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Making Regs and Products Work
Learning Truth in Lending's definitions of finance is an essential exercise for a compliance manager or auditor. When auditing disclosures for compliance it is essential to be able to recognize charges that are finance charges and then use that conclusion to test the accuracy of the calculations and disclosures.
The problem in this process is that the compliance auditor works with what is in the file. There are now a number of charges, such as those paid to lender-required third parties and mortgage brokers, that are finance charges. If the loan officer did not recognize these fees as finance charges, they may not appear in the file. In that case, your audit may not find them.
How can you be certain that all finance charges have been accurately captured? Sit down with several loan officers (one at a time) and ask them about the loan application process and all fees that might be paid by the customer.
Use your discussions with lenders to make a comprehensive list of all fees that may be charged to loan customers. Probe to find out about third party fees, including fees the customer may pay directly to third parties, and fees the customer may pay through the bank to third parties. Find out whether the bank ever retains a portion of a third party fee.
When you have compiled the list, review it and place each fee into one of three categories: "Always a finance charge", "Never a finance charge", and "Finance charge if a condition is met."
Make a copy of the list for everyone in lending and use it as the basis for a brief course on finance charges. Then advise your lenders that they should review this list each time they close a loan as a control tool to be sure they have identified all finance charges.
When you audit, look for these charges. Also carefully review HUD-1s and HUD-1As to see how the charges are reflected.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 3, 3/97
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