On every TILA form two disclosures are especially conspicuous, printed in larger and bolder type than the others: the Finance Charge and the Annual Percentage Rate (APR). The Finance Charge, expressed in dollars and cents, is defined as “the sum of all charges payable directly or indirectly by the consumer, imposed directly or indirectly by the creditor, as an incident to or a condition of the extension of credit.” On TILA disclosures, every dollar must be accounted for as part of the Amount Financed, Down Payment, or Finance Charge.
Think of the Finance Charge as the price tag for the privilege of buying on time or receiving a loan. Before TILA, sellers and lenders informed consumers of the cost of credit in different ways, usually by disclosing an interest rate or “time-price differential,” but these disclosures were not accurate or consistent. One reason was that the numbers quoted often omitted some of the charges associated with a credit transaction.
The functions of Finance Charge disclosure are to create a level playing field among different sellers and lenders and to let you see, before you become committed to a transaction, how much the use of credit will cost you so that you can decide whether you want to incur that cost.
Under TILA, the law, not the lender, decides what is included in the disclosed Finance Charge. The principle underlying the Finance Charge is: It doesn’t matter what the dealer calls it; if it’s a cost that you pay when buying on time that you would not pay if you paid cash, it is part of the Finance Charge. This can be seen most directly in home mortgage loans, where application or “origination” fees, “points” to buy down a mortgage rate, and similar charges which are not part of the advertised interest rate must be counted in the Finance Charge.
But as in so many cases, there are exceptions. Some would say the exceptions swallow the rule. For example, the seller or lender may take a mortgage or lien on the item being purchased and protect its position by recording this security interest in a government registry. Logically, the recording fee should be part of the Finance Charge, as there would be no corresponding fee if you paid cash. But TILA specifically exempts many such fees, to the extent they are actually paid to a third party, from being considered in the Finance Charge.
Similarly, in car sales, dealers often pack a deal with add-0ns such as various types of insurance. In the old days it was popular to sell credit life and disability insurance; now, not so much. Sellers may insist on Vendors Single Interest (VSI) insurance, which is like a collision policy but which pays out only to the extent of the amount you owe, and GAP, which, if your car is totaled, pays the lender the difference between its fair market value and your remaining loan balance. TILA allows these expensive items to be left out of the Finance Charge calculation, provided that your decision to buy them was voluntary. Legal forms for car dealers always include blanks for you to initial, attesting that your decision was informed and voluntary. Often, it wasn’t….. but it can be impossible to rebut the presumption created by such paperwork.
Also, most late charges and fees that are not built into the transaction, but which you may incur during the life of the contract, are not part of the Finance Charge. These, of course, may be very substantial.
In a credit card transaction, which TILA calls “open-end” credit, it is impossible to say at the outset what the Finance Charge will be. But under a 2010 law known as the CARD Act, monthly credit card statements now have to contain a very useful bit of information related to the Finance Charge: namely, how long it would take you to pay off your existing balance under various assumptions, and what the resulting Finance Charge would be. Given the high interest rates of credit cards, these results can be eye-opening indeed. For example, my latest credit card statement says that if I make only the minimum payment every month on a balance of $1500, it will take me 13 years to pay it off and I will incur Finance Charges of $2,960. If I pay $53 per month, it will take 3 years and cost $1919.
With computer-generated forms and electronic calculators, most TILA disclosure violations nowadays result from counting as part of the Amount Financed an item that actually should be included in the Finance Charge. As we will see in the next column, this results in understating the Annual Percentage Rate, giving the lawbreaker an unwarranted competitive advantage in competing for your business by making it seem like he is offering a better deal. If you have bought a car or made another credit purchase and you question whether TILA disclosures were made correctly, talk to a knowledgeable lawyer as soon as possible. You may be entitled to some money back, but the time frame for TILA claims is just one year.