To be compliant with Regulation E for the prohibition on requiring repayment of loans by electronic preauthorized (including AFT) except that we may offer an incentive to do so, would the following be considered an incentive:

AFT - no payment processing fee; processing fee for other payment methods

Is there any prohibition on charging for processing payments?

They would be finance charges

Finance Charges of this type would factor into the APR by way of the payment schedule, not as PFCs (except any fees you collect at closing and hold in escrow.) Just a guess, but your loan origination software might not be designed to handle that type of non-interest, recurring FC. That brings you full circle to the need for the incentive to be a carrot, not a stick.

I've never actually seen this on disclosures so I'll need some help to visualize it...

If the payment term is 36 months and we charge $5 for each payment due that is not expected to be paid by AFT, then $180 is a finance charge factored into the APR. But is is not disclosed as a $180 payment processing fee at the beginning of the transaction, but rather billed at the time of each payment.

Could we do something more simple like give a discount upfront for our loan processing fee. For example, charge $200 if the customer sets up an AFT, charge $300 if they choose to pay by any other method?

If we do this and 3 months down the road the customer sets up an AFT, do we have to refund any of the higher processing fee we charged up front?

If the consumer cancels the AFT 3 months down the road, can we collect the $100 discount back from the them?

Just to be clear...let's say we disclose that if the customer pays by check, we will charge a $5.00 processing fee for each check payment.

Collecting it in this manner, with each payment, would still be a finance charge that factors into APR?

If they don't sign up for an EFT at the onset, then how else would they pay - you would have to factor it in to your TILA disclosures.

As to your previous post - why in the world would anyone make such a complex scenario. Those would be subsequent events, but still, you would have to have this all built into the loan agreement and if you treat one person differently (because someone forgot) then you have fair lending issues.

Why try to recreate this wheel from what is pretty much an industry standard. Give then a slight break on the interest rate for sign up at set up.

We deal with a fintech company...I just reviewed their promissory note and TIL for an unsecured loan for which the consumer chose to pay by check. They disclose on the promissory note that a payment may be made either by check, subject to a check processing fee, or may authorize an ACH. If the borrower elects to make payments by check, there will be a $X.XX check processing fee per payment.

On the TIL it discloses that if the borrower elects to make payment by check, there is be a $X.XX processing fee.

I just tested the APR and Finance Charge on the TIL and it does not include anything except for the origination charge and interest.

So maybe I asked my question at the start incorrectly. If we charge a check processing fee for each payment made by mail or even telephone an it is assessed at the time of payment, is it truly not a Finance Charge that must be factored into the APR on the TIL?


We thought about giving a rate discount for an AFT, but wouldn't that make it a variable rate loan if we increase the rate if they cancel the AFT? I guess it would be easy enough to disclose this, but is there any subsequent notice requirement at the time an AFT is cancelled and the rate increases, or no since it is built already into the agreement and disclosures?

Thanks for all the help!!!

A fee to make a payment, regardless of the method. Have them point to 1026.4 and indicate how that is excluded from the finance charge.

There would be no notice required to raise the interest rate on a loan not subject to 1026.20(c).

I think the check processing fees paint you into a corner.

Section 1005.10(e) of Reg. E prohibits compulsory use of EFTs as loan payments. To get around the Reg. E violation, you allow the borrower to choose a different (higher cost) non-EFT payment method.

No matter why the borrower elected a higher-priced option, the additional charges become part of the legal obligation between the parties. Because these charges are part of the cost of obtaining the loan, and lacking a specific exclusion in Section 1026.4 of Reg. Z, the check processing fees must be included in the TIL disclosures as FCs. Because the payment fees are not collected at or before consummation of the loan, they cannot be called or handled as Prepaid FCs. All FCs except PFCs must be included in the disclosed payment schedule, TOP, FC, and APR.

If you know that your loan origination system can't add these fees to the payment schedule, TOP, FC, or APR, but require the fees anyway, that sounds a lot like a knowing and willful violation of TILA--a criminal offense.

So...where does that leave you? You can't require EFT payments and you can't comply with Reg. Z's requirements for payment-by-check fees. That means you drop the fees entirely (but retain the option to pay by check), or you find a new TIL disclosure generator that can handle these non-interest, non-prepaid FCs.