Legal Memorandum: Application of TILA Requirements

Issue: Under federal law, how does a court determine whether a loan was made for consumer purposes such that the Truth in Lending Act requirements will apply?

The Federal Truth-in-Lending Act (TILA), 15 U.S.C. § 1601 et seq., was enacted to

promote the informed use of consumer credit by requiring disclosures about its terms and costs, . . . give[] consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling, regulate[] certain credit card practices, and provide[] a means for fair and timely resolution of credit billing disputes.

12 C.F.R. § 226.  Among the many substantive and procedural protections afforded consumers, TILA allows consumers a period of time to rescind a credit transaction that retains or acquires a security interest in the consumer’s principal dwelling.  15 U.S.C. § 1635; 12 C.F.R. § 226.15. “[I]n a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind.” 12 C.F.R. § 226.15(a)(1)(i).  This right of rescission runs for a period of three days from the date the consumer receives from the lender a notice of his or her rescission rights.  Id.  If no notice is given by the lender, the consumer may rescind within three years of the transaction.  Id.

TILA, however, applies only to consumer credit transactions.  15 U.S.C. § 1603 (exempting certain transactions); 12 C.F.R. §§ 226.1(c), 226.3(a).  The Act and its regulations define “consumer credit” as “credit offered or extended to a consumer primarily for personal, family, or household purposes.” 12 C.F.R. § 226.2(a)(12).  The Federal Reserve […]