Does the Truth in Lending Act apply to a private loan?
Banks hand borrowers a stack of federal disclosures with every consumer loan: the annual percentage rate, the finance charge, the payment schedule. People lending to a friend or relative sometimes wonder if they need to do the same. Usually they do not, because federal law only treats someone as a creditor after they lend regularly. The thresholds are specific, and dwelling-secured loans have a much lower one.
Who counts as a creditor
The Truth in Lending Act is carried out through Regulation Z, 12 CFR Part 1026, enforced largely by the Consumer Financial Protection Bureau. Its disclosure rules apply to "creditors." Under 12 CFR 1026.2(a)(17), a creditor is a person who regularly extends consumer credit that has a finance charge or is payable by written agreement in more than four installments, and to whom the debt is first payable.
"Regularly" has a number attached:
| Type of consumer credit | Creditor if, in the preceding calendar year, the person extended |
|---|---|
| Consumer credit in general | More than 25 times |
| Credit secured by a dwelling | More than 5 times |
| High-cost mortgages | More than one in any 12-month period, or one or more through a mortgage broker |
If you did not hit the numbers last year, the same test is applied to the current year. A person who lends money to a niece once is not a creditor. A person who makes 30 small personal loans a year is.
What counts as consumer credit
Regulation Z only covers credit primarily for personal, family, or household purposes. Under 12 CFR 1026.3(a), it does not apply to credit extended primarily for a business, commercial, or agricultural purpose, or to credit extended to anyone other than a natural person. A loan to an LLC is outside Regulation Z no matter how often you lend. Our guide to business loan notes covers that kind of loan.
When private lenders do cross the line
Frequent personal lenders. Someone who runs a side business of small personal loans can pass 25 consumer loans in a year without much effort. At that point federal disclosures apply, and so, likely, do state lending license laws. Our guide on whether you need a lending license covers the state side.
Repeat seller financing. Investors who sell several homes a year with owner financing can pass the 5-dwelling threshold quickly. Seller financing also has separate federal rules on loan originators and ability to repay, which our guide to seller financing on a private home sale explains.
High-cost mortgages. A loan secured by a home with very high rates or fees can make you a creditor after just two such loans in 12 months, or even one through a broker.
Why a clear note still matters
Even when Regulation Z does not apply, the things it requires banks to disclose are the things a borrower and lender most often fight about: the rate, the total cost, the payment schedule, and the late charges. A promissory note that states the principal, the interest rate, how interest is calculated, the payment amount and dates, and any late fee gives both sides the same information without federal forms. It also helps you stay inside state usury limits. Our guide to the maximum legal interest rate by state covers those caps.
This is general information about a federal rule with many detailed provisions. If you lend often, a lawyer who handles consumer lending can tell you exactly where you stand.