Compliance Update with Amy K

​A reminder to disclose and calculate loan fees correctly, no matter what you call them. Reg Z defines “finance charge” as the cost of consumer credit as a dollar amount. 

by Amy Kleinschmit, Chief Compliance Officer

Loan Fees – a reminder to disclose and calculate correctly.
In the recent supervisory priorities letter from the National Credit Union Administration (NCUA), one of the consumer financial protection priorities that will be focused on includes the Truth in Lending Act. In Letter to Credit Union 23-CU-01, the NCUA goes on to indicate that examiners will evaluate compliance with Truth in Lending Act requirements and disclosures related to auto lending for certain credit unions that have experienced high auto loan growth over the past year.

This article is a reminder regarding the definition of finance charge, in that if the loan fee/charge – no matter what you call it – meets the definition of “finance charge,” it needs to be disclosed and calculated correctly.

Regulation Z, which implements the Truth In Lending Act, defines “finance charge” as the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.

Some examples of finance charges include:

• Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.
• Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.
• Points, loan fees, assumption fees, finder's fees, and similar charges.
• Appraisal, investigation, and credit report fees.
• Premiums or other charges for any guarantee or insurance protecting the creditor against the consumer's default or other credit loss.

Remember, the service for which a charge is incurred, not the name of the service, determines if it is a finance charge. For example, calling a loan origination fee a “processing” fee does not change the nature of the charge; it would still be a finance charge.

The term “finance charge” does not include any charge of a type payable in a comparable cash transaction. Charges imposed uniformly in cash and credit transactions are not finance charges. For example, the following items are not finance charges: taxes, license fees, or registration fees paid by both cash and credit customers, or discounts that are available to cash and credit customers, such as quantity discounts.

The fee that is frequently asked about, and whether or not it is finance charge, is an application fee (or whatever you want to call the fee that is charged when you take a loan application). Regulation Z does exclude several categories of fees from the definition of finance charge, one example is an application fee. 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. Regulation Z directs that if the application fee is to be excluded from the finance charge, it must be charged to all applicants, not just to applicants who are approved or who actually receive credit.

So, in other words, to be excluded from the finance charge, the application fee/fee for processing loan applications must be collected from every applicant, even the applicants when the loan is denied. If the credit union only collects the fee from approved loan applications, then it will be a finance charge and needs to be properly disclosed and calculated.

There are additional exceptions from the definition of “finance charge,” such as those under the category of real-estate related fees. §1026.4(c)(7). The following fees in a transaction secured by real property or in a residential mortgage transaction are excluded, if the fees are bona fide and reasonable in amount:

• Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
• Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.
• Notary and credit-report fees.
• Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations.
• Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.

Real estate or residential mortgage transaction charges noted above are those charges 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.

In a prior Consumer Compliance Outlook newsletter, the author took a deeper look into “Understanding Finance Charges for Closed-end Credit” which is a good article to review this topic in greater detail. The article also included a Finance Charge Chart that is a nice high-level visual for understanding what charges are, are not, or sometimes are included as a finance charge. Find that article and table here.

As always, DakCU members may contact Amy Kleinschmit with any compliance related questions.