The Truth In Lending Act (TILA) requires “meaningful disclosure of credit terms,” which translates to “simple and easy-to-read.” TILA applies to most types of credit, including closed-end credit—such as an auto loan or mortgage, or open-ended credit—such as a credit card. TILA does not regulate the charges that may be imposed on consumer credit. It is designed to protect consumers against inaccurate and unfair credit billing and credit card practices and terms.
Violations of TILA may entitle borrowers to cash compensation and/or offsets/reductions of their loan balance. Though each state has its own variations of TILA, the most important feature of TILA is always the proper disclosure of key information to protect both the consumer and the lender in credit transactions.
The following and additional information about TILA can be found in the sources listed below.
TILA applies to:
Individuals or businesses that offer or extend credit to consumers, and:
- They do it “regularly” or more than 25 times per year (more than 5 times when secured by a dwelling).
- The credit is subject to a finance charge or is payable by written agreement in more than four installments.
- The credit is primarily for personal, family, or household purposes.
If a credit card is involved, certain provisions apply, regardless of finance charges or installments, or if the credit card is used for business purposes. Credit card holders are liable for unauthorized use of the card only up to $50. 15 U.S.C. Sec. 1643. (see Fair Credit Billing Act).
TILA does not apply to:
- Creditors who extend credit primarily for business, commercial, agricultural, or organizational purposes or for other purposes that are otherwise regulated. But rules governing issuing credit cards and liability for unauthorized use apply to all credit cards.
- Student loans made, insured, or guaranteed pursuant to a program authorized by Title IV of the Higher Education Act of 1965.
- Credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the total amount financed exceeds $25,000.
- Identity of the creditor
- Amount financed with itemization
- Annual percentage rate, including applicable variable-rate disclosures
- Finance charge and prepayment/late payment penalties
- Payment schedule and total of payments
- If applicable to the transaction: (1) Total sales cost, (2) Demand feature, (3) Security interest, (4) Insurance, (5) Required deposit, and (6) Reference to contract
Required disclosures must be made:
- “Clearly and conspicuously”
- In meaningful sequence
- In writing
- In a form the consumer may keep.
Creditors are liable for violation of the disclosure requirements, regardless of whether the consumer was harmed by the nondisclosure, UNLESS:
- The creditor corrects the error within 60 days of discovery and prior to written suit or written notice from the consumer, or
- The violation is the result of bona fide error.
- The creditor bears the burden of proving by a preponderance of the evidence that:
- The violation was unintentional.
- The error occurred notwithstanding compliance with procedures reasonably adapted to avoid such an error. (Error of legal judgment is not a bona fide error.)
If your business accepts payments via credit cards, understanding TILA regulations is an important safeguard for you, too. You also must understand credit card processing fees, so you can dispute any costs you think are unfair and/or have a better understanding of what your true overhead costs are. Be sure you know about the parties involved and the types of fees.
The financial “middlemen” between a customer and merchant include:
- Credit Card Associations: The companies that create the credit cards, like Visa, MasterCard, and American Express. They set the rules.
- Credit Card Issuing Banks: The financial institutions that issue the credit cards, like Chase, Citi, and Wells Fargo.
- Credit Card Processors: Also known as Acquiring Banks aka Acquirers, these institutions act as messengers between merchants and credit card associations. They pass batch information and authorization requests along so that merchants can complete transactions in their businesses. A merchant may encounter several acquirers for one transaction – one that creates monthly statements, one that handles technical support, and one that issues money to a bank account.
- Merchant Account Providers: These are companies that manage credit card processing (e.g., sales, support, etc.), usually through the help of an acquirer. They could be financial institutions, independent sales organizations, or double-duty acquirers, depending on the situation.
- Payment Gateways: These are portals that route transactions to an acquirer, usually in the case of an online shopping cart.
Types of Fees
- Transactional Fees
These fees are assessed every time you run a transaction. They represent the biggest cost of operating a merchant account.
- Flat Fees
In addition to transactional fees, you may be charged flat fees. They vary by name, value, and applicability.
- Incidental Fees
Flat fees are always charged, but incidental fees only appear per incidence. For example, when a chargeback occurs, you could be charged a chargeback fee.
Wholesale vs. Markup
All of the above fees (transactional, flat, incidental) fall into one of two categories: (1) wholesale fees, and (2) markups. Markups are negotiable, while wholesale fees are not.
- Wholesale Fees
These fees can go by other names as well, like, “base fee” or “pre-markup,” etc. They are determined by the credit card issuing bank and the credit card associations. They are consistent regardless of which provider you choose.
Your markup fees are how your credit card processor makes a profit from your business. Markup fees are different from processor to processor. You should compare them before you open a new merchant account.
Every credit card and merchant account provider has a different set of costs associated with its services. Some of them are unavoidable, but others can be negotiated. You need to find a processor that is very transparent with their fees. Evaluating your payment processing plan can be a “money saving” move. NL members and clients should watch for an email from NL about a free evaluation of your payment processing plan with no obligation to buy, offered by Clear Payment Solutions. Their evaluation of our payment processing fees found multiple ways we could start saving immediately.