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#1744809 - 09/27/12 04:38 PM Seller Paid Finance Charges and the APR
Many Hats Offline
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If the Bank knows at the time of application that pretty much all of the closing costs and prepaid finance charges will be paid by the seller, is it permissible to exclude those from the finance charge for purposes of calculating the APR? Or, should all the prepaid finance charges be included in the APR calculation regardless of who’s paying them?

I found the following in Reg Z:

Official Board Commentary
Section 226.4—Finance Charge
Paragraph 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 non creditor 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.

So the way I interpret this to mean that they should be excluded. The “…if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge” confuses me a bit though. What does this mean exactly?

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#1744810 - 09/27/12 04:41 PM Re: Seller Paid Finance Charges and the APR Many Hats
Rocky P Offline
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"So the way I interpret this to mean that they should be excluded. The “…if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge” confuses me a bit though. What does this mean exactly?"


It must be in writing that the seller will pay. If it is verbal the seller is not legally bound.
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#1744822 - 09/27/12 04:53 PM Re: Seller Paid Finance Charges and the APR Many Hats
Many Hats Offline
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Okay, so essentially, if a bank obtains a copy of the purchase agreement and it specifically states that the seller will pay $2000 in closing costs (and it just do happens that the finance charges are apprx that amount), then a bank would be safe to prepare a TIL EXCLUDING the finance charges.

But, if the Bank does not have a copy of the purchase agreement and is told that the seller will be paying some costs (but they do not know precisely what or how much), then they should INCLUDE them in the APR.

Am I understanding it right?

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#1744831 - 09/27/12 05:05 PM Re: Seller Paid Finance Charges and the APR Many Hats
Rocky P Offline
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IMHO, I would not exclude the PPFC's on that statement.

Since closing costs could be finance charges or not, it might be less subject to interpretation if the seller would agree in the contract to "Loan Origination fees (or similar prepaid finance charges), not to exceed $2,000.")

I do not believe that the bank could exclude a generic amount which could be applied to either prepaid finance or other charges.
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#1744836 - 09/27/12 05:08 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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It must be in writing that the seller will pay.

Only if the "in writing" obligates the seller to the creditor for paying the fees, otherwise the buyer is still obligated and paying them indirectly to the creditor through negotiations with the seller.
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#1744866 - 09/27/12 05:47 PM Re: Seller Paid Finance Charges and the APR Many Hats
WHEDA Offline
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What if total closing costs are $2,500 and $2,000 of those fall into the PPFC category? If the purchase agreement doesn't specifically state to which closing costs the seller's $2,000 credit is to be applied, can a lender arbitrarily assign the credit to the $2,000 in PPFCs?

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#1744884 - 09/27/12 06:00 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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can a lender arbitrarily assign the credit to the $2,000 in PPFCs?

No. If the credit is applied toward closing costs then the credit should be shown in the 200 series.

Even if you did apply them to the PPFC they would still be included in the APR unless you, the financial institution, had a contract with the seller to pay those charges. The purchase agreement is an agreement between the buyer and the seller, not the seller and financial institution.
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#1744886 - 09/27/12 06:00 PM Re: Seller Paid Finance Charges and the APR Dan Persfull
RR Joker Offline
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Originally Posted By: Dan Persfull
It must be in writing that the seller will pay.

Only if the "in writing" obligates the seller to the creditor for paying the fees, otherwise the buyer is still obligated and paying them indirectly to the creditor through negotiations with the seller.


ditto that!
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#1744939 - 09/27/12 07:24 PM Re: Seller Paid Finance Charges and the APR Many Hats
Many Hats Offline
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Ok...so just to be clear...in most cases I've seen, there is no particular contract between the seller and the bank per se that talks about the seller paying some of the closing costs. Usually, it is in the purchase agreement between the seller and the buyer.

So, having said that, it sounds like all the finance charges would be considered in the APR calculation, regardless of who is paying them UNLESS the seller and the bank have a written agreement (which is not typical).

Right?

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#1744958 - 09/27/12 07:42 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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That's correct. Absent an agreement between the seller and the bank making the seller legally responsible for those charges then the buyer remains obligated to pay them should the seller for some reason balks on the purchase agreement.

