Sep 7, 2011 FIC Alliance â Week 6 ANNUAL PERCENTAGE RATE ...
Sep 7, 2011
FIC Alliance – Week 6
ANNUAL PERCENTAGE RATE CALCULATION Annual Percentage Rate is a measure of the cost of credit, expressed as a yearly rate, which relates to the amount and timing of value received by the consumer to the amount and timing of payments made. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question to a similar cash transaction. If the charge is a result of the transaction being conducted by credit as opposed to cash, it is a finance charge, unless specifically exempt under the regulation. A finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer or imposed directly or indirectly by the creditor as an incident to or a condition of credit. It does not include any charge of a type payable in a comparable cash transaction. The following items are exempt from finance charges and the calculation of APR in real estate transactions. This is not to be confused with any other type of lending, such as consumer loans.
Regulation Z Section 226.4 - Finance Charge 4(a) Definition 1. Charges in comparable cash transactions. Charges imposed uniformly in cash and credit transactions are not finance charges. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question with a similar cash transaction. A creditor financing the sale of property or services may compare charges with those payable in a similar cash transaction by the seller of the property or service.
Items Exempt from APR and Finance Charge The 1995 Truth in Lending Act Amendments which were implemented by Regulation Z in October 1996, and the Official Staff Commentary in October 1997, clarified the treatment of specific charges, among other things.
The following fees in a transaction secured by real property or in a residential mortgage transaction (which may include example, the purchasing of a mobile home) must be a bona fide and reasonable amount. The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor’s employees rather than a third party. In calculating the APR, certain items have been specifically exempted from prepaid finance charges, as it pertains to the APR on real estate loans.
Charges Exempt WITHOUT ITEMIZATION from the Calculation of APR in Real Estate Transactions: 1. Application Fees An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals. The creditor is free to impose the fee in only certain of it’s loan programs, such as, mortgage loans. However, if the fee is to be excluded from the finance charge, it must be charged to all applicants, not just to applicants who are approved and who actually receive credit.
2. Fees or Premiums for Title Examination, Abstract of Title, Title Insurance, or similar purposes of establishing valid title to the property. 3. Property Surveys 4. Fees for Preparing Loan-Related Documents, such as Deeds, Mortgages, and Reconveyance, or Settlement documents. CAUTION: No fee can be charged for the preparation of the Reg Z Truth In Lending Disclosure or Good Faith Estimate or HUD Settlement Statement in a RESPA-related transaction.
5. Amounts Required to be Placed or Paid into an Escrow or Trustee Account for future payment of taxes, insurance, water, sewer and land rents. 6. Fees for Notarizing Deeds and Other Documents. 7. Property Appraisal Fees or fees for assessing the value or condition of the property if the service is performed prior to closing, including fees related to any pest infestation or flood hazard determination.
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8. Credit Report Fees, including not only the credit report but also the cost of verifying the information in the report or further credit investigation.
9. Seller’s Points, including any charges imposed by the creditor upon the non creditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller’s points are frequently involved in real estate transactions guaranteed or insured by governmental agencies, such as FHA and VA. A “commitment fee” paid by a non-creditor seller (such as a real estate developer) to the creditor should be treated as seller’s points. Buyer’s points (that is, points charged to the buyer by the creditor), however, are finance charges.
Other Seller Paid Amounts Mortgage insurance premiums and other charges are sometimes paid at or before consummation or settlement on a borrower’s behalf by a non-creditor seller. In such cases, the creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge. A creditor who gives disclosures before the payment has been made, should base them on the best information reasonably available, as called for by the estimate provisions of the regulation.
Charges Exempt WITH ITEMIZATION from the calculation of APR in real estate transactions: (If itemized and disclosed) 1. Taxes and Fees prescribed by law that actually are or will be paid to Public Officials for determining the existence of or for perfecting, or releasing, or satisfying a security interest. These may be totaled and disclosed as a total sum, or they may be itemized by the specific fees and taxes imposed. If a total sum is disclosed, a general term such as “security interest fees” or “filing fees” may be used. Most preprinted truth in lending disclosure forms have a blank on the form to fill in the amount of the filing fees. This should be filled in to keep these from affecting the finance charge and APR.
