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#1247109 - 09/09/09 02:48 PM
Interest During Rescission Period
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Gold Star
Joined: Jun 2008
Posts: 287
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Can you charge interest during a rescission period?
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#1247125 - 09/09/09 03:00 PM
Re: Interest During Rescission Period
Random
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Power Poster
Joined: Nov 2000
Posts: 2,701
PA
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Yes - if it's not prohibited by your state law.
From the OSC 226.23(c)
3. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited, such as by state law, the creditor may, for example:
• Prepare the loan check.
• Perfect the security interest.
• Prepare to discount or assign the contract to a third party.
• Accrue finance charges during the delay period.
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#1247129 - 09/09/09 03:03 PM
Re: Interest During Rescission Period
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Power Poster
Joined: Aug 2001
Posts: 7,351
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Charge interest for funds your borrower does not have use of? I've had LO's argue that the funds are "committed" and therefore no longer available to lend to others. Therefore, the Bank has the right to charge the borrower for the committed funds. Our legal counsel said "absolutely not" and that under state law the practice would be considered usurious.
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#1247369 - 09/09/09 06:03 PM
Re: Interest During Rescission Period
David Dickinson
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Joined: Aug 2001
Posts: 7,351
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Unless it was a jumbo loan at a high rate, three days isn't much anyway.....for example $50,000 at 8% would amount to about $33.....big deal.
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The more you sweat in training, the less you bleed in battle.......
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#1247687 - 09/10/09 01:27 AM
Re: Interest During Rescission Period
swiggles
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Joined: Oct 2000
Posts: 10,179
Toano, VA
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It's an abusive practice and the regulators can use their UDAP rules to stop it any time they wish. The "little bit pregnant" argument won't cut it with customers. They're being gouged and the dollar amount won't matter if they realize what's happening.
I once had a customer go ballistic over a penny difference in the interest we paid on identical husband/wife CDs. It seems our accrual software occasionally rounded the "wrong way" in order to avoid accumulating rounding differences which could be a target for theft by the programmer. Unfortunately, the logic chose one of these matched CDs for this special procedure. No matter how hard we tried to explain what happened, the customer was convinced there was foul play.
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#1248520 - 09/11/09 02:26 AM
Re: Interest During Rescission Period
David Dickinson
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Joined: Oct 2000
Posts: 10,179
Toano, VA
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I did not say the practice is illegal (although some states may restrict or prohibit it.) Also, I didn't say that TILA had anything to do with the practice of charging interest on funds that have not been advanced.
Just because something is legal doesn't guarantee it's not abusive. UDAP is so broad that ANYTHING can be seen as unfair or deceptive and the agencies pointed out that they could reach such a conclusion even though a practice is clearly legal.
I consider it unethical and abusive to charge customers without providing a service or product. How would you react if your gas station started the pump running with the cost of 3 gallons of gas already on the meter?
You are right that this is a management decision. Since there are no governing regulations, it is a matter of business ethics.
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#1249365 - 09/13/09 11:28 AM
Re: Interest During Rescission Period
David Dickinson
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Joined: Oct 2000
Posts: 10,179
Toano, VA
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I see no endorsement in Regulation Z for charging interest on funds that have not been advanced. Unless I'm forgetting comments elsewhere in the OSC, this question turns on the following: 3. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited, such as by state law, the creditor may, for example: ... • Accrue finance charges during the delay period.
This is a "no contest" statement, not permission or an endorsement of any practice. All this says is that the scope of Regulation Z does not prevent creditors from engaging in the practice of accruing FCs during the rescission period. This is the Fed's way of telling us that Reg. Z does not stand in the way because Congress did not choose to address this practice in the TILA. I don't consider a "no contest" statement to be a "governing regulation" or permissive.
Reading permission out of this comment is a stretch. The comment isn't limited to interest and it isn't specific to the question we are discussing. The comment has meaning, but in no way does it grant permission for unearned interest charges. As we all know, the Finance Charge includes a wide range of fees associated with loan origination. Pursuant to the ROR rules, none of these up-front FCs may be collected until the rescission period has expired--but this comment says that a lender may book them to an accrual account until they can be collected.
Even if Regulation Z was permissive, there could be problems on the UDAP side. From FIL 26-2004:
Relationship to Other Laws ...there may be circumstances in which an act or practice violates section 5 of the FTC Act even though the institution is in technical compliance with other applicable laws, such as consumer protection and fair lending laws.
