Truth In Lending (Regulation Z) Changes -- Broker Fees and Escrow Fees
by David Sands
November 1996
The Federal Reserve Board (FRB) recently issued final amendments to the Regulation Z (Truth In Lending). These amendments will have important consequences on the manner in which creditors prepare their Truth In Lending Disclosure Statements. Among the most important changes to result from these amendments will be the following:
Escrow Fees: The FRB has changed its previously stated oral interpretation of fees charged by escrow and closing agents and concluded that these fees should be included in the calculation of the finance charge. This is a significant change from the prior interpretations of Regulation Z and will have a significant impact on both the calculation of the finance charge and the calculation of the eight point (points and fees test) under the provisions of Section 226.32 of Regulation Z.
Mortgage Broker Fees: The changes made clear that on and after September 30, 1996, all fees charged by a mortgage broker and paid directly and by the consumer must be included in the finance charge. However, a fee charged by a mortgage broker may be excluded from the finance charge if it is of the type of fees that would also be excluded when it is charged by the creditor (such as appraisal review fees or document preparation fees). The new rules specifically provide that there is no tolerance for an understatement of the finance charge if the understatement is due to a failure to properly include the broker fee in the calculation of the finance charge.
Appraisal and Inspection Fees: The changes make clear that fees related to property inspections prior to closing for items such as pest inspections, flood determinations or appraisals may be excluded from the finance charge. However, this exclusion would not apply to fees for inspections or services performed periodically during the term of the loan (such as HUD inspection fees)
Prepaid or Per Diem Interest: The changes made by the FRB incorporate amendments made to Truth In Lending in 1995 by providing that pre-paid interest will be deemed accurate if the disclosure is based upon information known to the creditor at the time the disclosure is prepared, even if the actual charge at consummation differs. The FRB also makes clear in the new rules that as long as the disclosure of pre-paid interest was based upon information known to the creditor at the time the disclosure is prepared, the fact that the difference between the estimated and final pre-paid interest causes the APR to vary by more than 1/8th of 1% (existing tolerance for APR errors) or is greater than $100 (the existing tolerance for errors in the finance charge) will not affect the availability of this exemption.
Estimates: The FRB restates its positions that in order to take advantage of any of the tolerance rules provided in Regulation Z, any charge which is estimated must be so designated as a "estimate." Accordingly, for example, if a creditor wishes to rely upon the tolerance for pre-paid interest, and the calculation of pre-paid interest including the APR, the total of payments, the finance charge and the payment schedule must be noted or designated as estimates.
APR and Finance Charge Errors: The new rule makes clear that the finance charge rule will be deemed accurate if it is understated by $100 or less or if it is overstated. This new tolerance applies both to the disclosed finance charge and to any disclosure affected by the finance charge including the APR. As a result, even if the disclosed APR differs from the actual APR by more than 1/8th of 1%, if the dollar amount of that difference is within the new finance charge tolerance (i.e., understated by $100 or less or overstated), the APR will be deemed to be correct.
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