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#1374190 - 04/14/10 07:50 PM Prepaid charges on the TIL
Soccer Offline
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On a Home Equity loan should normal pre-paid charges that are NOT paid by the borrower affect the amount financed on the TIL and inflate the APR?
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#1374874 - 04/15/10 07:34 PM Re: Prepaid charges on the TIL Soccer
laurianne5 Offline
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who is paying the fees? Are they paid by the lender? Fees are not required to be disclosed as finance charges if the are paid by the lender and not imposed on the borrower.
Prepaid finance charges are paid to the lender or third party in cash or by check before or at settlement or consummation of the transaction, or withheld from proceeds of credit. If the fee is paid by lender or seller it was never charged to the borrower making it excludable in your finance charge.
Your APR should not increase if you are not including the fees in the TIL calc - if it has increased you may have an issue with payment streams or insurance if applicable to this transaction

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#1375437 - 04/16/10 05:22 PM Re: Prepaid charges on the TIL laurianne5
Richard Insley Offline
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Originally Posted By: laurianne5
who is paying the fees? ... If the fee is paid by lender or seller it was never charged to the borrower making it excludable in your finance charge.

The controlling factor is who was required by the credit contract to pay the fee, not who actually paid the fee. If the lender agrees to absorb fees that would ordinarily be charged, these fees are out of the FC and APR. This is because the lender is amending the terms of the contract between the parties--the basis for all closed-end Reg. Z disclosures.

If the fees are paid by the seller or any other entity who is not a party to the credit agreement(s), however, you have to look for some type of agreement whereby the lender agrees to collect the fees from someone other than the borrower. Side agreements between buyer and seller are recognized by Reg. Z only when the lender is a party to these agreements.
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#1375537 - 04/16/10 06:08 PM Re: Prepaid charges on the TIL Richard Insley
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So Richard. If you have a sales contract which the lender is not party too, other than accepting the contract as is...does that actually mean that if the seller is paying all closing costs...you would need to count the charges considered ppfc even if paid by the seller?

Just wanting to be clear here...and thanks!
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#1376001 - 04/17/10 12:28 PM Re: Prepaid charges on the TIL RR Joker
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After reviewing Section 226.17(c)(1) {The disclosures shall reflect the terms of the legal obligation between the parties.}, the OSC makes more sense and provides the answers you need:
Section 226.4(c)(5)
1. Seller's points. The seller's points mentioned in 226.4(c)(5) include any charges imposed by the creditor upon the non-creditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A "commitment fee" paid by a non-creditor seller (such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges.

2. Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a noncreditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available.


The pivotal question is always - what does the credit contract say? Side agreements have no bearing on Reg. Z disclosures unless they become part of the credit contract in one way or another.

Notice how the OSC handles seller's points. To be excluded from the FC, these points must be "imposed by the creditor upon the non-creditor seller." Imposition occurs by contract--the seller has entered into a contract with the lender, agreeing to pay points as an inducement for the lender to provide credit to the buyer. Unless that contract is amended in such a way that the borrower becomes legally responsibility for paying these points, they are excluded from the FC. Again, remember that side agreements between the seller an buyer have no impact on the Reg. Z disclosures. This would include a seller/buyer agreement that the sale price would be jacked up enough to cover the extra cash the seller will need to pay the points.

"Other seller-paid amounts" follow the same Reg. Z coverage rules. If the credit contract says the borrower is responsible for various fees, then these fees are included in the Reg. Z disclosures (as applicable.) Even if the seller (or anyone else, for that matter) steps up and agrees (side agreement with the borrower, only) to cover the cost of the fees, Reg. Z requires the fees to be included in the disclosures. Three-party agreements are different. By adding the lender to the agreement to transfer responsibility for payment of the fees in question, you have effectively amended the credit agreement. Now that the legal obligation between the parties calls for the fees to be paid by someone other than the borrower, "the consumer is not legally bound to the creditor for the charge" and the fees are excluded from the disclosures.

Remember - the real question is not "who pays the fees", but rather, "who's contractually liable to pay the fees."
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#1394617 - 05/21/10 03:42 PM Re: Prepaid charges on the TIL Richard Insley
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To tag back on to this issue. If you have a tolerance cure on something that is a FC. Techncially, you had contracted for the borrower to pay, say a recording fee, and there was a quote error on the GFE which created a lender paid tolerance cure. Since the intention was for them to pay it, but we end up paying it...I'm thinking, based on the above, it would still be a FC...is this correct?
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#1394940 - 05/21/10 10:20 PM Re: Prepaid charges on the TIL RR Joker
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Since the lender is a primary party, the act of waiving a mis-disclosed fee is an amendment to the agreement between the parties. If the charge is waived before consummation, it's not a FC. Post-consummation waivers do not change the fee from a FC to a non-FC--leaving you with a violation. At this stage of the relationship, a Section 130(b) cure is the only way to eliminate this violation.
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