2. Property Insurance is exempt from the finance charge if it may be obtained from a person the consumer’s choice and that fact is disclosed. This disclosure can be provided on the “fed box” truth in lending disclosure or given in other documents.
3. Credit Life, Accident & Health Insurance Whether the insurance is in fact required or optional is a factual question. If the insurance is required, the premiums must be included in the finance charge, whether the insurance is purchased from the creditor or from a third party. If the only option the creditor gives the consumer is to purchase credit life insurance from the creditor or to FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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assign an existing life insurance policy, and the consumer purchases the credit life insurance, the premium must be included in the finance charge. (If the consumer assigns a preexisting policy instead, no premium is included in the finance charge).
Premiums for credit life, accident, health or loss of income may be excluded from the finance charge if the following conditions are met: a. The insurance is not required by the creditor and that fact is disclosed. b. The premium for the initial term of the insurance is disclosed. If the term of the insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under section 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage. Initial Term The initial term of insurance coverage determines the period for which a premium amount must be disclosed. In some cases the initial term is clear, for example, a property insurance policy on an automobile written for one year (even though the term of the credit transaction is four years) or a credit life insurance policy for the term of the credit transaction purchased by paying or financing a single premium. In other cases, however, it may not be clear what the initial term of the insurance is, for example, when the consumer agrees to pay a premium that is assessed periodically and the consumer is under no obligation to continue making the payments. In cases such as this, the cost disclosure may be made on the basis of a premium for one year of insurance coverage. The premium must be clearly labeled as being for one year. This disclosure can be separate from or included in the “fed box” disclosure. c. The consumer signs or initials an affirmative written request for the insurance after receiving the disclosures of the optional nature and cost of the insurance. A number of violations of these requirements have occurred because the institution failed to obtain the customer’s affirmative written request indicating that the insurance coverage was desired. Having the customer complete an application to the insurance company for the insurance is not a substitute for obtaining the customer’s affirmative written request for insurance. Under the following rule, it is clear that a creditor can write insurance in default situations or when the consumer requests insurance without being part of finance charges.
Insurance Written in Connection with the Transaction Insurance sold after consummation on closed-end credit transactions or after the opening of a plan in open-end credit transactions is not “written in connection with” the credit transaction if the insurance is written because of the consumer’s default (for FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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example, by failing to obtain or maintain required property insurance) or because the consumer requests insurance after consummation or the opening of a plan (although credit sale disclosures may be required for the insurance sold after consummation if it is financed).
Taxes Generally, a tax imposed by a state or other governmental body solely on a creditor, is a finance charge if the creditor separately imposes the charge on the consumer. In contrast, a tax is not a finance charge (even if it is collected by the creditor) if applicable law imposes the tax:
a. Solely on the consumer; b. On the creditor and the consumer jointly; or c. On the credit transaction, without indicating which party is liable for the tax; or d. On the creditor, if applicable law directs or authorizes the creditor to pass the tax on to the consumer. (For purposes of this section, if applicable law is silent as to passing on the tax, the law is deemed not to authorize passing it on.) For example, a stamp tax, property tax, intangible tax, or any other state or local tax imposed on the consumer or on the credit transaction, is not a finance charge even if the tax is collected by the creditor. In addition, a tax is not a finance charge if it is excluded from the finance charge by another provision of the regulation or commentary (for example, if the tax is imposed uniformly in cash and credit transactions).
Lump Sum Charges If a lump sum charged for several services includes a charge that is not excludable, a portion of the total shall be allocated to that service and included in the finance charge. However, a lump sum charged for conducting or attending a closing (for example, by a lawyer or title company) is excluded from the finance charge if the charge is primarily for services related to items which are not finance charges (for example, reviewing or completing documents), even if other incidental services such as explaining various documents or disbursing funds for the parties are performed. The entire charge is excluded even if a fee for the incidental services would be a finance charge if it were imposed separately.
