We had the 1st payment for PMI coming from the customer in very 1st payment of their loan. This was affecting the Amount Financed of the loan because the PMI payment to the PMI company wasn't due until the 2nd payment. The mortgage software company stated that because it wasn't due until the second payment the PMI payment included in the first payment was a prepaid finance charge and was affecting the Amount Financed.

Does this sound correct?

So I think my real question is CAN the PMI payment in the first biweekly payment affect the Amount Financed of the loan IF the PMI payment is not due to the company until the 2nd biweekly payment?

Or do we have a violation of some kind?

The PMI payment included in the first payment also caused the escrow to be off resulting in the need for a refund of the first payment.

Section 1026.2(a)(23) defines the term "prepaid finance charge" to mean:
- any finance charge paid separately in cash or by check before or at consummation of a transaction, or
- (any finance charge) withheld from the proceeds of the credit at any time.

Neither the first nor the second payment are scheduled to occur "before or at consummation" and all of the loan's proceeds are disbursed at settlement. At the time of the first and second payments, there are no undisbursed proceeds from which ANYTHING can be withheld. This MI renewal premium float has nothing to do with the PFC and, therefore, nothing to do with the AF. End of discussion. The mortgage software company seems to have invented a new Reg. Z requirement.

There could be a breach of contract, violation of state insurance regulations, or UDAAP possibility, but Reg Z is off the radar.

Thank you Richard.


So apparently they are saying that because we have the PMI as a cushion (1 payment) in Section G "Initial Escrow Payment at Closing" and the fact that we are also collecting in the first biweekly payment, the PMI cushion in Section G is a Prepaid finance charge per Reg Z and should be affecting the Amount Financed. But this only happens on Biweekly mortgages. Is this correct?

This issue is currently causing an overage in the escrow account where the bank has to issue a refund to the customer from the escrow account.

The PMI premiums collected at closing and disclosed in Section G would be a prepaid finance charge and affect the amount financed. The premium collected with the first payment after consummation would fall under Richard's above explanation.

I would suggest not collecting the payment cushion you are disclosing in Section G. That should solve your issue if I'm understanding correctly.

Thank you Dan.

Can you give me an idea of where to look for where it states that the premium in the initial escrow deposit would be a prepaid finance charge?

I can't find it in Reg Z.

Check out Reg Z 1026.4(b)(5) and 1026.4(c)(7). It's a finance charge, and its not excluded from the definition of finance charges for real estate loans. Since it's a finance charge and it's paid before closing .....