Option 1: The member pays a loan “change in terms” fee and we reduce the interest rate. All other aspects of the loan stay the same, but due to the decreased interest, the loan ultimately ends up paying off earlier than the original term listed on the note.

Option 2: The member pays a loan “change in terms” fee and we essentially refinance the loan. We pay off the existing obligation, reduce the interest rate, reduce the term, and can add new money if desired by the customer.

Either way, we charge the fee. BUT we do not include the fee in the APR. Both of these scenarios are for closed end loans. We do allow a similar scenario for an open-end loan where we would reduce the interest rate only (that is the only option unless they want to do a refi) (this is only available on our home equity).

My question is this: In either of the options, are we required to calculate the change in terms fee into the APR? Must we disclose the loan change in terms fee in our initial disclosures/note if it is something the member could potentially do?

We are a state chartered credit union and we do not have an APR cap in our state.

Any fee, no matter what it's called, that buys down a closed-end consumer credit interest rate is a FC which must show up in the APR calculation. I have no idea how the current rules would work for open-end accounts.

For the closed-end loans, Option 1 appears to be a "subsequent event" that occurs without replacement of the note. Sections 226.17(e) and .20(a) tell us that the fee has no effect on the disclosures already given and does not trigger new ones. Option 2 is a refinance (by virtue of satisfying the old note and replacing it with a new one), so new disclosures are required and the fee must be reflected in both the FC and APR. (Let's hope you haven't done any transactions like this yet.)

If you are doing this (either option) prior to close (rate buy down) then yes the fee must be included.

It sounds like you are making the option available after closing (not automatic) so it would be a subsequent event and is not included in the initial disclosed APR. If you are talking about a loan modification (no replacement of note) which does not require redisclosure unless changing nature of loan (changing from fixed to ARM).

Please, note that if you are doing additional advance, (including fees) that you will need to give an ROR on the additional amount.

So on a closed-end, as long as it is done after the closing of the loan (most of the time a few years in), then we are okay?

For an open-end HE, am I understanding that the fee would be considered an advance so we would need to complete a new ROR?

Option 1 should cause no TIL trouble. Option 2 is a discloseable refi.

Thank you! Thank you! Thank you!