Remember the TIL has to reflect the legal agreement between the borrower and the bank. In 99.9999% of the time the borrower has the legal responsibility to pay the charges. As I said earlier if he negotiates with the seller to pay the charges then good for him but he is still paying them indirectly.
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#1745040 - 09/27/12 09:17 PM Re: Seller Paid Finance Charges and the APR Many Hats
WHEDA Offline
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Originally Posted By: Many Hats
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 non creditor 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.

So the way I interpret this to mean that they should be excluded. The “…if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge” confuses me a bit though. What does this mean exactly?


What if the purchase agreement specifically states, "At closing seller agrees to pay any MI premium escrow cushion required by the buyers lender and the closing agent fee, not to exceed a cummulative total of $500."

Wouldn't the seller's credit in payment of these charges release the consumer from being legally bound to the creditor for the charge, even though the agreement is not between the seller and the lender, thus removing it from the PPFC calculation?

I'm not trying to be argumentative, just anticipating the situation and formulating my response.

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#1745129 - 09/28/12 01:32 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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How does that statement in the purchase agreement between the buyer and seller legally obligate the seller to the bank to pay those fees? As I said in an earlier post the purchase agreement is between the buyer and the seller. The seller has no legal contract with the bank to pay those fees, the contract is between the buyer and the seller.

If for whatever reason the seller reneges on paying the fees you will not close the loan unless the buyer pays those fees therefore how can you, absent a contract between you and the seller for the fees, state the buyer is not responsible to pay them.

Again, the buyer is paying those fees indirectly through negotiations with the seller in the terms of the purchase agreement.

§ 1026.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1745142 - 09/28/12 02:13 PM Re: Seller Paid Finance Charges and the APR Many Hats
WHEDA Offline
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Thanks Dan. I completely understand and agree with your interp. Like I wrote, I'm not being argumentative, just anticipating . ."

In reality, who, other than a compliance geek, would have the knowledge to even suggest writing specific language into a purchase agreement? Certainly not a MLO or a Realtor. : - )

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#1800729 - 04/02/13 09:47 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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We were trying to step up and stop the use of seller credits in our final TIL and finance charges and have encountered road blocks. Seller credit have been used in lowering finance charges that are beyond our control and cause the loan to be in danger of being a HOEPA loan.

Also we incorporated changes back in 2011 to net HUD line 802 instead of itemizing. Instructions were to include all credits first to the finance charges. In this instance we always seem to run into issues with Investors and how we itemized the charges in 802.

Anyone else have secondary Investor dilemas with this?

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#1800737 - 04/02/13 10:14 PM Re: Seller Paid Finance Charges and the APR Many Hats
Richard Insley Offline
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Why "stop the use of seller credits in our final TIL"? Wouldn't it be cleaner to get a 3-party agreement (borrower, seller, and bank) calling for the seller to pay specific charges? Once the seller enters into such an agreement, "the consumer is not legally bound to the creditor for the charge."
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#1800747 - 04/02/13 10:56 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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Agreed. Is that what you do? What does your agreement entail and when do you execute it?

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#1800749 - 04/02/13 11:39 PM Re: Seller Paid Finance Charges and the APR Many Hats
Richard Insley Offline
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We'll have to let someone answer who actually works for a bank provide these answers. (I've been retired for 5 years and it's been 16 years since I was employed by a financial institution.)
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#1800892 - 04/03/13 03:49 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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Does anyone have a Sellers Credit Contract that you use?

This would allow us to reduce the risk and enable us to use the sellers credit agains the FC and disclose it on the TIL.

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#1806467 - 04/19/13 03:48 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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BUMP-- Does anyone use a Seller's Credit Contract???

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#1806485 - 04/19/13 04:20 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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BUMP-- Does anyone use a Seller's Credit Contract???

In all my years in banking I've never seen one.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1806488 - 04/19/13 04:24 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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What do you think that means?
A.)Everyone is using the Purchase Agreement or
B.)No one is putting the sellers credit on their final TIL

I am just trying to make the best proposal to my selling team and remain compliant.....

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#1806497 - 04/19/13 04:31 PM Re: Seller Paid Finance Charges and the APR Many Hats
Dan Persfull Offline
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A. If they are and adjusting the FC based on that then IMO they have violations if the examiner questions it. They have no contract with the seller.

B. I've been in lending in one capacity or another since 1974 and I have never worked where seller credits were allowed to affect the finance charges.
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#1806514 - 04/19/13 04:51 PM Re: Seller Paid Finance Charges and the APR Many Hats
deh Offline
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Thank you.

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