I'm questioning the accuracy of an exception that arose from a recent independent loan review of a mortgage with mortgage-guarantee insurance transaction. We were cited for marking "will not" as opposed to "may" in regards to whether or not the consumer was entitled to a rebate of any finance charge if the obligation was prepaid in full. I've read 12 CFR § 226.18(k) and the commentaries and can't find anything that supports this finding. Any thoughts on this?

OSC 226.18(k), Comment 2:

"2. Rebate-penalty disclosure. A single transaction may involve both a precomputed finance charge and a finance charge computed by application of a rate to the unpaid balance (for example, mortgages with mortgage-guarantee insurance). In these cases, disclosures about both prepayment rebates and penalties are required. Sample form H–15 in appendix H illustrates a mortgage transaction in which both rebate and penalty disclosures are necessary."

Can I have that comment paraphrased, please? I still don't get it.

This is how I would paraphrase it.

MI premiums are finance charges that are calculated based on the loan's balance. When a loan that has MI is paid off early generally there is a rebate/refund of the unearned collected premiums. Therefore the borrower "may" be entitled to a rebate of finance charges.

Kelsey, are you paying the MI premiums monthly, or annually in advance?

Steve-pickin your brain, thought process, but why would how it is paid make a difference?

If you are paying annually, you would collect and remit the annual premium in advance. Hence, if the loan paid in full within the next year, a pro rata refund of the premium would be due to the mortgagor.

If you are collecting and paying the MI premium monthly, no refund would be due to the mortgagor upon payoff, since no premium had been paid in advance.

If the borrower is not paying ahead - then there is no refund. If the bank is escrowing mortgage insurance payments up to the 2 month buffer or if MI is paid up front, the borrower would be entitled to a refund.

We're escrowing MI payments and paying monthly premiums.

Then the disclosure is required.

Thanks, everybody! It makes sense now.