensively and quickly configure their lending systems to change decision rules so that they comply with changing regulations, including by recording which rules were used and why. 

Modern, cloud-based loan origination systems offer auto lenders all these things, which in turn help lenders stay compliant with the Truth in Lending Act. Unlike traditional paper processes or even proprietary software, defi SOLUTIONS’ modern lending platform not only enables compliance with rules and regulations but also encourages better lending practices.