Charges By Third Parties Charges imposed on the consumer by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the use of a third party as a condition of or incident to the extension of credit, even if the consumer can choose the third party or the creditor retains the charge. For example: i. The cost of required mortgage insurance, even if the consumer is allowed to choose the insurer. FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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ii. A mortgage broker fee, to the extent that the broker shares the fee with the creditor. It has been clarified by the 1995 TIL Act Amendments that the inclusion of mortgage broker fees in the finance charge, extends only to borrower paid fees, regardless of whether such fees are paid by the borrower directly to the broker or to the lender for delivery to the broker, or whether such fees are paid in cash or financed in the loan amount. Lender paid broker fees, including yield spread premiums and service release premiums will continue to be excluded from the finance charge.
Charges By Settlement Agents Charges imposed on the consumer by a settlement agent (such as an attorney, escrow agent or title company) are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge for those services is not otherwise excluded from the finance charge. For example, a fee for courier service charged by a settlement agent to send a document to the title company or some other party, is not a finance charge, provided that the creditor has not directly or indirectly required the use of a courier or retained the charge.
Required Closing Agent If the creditor requires the use of a closing agent, escrow agent, settlement agent, etc. the fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service (including performing the closing or settlement); or requires the imposition of the fee or retains a portion of the charge. Generally, we find that in cases where creditors are not performing their own settlement, the credit is requiring the use of a professional for the service.
Charges Assessed During the Loan Term Charges excluded from the finance charges are those imposed solely in connection with the initial decision to grant credit. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected. For example, a fee for one or more determinations during the loan term of the current tax lien status or flood insurance requirements is a finance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing, is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.
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Prepaid Finance Charges Prepaids in the calculation of APR in real estate transactions are actually FINANCE CHARGES WHICH ARE PREPAID. Prepaid finance charges mean any finance charge paid separately in cash or by check before or at consummation of the transaction, or withheld from the proceeds of the loan. Always remember to decide whether the cost was incurred due to this being a credit transaction. If it was, and is not exempt under the exemptions previously discussed, it is a finance charge and a part of the APR. The following are examples of finance charges. These are not all inclusive but rather, are examples of some commonly incurred items. 1. Odd Days Interest – Per Diem Interest – Prepaid Interest 2. Origination Fee 3. Discount Points 4. Administrative Fee 5. Processing Fee 6. Private Mortgage Insurance 7. FHA Mortgage Insurance Premium (If total MIP is collected up front in cash or added to the mortgage, it is a prepaid finance charge. Only the old monthly MIP type is not prepaid, when paid over the life of the loan.) 8. VA Funding Fee 9. Underwriting Fee 10. Tax Service Fee (Usually associated with secondary market loans.) 11. Inspection & Handling Fees for Staged Disbursements of Construction Loans 12. Charges for a Required Maintenance or Service Contract Imposed Only in a Credit Transaction 13. Filing or Recording Assignment to a Third Party Investor 14. Borrower Paid Mortgage Broker Fees 15. Escrow Waiver Fee 16. Certain Finance Charges - If the charge in a credit transaction exceeds the charge imposed in a comparable cash transaction, only the difference is a finance charge. In addition, if the amount is over and beyond what is bona fide and reasonable in amount, FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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it shall be deemed as a finance charge or at least the portion of it that is beyond reasonable. 17. Closing Fee or Settlement Fee – Regardless of who is making the charge. 18. Life of Loan Flood Monitoring Fee - (If this is a combination fee that combines an amount for the initial flood determination and the continued life of the loan flood monitoring, then the entire combination fee should be treated as a prepaid finance charge for the purpose of the APR calculation.)