Turning to Section 8 of RESPA for an example of the Congressional view of unearned charges, we find the harshest of penalties: one year in prison and a $10,000 fine. Conceptually, what's the difference between bogus fees and bogus "interest"? If a lender does nothing and provides nothing of value to justify 3 days' of interest it all looks the same to me.
I'm not making up rules, merely taking a cautious view of the ones that exist.
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...gone fishing.
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#1249459 - 09/14/09 01:44 PM
Re: Interest During Rescission Period
Richard Insley
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Diamond Poster
Joined: Nov 2005
Posts: 1,032
Midwest
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So in the case of a refinance within your own institution-which 90% of ours are, what day would you stop collecting interest on the mortgage in place which is being refinanced, Mr. Insley? Would you continue to charge what is likely the higher rate for the three days on the mortgage you are refinancing? This too could be considered unethical- We're darned if we do and darned if we don't!
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#1250078 - 09/15/09 02:49 AM
Re: Interest During Rescission Period
rlcarey
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10K Club
Joined: Nov 2000
Posts: 18,762
Central City, NE
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The first link Randy provides is about North Carolina law.
From the 2nd court case Randy provided: 9. A plain reading of the relevant language indicates that Wixom is incorrect. These two provisions concern separate issues and are not required to be read in conjunction. Wixom is attempting to create a limitation that simply does not exist. The accrual of finance charges applies to all funds, not merely to those placed in escrow, and is permissible so long as not otherwise prohibited.
10. Because we have concluded that Regulation Z clearly permits interest to be charged on all funds during the rescission period unless prohibited by state law or other means, we must now determine whether there exists in Ohio any law that would prohibit this practice.
13. We conclude that a contract provision allowing for interest to be charged during a rescission period is commercially reasonable and is not substantively unconscionable.
14. Further, the contract had already been signed and Union Savings Bank had already committed to refinancing Wixom’s mortgage. It was commercially reasonable for the bank to charge interest on funds committed to and designated for Wixom.
21. The trial court correctly granted summary judgment to Union Savings Bank. There is no applicable law or regulation that prohibits the accrual of interest before the disbursement of loan proceeds when a mortgage is refinanced, and a contract term permitting such accrual is not unconscionable. Because there existed no genuine issue of material fact and Union Savings Bank was entitled to judgment as a matter of law, we affirm the trial court’s judgment.
23. Regulation Z allows just what happened here, unless state law directs otherwise. The Ohio General Assembly, in its wisdom, has decided not to intervene. That is the end of the case, in my judgment.
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#1250080 - 09/15/09 03:01 AM
Re: Interest During Rescission Period
David Dickinson
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Joined: Jul 2001
Posts: 83,227
Galveston, TX
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David - I was talking about the dissenting opinion from the presiding judge on the appellate court. That is what I found interesting and dangerous. This case was not a slam dunk or unanimous and the environment has shifted even more against banks and for consumers in the last few years - even though judges are suppose to decide based on the law. Either way it most likely cost both of these banks more in legal fees than they ever collected.
GORMAN, Presiding Judge, dissenting.
24. Something seems terribly wrong if a bank can require payment of interest by its customers on a loan before the bank disburses the money. But Union Savings Bank, by charging interest during the three-day rescission period required by Regulation Z of the Federal Truth in Lending Act, is doing exactly that to borrowers who refinance their note and mortgage. In my opinion, this practice is substantively and procedurally unconscionable.
25. The practice of allowing the lender to accrue finance charges during the rescission period is not authorized if it is “otherwise prohibited, such as by state law.” See Part 226, Supplement 1, Title 12, C.F.R. The majority correctly observes that unlike small loans and second mortgages, Ohio has no statutory prohibition against collecting interest before disbursing the loan funds. Furthermore, R.C. Chapter 1161, governing state savings banks, is silent.
26. However, the phrase in Part 226, Supplement 1, Title 12, C.F.R. “otherwise prohibited, such as by state law” is not limited to legislative enactments. The equitable defense of unconscionability has long been recognized under Ohio’s common law. See Collins v. Click Camera & Video, Inc., 86 Ohio App.3d at 834-835, 621 N.E.2d 1294. Surely, the object of Regulation Z is not to turn a blind eye to a banking practice that is so unconscionable that it undermines fair standards and the integrity of the banking industry.
