Application Fees

by Mary Beth Guard

Are the loan applications flooding in, now that interest rates have fallen? It's a good time to take a look at how you're handling application fees in order to ensure you're in compliance.

Start by recognizing that consumer loans are the ones to be concerned about. On commercial loans there are generally no laws that set limits on application fees and you are therefore free to charge whatever the applicant agrees to pay.

Consumer loans are another story, however. There are two issues with respect to application fees on consumer loans:

Can you charge an application fee?
Must you treat the application fee as a finance charge?

First, take a look at whether the loan application is covered by Regulation Z. Is the application for credit:

from an individual?
primarily for a personal, family or household purpose? and
either in an amount not exceeding $25,000 or, if it does exceed that amount, to be secured by real estate or the consumer's principal dwelling?.

If the answer to each of these questions is "yes", the application will be covered by Regulation Z.

Note, however, that Regulation Z is a disclosure regulation. It does not specify what fees you may or may not charge. It simply designates how fees must be disclosed to the consumer, assuming it is legal to charge them under whatever law is applicable.

That means the two sources of guidance for whether you may charge an application fee on a consumer loan are l) state law; and 2) the contract with your customer.

Oklahoma law does not prohibit the charging of an application fee, nor does it specifically delineate a limit on the dollar amount. If the loan application is one which is subject to Oklahoma's Uniform Consumer Credit Code (U3C), Section 3-202 of the U3C provides, in subpart (1)(d), that a lender may contract for and receive "a charge for processing the debtor's application for credit, including but not limited to costs of services such as credit reports, credit investigations, appraisals and fees for preparation of loan-related documents." If the loan is not subject to the U3C, there is no guiding statute and you simply rely on your contract with your customer to provide authority for the fee.

So, under Oklahoma law, if the customer agrees to pay it, you can charge it! (We'll skip the lecture about the fee being reasonable for now.)

On to the second issue: how to properly disclose the fee. The big question is whether the fee must be treated as a finance charge or not. If it is part of the finance charge, it will adversely impact the APR. Fortunately, Regulation Z provides a way to exclude it. Section 226.4(c)(1) of Reg Z provides that you can exclude from the finance charge application fees charged to all applicants for credit, whether or not credit is actually extended.

Let's examine that provision. It means that if you charge an application fee to all applicants for credit, you can exclude the fee from the finance charge. On the other hand, if you only charge the fee to successful applicants - i.e., those you extend credit to, you cannot exclude the fee from the finance charge.

The Commentary to this part of Regulation Z states that "[a]n application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. * * * The creditor is free to impose the fee in only certain of its loan programs, such as mortgage loans, However, if the fee is to be excluded from the finance charge under Sec. 226.4(c)(1), it must be charged to all applicants, not just to applicants who are approved or who actually receive credit."

This addresses one of the most commonly asked questions. Some bankers read the Reg too literally, and when they see it says you can "exclude from the finance charge application fees charged to all applicants for credit, whether or not credit is actually extended", they interpret that to mean that you must impose the application fee to every applicant on every type of loan you offer. The Commentary makes clear that you have the flexibility to vary your fee structure among your different loan offerings. You could choose to charge a fee on car loan, for example, and not charge a fee on mobile home loans. As long as you treat all applicants the same who apply for a certain type of loan, and impose the fee regardless of whether the application is successful, you can exclude the fee from the finance charge.

Originally appeared in the November 2001 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 3/25/02