Faulty Calculation Tools There is a common misconception in the industry that if APR was disclosed due to a faulty calculation tool this will provide the institution with some amount of defense against Civil and Criminal actions. Regardless of the calculation tool being used, if the APR was disclosed low, the institution is required to make the necessary adjustments to ensure that the customer is not required to pay an amount in excess of the charge disclosed, or the dollar equivalent of the APR disclosed, whichever is lower. A redisclosure to the customer of the corrected APR or other violations without adjustment to the customer's account does not relieve the possibility of civil liability or an enforcement agency reimbursement order. The overstatement of the APR or finance charge is not a violation. Tolerances for Accuracy in Disclosures "Understated APR" means a disclosed APR that is understated by more than the reimbursement tolerances provided under the Truth In Lending Act and Regulation Z. "Understated Finance Charge" means a disclosed finance charge which, when increased by the greater of the finance charge dollar tolerance or a dollar tolerance that is generated by the corresponding APR reimbursement tolerance, is less than the finance charge calculated under the act. In Regular Transactions, the Annual Percentage Rate is considered accurate if it varies plus or minus, not more than one-eighth of one percentage point (12.5 bases points) from the actual annual percentage rate. Furthermore, there is a tolerance of $100 for the Finance Charge for closed-end credit transactions secured by real estate or a dwelling. In Irregular Transactions, the Annual Percentage Rate is considered accurate if it varies in either direction, by not more than ¼ of one percentage point (25 bases points) from the actual annual percentage rate. Again, there is a tolerance of $100 for the Finance Charge for closed-end credit transactions secured by real estate or a dwelling.
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Resources: Electronic Code of Federal Regulations – eCFR 12 CFR – Regulation Z Truth in Lending Section 226.4 http://ecfr.gpoaccess.gov/cgi/t/text/textidx?c=ecfr&sid=d6f230d11dc637d532fc756316f611c8&rgn=div5&view=text&node= 12:3.0.1.1.7&idno=12#12:3.0.1.1.7.1.8.4
Check Your Calculation Tool – Download it – it’s free! www.occ.treas.gov/aprwin
Kimberly Lundquist FIC Conferences, Inc. 1150 N Loop 1604 W Suite 108-603 San Antonio, TX 78248 Tel 210.493.1761 Fax 210.493.9659 [email protected] www.ficconferences.com
FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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FIC Alliance – Week 6
ANNUAL PERCENTAGE RATE CALCULATION Annual Percentage Rate is a measure of the cost of credit, expressed as a yearly rate, which relates to the amount and timing of value received by the consumer to the amount and timing of payments made. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question to a similar cash transaction. If the charge is a result of the transaction being conducted by credit as opposed to cash, it is a finance charge, unless specifically exempt under the regulation. A finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer or imposed directly or indirectly by the creditor as an incident to or a condition of credit. It does not include any charge of a type payable in a comparable cash transaction. The following items are exempt from finance charges and the calculation of APR in real estate transactions. This is not to be confused with any other type of lending, such as consumer loans.
Regulation Z Section 226.4 - Finance Charge 4(a) Definition 1. Charges in comparable cash transactions. Charges imposed uniformly in cash and credit transactions are not finance charges. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question with a similar cash transaction. A creditor financing the sale of property or services may compare charges with those payable in a similar cash transaction by the seller of the property or service.
Items Exempt from APR and Finance Charge The 1995 Truth in Lending Act Amendments which were implemented by Regulation Z in October 1996, and the Official Staff Commentary in October 1997, clarified the treatment of specific charges, among other things.
The following fees in a transaction secured by real property or in a residential mortgage transaction (which may include example, the purchasing of a mobile home) must be a bona fide and reasonable amount. The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor’s employees rather than a third party. In calculating the APR, certain items have been specifically exempted from prepaid finance charges, as it pertains to the APR on real estate loans.
Charges Exempt WITHOUT ITEMIZATION from the Calculation of APR in Real Estate Transactions: 1. Application Fees An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals. The creditor is free to impose the fee in only certain of it’s loan programs, such as, mortgage loans. However, if the fee is to be excluded from the finance charge, it must be charged to all applicants, not just to applicants who are approved and who actually receive credit.
