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#1783496 - 02/06/13 10:07 PM Reg Z Compliance
WHEDA Offline
100 Club
WHEDA
Joined: Apr 2009
Posts: 189
Wisconsin
I grabbed the wrong hat when I left home this morning and now I have "Stupid" imprinted across my forehead. That's my excuse for asking a stupid question, and I'm sticking to it!

I have a fixed-rate, 30 yr, FHA loan where the APR was understated by .055% (so within 1026.22(a)(2) [.125%] tolerance) but the corresponding Finance Charge is understated by $237.26 (so not in compliance with 1026.18(d)(1)(i)).

Am I correct in thinking that if the APR is less .125% lower than the correct APR, but the FC is more than $100 lower than the correct FC there is a violation?

Is there even more steps to determine if there is a tolerance violation?

If there is nothing more, is my corrective action to refund $237.26 to the borrower or do I only refund $137.26 to get within $100?

Thank you for your guidance.

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#1783527 - 02/06/13 11:36 PM Re: Reg Z Compliance WHEDA
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 9,995
Toano, VA
For starters, on most (all?) FHA loans you have 0.25% APR tolerance. You get double the normal tolerance because the monthly payments drop every year (due to the decreasing MI renewal premium.) These annual steps in the payment schedule meet Section 1026.22(a)(3)'s definition of an "irregular transaction." Detailed explanation is here.

You are correct to conclude that there is a FC violation but no APR violation. Corrective action comes in two flavors.

If your regulator discovers FC understatements during a compliance exam, you will be ordered to search your files for all similarly affected borrowers and follow the interagency enforcement policy regarding reimbursement. That policy allows you to apply "cross tolerances." In your case, that means you would convert the unused portion of the APR tolerance (0.25% - 0.055 = 0.195%) to a dollar equivalent and use that number as the FC tolerance for reimbursement purposes. That value will very likely be MUCH higher than the $100 Reg. Z tolerance. Comparing your understatement with this cross tolerance, you will probably be off the hook--no reimbursement required. (APRWIN does all the math.)

Flavor #2 is self-discovery. When you discover the FC violation without your regulator's help, you have the option to cure the violation. The cure procedure is spelled out in Section 130(b) of the TILA. Part of the cure will be reimbursement of any understatement outside Reg. Z's tolerances--no cross tolerance recognized.

If you decide to take the cure, think carefully about keeping the $100 tolerance. If the borrower should ask how the amount was determined, you will have to admit that you chose to screw him/her out of the first $100 of YOUR ERROR!
_________________________
...gone fishing.

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#1783586 - 02/07/13 02:03 PM Re: Reg Z Compliance WHEDA
WHEDA Offline
100 Club
WHEDA
Joined: Apr 2009
Posts: 189
Wisconsin
Wow! We are relatively new to FHA lending and I had never imagined that an FHA loan would be considered an "irregular transaction". I applied the principle of irregular payment amounts only to the P&I payment. That being said, we are still understated by more than $100. Now we need to make a decision on whether to correct it or wait to see if a regulator stumbles across it and requires us to correct it. Morally, I would opt for self-correction, but the final is up to management.

Thank you Richard. Enjoy your day!

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#1783620 - 02/07/13 02:51 PM Re: Reg Z Compliance WHEDA
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 9,995
Toano, VA
Originally Posted By: WHEDA
Wow! We are relatively new to FHA lending
Your next compliance exam could very well zero in on this new product line. Examiners are trained to look for change and see how well you handle it. Once again, your regulator would call this a violation but would not require you to reimburse anything. Just be sure you have identified the cause and eliminated the possibility of recurrence.

Originally Posted By: WHEDA
I applied the principle of irregular payment amounts only to the P&I payment.
For TIL purposes, disclosed payments must include all FCs and any curtailment of the AF.
Last edited by Richard Insley; 02/07/13 02:55 PM.
_________________________
...gone fishing.

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