27. What is commercially reasonable about the bank’s practice that generates two streams of interest on a single sum during the three-day rescission period? The bank’s interpretation, allowing it to earn interest by investing the sum it retains for three days while simultaneously charging interest to the customer, is at odds with the purpose of the Truth in Lending Act, which is to protect consumers. See Section 226.1(b), Title 12, C.F.R. Had the bank placed the sum in a non-interestbearing escrow account during the rescission period, arguably there would have been justification for charging interest to the borrower as a finance charge under Section 226, Title 12, C.F.R., Supplement 1, Section 23(c)(3). See, generally, Forgus v. First Fed. S. & L. Assn. of Lakewood (Dec. 6, 1979), 8th Dist. No. 39664.
28. Since the borrower does not routinely learn of the terms of the bank’s refinancing agreement until the closing, this one-sided situation places the borrower in an unequal bargaining position with the bank. The majority’s conclusion that the borrower can “look elsewhere for a bank that could provide a similar loan” amounts to nothing more than speculation. How realistic is it for the borrower to obtain a loan from another lender with an identical interest rate and the same points during the three-day rescission period?
29. The majority also justifies the interest charged by the bank over the three-day period as not an “overly burdensome amount of money” to the consumer. The focus of an unconscionability analysis, however, is on the bank’s practices and not their effect upon the consumer. In the context of sheer numbers, the advantage to the bank can be significant when a period of steadily declining interest rates, as has occurred over the last five years, provides incentive for a large number of the bank’s customers to refinance their mortgages for a better interest rate.
30. I would reverse the trial court’s order granting summary judgment in favor of the bank and remand this case to the trial court for further proceedings.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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#1250110 - 09/15/09 12:31 PM
Re: Interest During Rescission Period
rlcarey
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Diamond Poster
Joined: Jan 2003
Posts: 1,046
Dallas, TX
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So, although the practice may be legal (unless "otherwise prohibited"), it does not appear to be prudent based on the potential negatives.
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#1250165 - 09/15/09 02:00 PM
Re: Interest During Rescission Period
M Cockrell
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10K Club
Joined: Jul 2003
Posts: 17,395
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While it may not be prudent based on case law that is popping up, it is, at least in the six states I work in, SOP. All the states' laws allow it and the banks collect it.
As a side comment, IF I were a lawyer defending a bank in this instance, I might try the argument that the ROR was mandated by law to protect the customer. Having the customer pay for the bank to hold money in suspense while they decide whether or not to proceed with the loan is not an unfair practice, imho. Might this be better served by a 'holding fee' instead of daily interest accrual over the three days?
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#1250826 - 09/16/09 01:58 PM
Re: Interest During Rescission Period
David Dickinson
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10K Club
Joined: Oct 2000
Posts: 10,179
Toano, VA
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Sorry for the delayed response, David, I had to go fishing the past two days. Unlike other posters who have studied this more than I have, my concern isn't based on actual cases, but rather the analysis of the fairness of the practice from the consumer's point of view. I've always taken conservative positions during the planning stage of a project or product. When a gray issue turns into a black eye for someone, my goal was that it be someone other than my bank. I've always seen "double interest" along the lines of the dissenting opinion that Randy cited. Until this discussion, I hadn't considered the parallel between Section 8 and "double interest", but that pushes me even further away from the practice. Biz- The new terms cannot go into effect until the ROR period expires, so interest should continue to run at the rate provided in the old note until the end of the rescission period. Think about what you'd have to do if you moved to the new pricing and then the borrower rescinded the new agreement!
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#1251767 - 09/17/09 11:33 AM
Re: Interest During Rescission Period
David Dickinson
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10K Club
Joined: Oct 2000
Posts: 10,179
Toano, VA
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Hope you had a great time fishing Richard. Monday's destination was scenic, but slow. Tuesday's lake was fantastic! My buddy & I kept 45 crappies (10" min.) and 11 nice-size white perch. We guesstimated our total for the day at 250 to 300 fish. The water's still hot & the level's down, so this lake will get better as the weather cools.
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#1252080 - 09/17/09 03:54 PM
Re: Interest During Rescission Period
WHEDA
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10K Club
Joined: Oct 2000
Posts: 10,179
Toano, VA
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Do these institutions accrue interest on HELOC funds that are "committed" but haven't been drawn down Do these institutions pay interest on float on the deposit side?
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