2. Fees or Premiums for Title Examination, Abstract of Title, Title Insurance, or similar purposes of establishing valid title to the property. 3. Property Surveys 4. Fees for Preparing Loan-Related Documents, such as Deeds, Mortgages, and Reconveyance, or Settlement documents. CAUTION: No fee can be charged for the preparation of the Reg Z Truth In Lending Disclosure or Good Faith Estimate or HUD Settlement Statement in a RESPA-related transaction.
5. Amounts Required to be Placed or Paid into an Escrow or Trustee Account for future payment of taxes, insurance, water, sewer and land rents. 6. Fees for Notarizing Deeds and Other Documents. 7. Property Appraisal Fees or fees for assessing the value or condition of the property if the service is performed prior to closing, including fees related to any pest infestation or flood hazard determination.
FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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8. Credit Report Fees, including not only the credit report but also the cost of verifying the information in the report or further credit investigation.
9. Seller’s Points, including any charges imposed by the creditor upon the non creditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller’s points are frequently involved in real estate transactions guaranteed or insured by governmental agencies, such as FHA and VA. A “commitment fee” paid by a non-creditor seller (such as a real estate developer) to the creditor should be treated as seller’s points. Buyer’s points (that is, points charged to the buyer by the creditor), however, are finance charges.
Other Seller Paid Amounts Mortgage insurance premiums and other charges are sometimes paid at or before consummation or settlement on a borrower’s behalf by a non-creditor seller. In such cases, the creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge. A creditor who gives disclosures before the payment has been made, should base them on the best information reasonably available, as called for by the estimate provisions of the regulation.
Charges Exempt WITH ITEMIZATION from the calculation of APR in real estate transactions: (If itemized and disclosed) 1. Taxes and Fees prescribed by law that actually are or will be paid to Public Officials for determining the existence of or for perfecting, or releasing, or satisfying a security interest. These may be totaled and disclosed as a total sum, or they may be itemized by the specific fees and taxes imposed. If a total sum is disclosed, a general term such as “security interest fees” or “filing fees” may be used. Most preprinted truth in lending disclosure forms have a blank on the form to fill in the amount of the filing fees. This should be filled in to keep these from affecting the finance charge and APR.
2. Property Insurance is exempt from the finance charge if it may be obtained from a person the consumer’s choice and that fact is disclosed. This disclosure can be provided on the “fed box” truth in lending disclosure or given in other documents.
3. Credit Life, Accident & Health Insurance Whether the insurance is in fact required or optional is a factual question. If the insurance is required, the premiums must be included in the finance charge, whether the insurance is purchased from the creditor or from a third party. If the only option the creditor gives the consumer is to purchase credit life insurance from the creditor or to FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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assign an existing life insurance policy, and the consumer purchases the credit life insurance, the premium must be included in the finance charge. (If the consumer assigns a preexisting policy instead, no premium is included in the finance charge).
Premiums for credit life, accident, health or loss of income may be excluded from the finance charge if the following conditions are met: a. The insurance is not required by the creditor and that fact is disclosed. b. The premium for the initial term of the insurance is disclosed. If the term of the insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under section 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage. Initial Term The initial term of insurance coverage determines the period for which a premium amount must be disclosed. In some cases the initial term is clear, for example, a property insurance policy on an automobile written for one year (even though the term of the credit transaction is four years) or a credit life insurance policy for the term of the credit transaction purchased by paying or financing a single premium. In other cases, however, it may not be clear what the initial term of the insurance is, for example, when the consumer agrees to pay a premium that is assessed periodically and the consumer is under no obligation to continue making the payments. In cases such as this, the cost disclosure may be made on the basis of a premium for one year of insurance coverage. The premium must be clearly labeled as being for one year. This disclosure can be separate from or included in the “fed box” disclosure. c. The consumer signs or initials an affirmative written request for the insurance after receiving the disclosures of the optional nature and cost of the insurance. A number of violations of these requirements have occurred because the institution failed to obtain the customer’s affirmative written request indicating that the insurance coverage was desired. Having the customer complete an application to the insurance company for the insurance is not a substitute for obtaining the customer’s affirmative written request for insurance. Under the following rule, it is clear that a creditor can write insurance in default situations or when the consumer requests insurance without being part of finance charges.
