Truth in Lending: Changes To Regulation Z
Note to the Reader: This article identifies the key features of the changes to Regulation Z. In our next issue, we will provide au in-depth analysis and compliance advice on these rules.
On September 16, 1996, the Federal Reserve Board issued final rules to amend Regulation Z and implement the Truth in Lending Act Amendments of 1995. That act made changes to the definition of finance charge and to tolerances for under disclosure of the finance charge and the APR. In addition to issuing regulations to implement provisions of the 1995 act, the FRB has issued a final rule on treatment of fees for debt cancellation agreements and similar alternatives to credit insurance.
Charges imposed by third parties
Inclusion or exclusion of third party fees will depend on two facts: whether the creditor required the service, and whether the creditor retained any portion of the fee. If the creditor required the service, such as a courier delivery, that service is a finance charge. If the creditor retains any portion of a fee imposed by a third party, the entire fee becomes a finance charge and must be included in the calculations.
Closing agent charges
The revised regulation clarifies treatment of closing agent charges. As with other fees, if the creditor requires the service for which the fee is imposed or retains any portion of the charge, it is a finance charge. However, charges incurred or imposed by the closing agent that are not required by the creditor would not be a finance charge. Thus, a fee for the use of a courier when the creditor did not require it or did not retain any portion of the fee is not a finance charge.
Mortgage broker fees
The 1995 act brought in a significant change for the treatment of mortgage broker fees. Beginning September 30, 1996, fees paid by a consumer to a mortgage broker are a finance charge. It does not make any difference whether the creditor required the use of the broker or the consumer had already retained the services of the broker before applying to the bank for a mortgage. As a practical matter, loan originators will have to ask each customer whether they used a mortgage broker and what the fee was so that it can be included in the finance charge. We strongly recommend that each loan contain documentation showing that the loan originator took this step.
Taxes on security instruments
The revisions exempt from the finance charge taxes paid to file a security instrument. These charges are now exempted from the finance charge without regard to when the fee is paid. As is the case for other charges to perfect security, these taxes or fees must be itemized and disclosed in order to be exempted from the finance charge.
The revisions to the regulation connect the tolerances for finance charge and APR disclosures. Under the new rule, if the APR disclosure error is caused by a finance charge error that is within the tolerance for finance charge errors, that tolerance will be reflected in the tolerance for the APR calculations.
Debt cancellation agreements
Debt cancellation agreements differ from credit insurance but serve a similar purpose. There has been confusion about how to treat fees for debt cancellation and GAP agreements. States vary in whether these agreements constitute "insurance. In this rulemaking, the FRB amends Regulation Z to treat fees for debt cancellation agreements and GAP agreements in the same way that the regulation treats credit insurance. If the service is required, it is a finance charge. However, if it is voluntary and this fact and the cost are properly disclosed, the fees may be excluded from the finance charge. This rule finally resolves a very troublesome problem and makes compliance very attainable. Thank you, FRB!
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96
First published on 09/01/1996