Insurance Written in Connection with the Transaction Insurance sold after consummation on closed-end credit transactions or after the opening of a plan in open-end credit transactions is not “written in connection with” the credit transaction if the insurance is written because of the consumer’s default (for FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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example, by failing to obtain or maintain required property insurance) or because the consumer requests insurance after consummation or the opening of a plan (although credit sale disclosures may be required for the insurance sold after consummation if it is financed).
Taxes Generally, a tax imposed by a state or other governmental body solely on a creditor, is a finance charge if the creditor separately imposes the charge on the consumer. In contrast, a tax is not a finance charge (even if it is collected by the creditor) if applicable law imposes the tax:
a. Solely on the consumer; b. On the creditor and the consumer jointly; or c. On the credit transaction, without indicating which party is liable for the tax; or d. On the creditor, if applicable law directs or authorizes the creditor to pass the tax on to the consumer. (For purposes of this section, if applicable law is silent as to passing on the tax, the law is deemed not to authorize passing it on.) For example, a stamp tax, property tax, intangible tax, or any other state or local tax imposed on the consumer or on the credit transaction, is not a finance charge even if the tax is collected by the creditor. In addition, a tax is not a finance charge if it is excluded from the finance charge by another provision of the regulation or commentary (for example, if the tax is imposed uniformly in cash and credit transactions).
Lump Sum Charges If a lump sum charged for several services includes a charge that is not excludable, a portion of the total shall be allocated to that service and included in the finance charge. However, a lump sum charged for conducting or attending a closing (for example, by a lawyer or title company) is excluded from the finance charge if the charge is primarily for services related to items which are not finance charges (for example, reviewing or completing documents), even if other incidental services such as explaining various documents or disbursing funds for the parties are performed. The entire charge is excluded even if a fee for the incidental services would be a finance charge if it were imposed separately.
Charges By Third Parties Charges imposed on the consumer by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the use of a third party as a condition of or incident to the extension of credit, even if the consumer can choose the third party or the creditor retains the charge. For example: i. The cost of required mortgage insurance, even if the consumer is allowed to choose the insurer. FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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ii. A mortgage broker fee, to the extent that the broker shares the fee with the creditor. It has been clarified by the 1995 TIL Act Amendments that the inclusion of mortgage broker fees in the finance charge, extends only to borrower paid fees, regardless of whether such fees are paid by the borrower directly to the broker or to the lender for delivery to the broker, or whether such fees are paid in cash or financed in the loan amount. Lender paid broker fees, including yield spread premiums and service release premiums will continue to be excluded from the finance charge.
Charges By Settlement Agents Charges imposed on the consumer by a settlement agent (such as an attorney, escrow agent or title company) are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge for those services is not otherwise excluded from the finance charge. For example, a fee for courier service charged by a settlement agent to send a document to the title company or some other party, is not a finance charge, provided that the creditor has not directly or indirectly required the use of a courier or retained the charge.
Required Closing Agent If the creditor requires the use of a closing agent, escrow agent, settlement agent, etc. the fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service (including performing the closing or settlement); or requires the imposition of the fee or retains a portion of the charge. Generally, we find that in cases where creditors are not performing their own settlement, the credit is requiring the use of a professional for the service.
Charges Assessed During the Loan Term Charges excluded from the finance charges are those imposed solely in connection with the initial decision to grant credit. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected. For example, a fee for one or more determinations during the loan term of the current tax lien status or flood insurance requirements is a finance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing, is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.
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Prepaid Finance Charges Prepaids in the calculation of APR in real estate transactions are actually FINANCE CHARGES WHICH ARE PREPAID. Prepaid finance charges mean any finance charge paid separately in cash or by check before or at consummation of the transaction, or withheld from the proceeds of the loan. Always remember to decide whether the cost was incurred due to this being a credit transaction. If it was, and is not exempt under the exemptions previously discussed, it is a finance charge and a part of the APR. The following are examples of finance charges. These are not all inclusive but rather, are examples of some commonly incurred items. 1. Odd Days Interest – Per Diem Interest – Prepaid Interest 2. Origination Fee 3. Discount Points 4. Administrative Fee 5. Processing Fee 6. Private Mortgage Insurance 7. FHA Mortgage Insurance Premium (If total MIP is collected up front in cash or added to the mortgage, it is a prepaid finance charge. Only the old monthly MIP type is not prepaid, when paid over the life of the loan.) 8. VA Funding Fee 9. Underwriting Fee 10. Tax Service Fee (Usually associated with secondary market loans.) 11. Inspection & Handling Fees for Staged Disbursements of Construction Loans 12. Charges for a Required Maintenance or Service Contract Imposed Only in a Credit Transaction 13. Filing or Recording Assignment to a Third Party Investor 14. Borrower Paid Mortgage Broker Fees 15. Escrow Waiver Fee 16. Certain Finance Charges - If the charge in a credit transaction exceeds the charge imposed in a comparable cash transaction, only the difference is a finance charge. In addition, if the amount is over and beyond what is bona fide and reasonable in amount, FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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it shall be deemed as a finance charge or at least the portion of it that is beyond reasonable. 17. Closing Fee or Settlement Fee – Regardless of who is making the charge. 18. Life of Loan Flood Monitoring Fee - (If this is a combination fee that combines an amount for the initial flood determination and the continued life of the loan flood monitoring, then the entire combination fee should be treated as a prepaid finance charge for the purpose of the APR calculation.)
Faulty Calculation Tools There is a common misconception in the industry that if APR was disclosed due to a faulty calculation tool this will provide the institution with some amount of defense against Civil and Criminal actions. Regardless of the calculation tool being used, if the APR was disclosed low, the institution is required to make the necessary adjustments to ensure that the customer is not required to pay an amount in excess of the charge disclosed, or the dollar equivalent of the APR disclosed, whichever is lower. A redisclosure to the customer of the corrected APR or other violations without adjustment to the customer's account does not relieve the possibility of civil liability or an enforcement agency reimbursement order. The overstatement of the APR or finance charge is not a violation. Tolerances for Accuracy in Disclosures "Understated APR" means a disclosed APR that is understated by more than the reimbursement tolerances provided under the Truth In Lending Act and Regulation Z. "Understated Finance Charge" means a disclosed finance charge which, when increased by the greater of the finance charge dollar tolerance or a dollar tolerance that is generated by the corresponding APR reimbursement tolerance, is less than the finance charge calculated under the act. In Regular Transactions, the Annual Percentage Rate is considered accurate if it varies plus or minus, not more than one-eighth of one percentage point (12.5 bases points) from the actual annual percentage rate. Furthermore, there is a tolerance of $100 for the Finance Charge for closed-end credit transactions secured by real estate or a dwelling. In Irregular Transactions, the Annual Percentage Rate is considered accurate if it varies in either direction, by not more than ¼ of one percentage point (25 bases points) from the actual annual percentage rate. Again, there is a tolerance of $100 for the Finance Charge for closed-end credit transactions secured by real estate or a dwelling.
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Resources: Electronic Code of Federal Regulations – eCFR 12 CFR – Regulation Z Truth in Lending Section 226.4 http://ecfr.gpoaccess.gov/cgi/t/text/textidx?c=ecfr&sid=d6f230d11dc637d532fc756316f611c8&rgn=div5&view=text&node= 12:3.0.1.1.7&idno=12#12:3.0.1.1.7.1.8.4
Check Your Calculation Tool – Download it – it’s free! www.occ.treas.gov/aprwin
Kimberly Lundquist FIC Conferences, Inc. 1150 N Loop 1604 W Suite 108-603 San Antonio, TX 78248 Tel 210.493.1761 Fax 210.493.9659 [email protected] www.ficconferences.com
FIC Regulatory Education Alliance / Copyright ©FIC Conferences, Inc. – Sep 7, 2011 – Week 6
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