We were recently cited for not being in compliance with 226.7(f) with regards to the initial statement. We had been allowing customers to pay for prepaid finance charges with the first advance and not properly disclosing it on the statement. Due to system limitations this is not something that we can change at this time.

We are now going to require a check or a debit to the customers account at closing. Our concern is that often times it seems as though the customer does not have the funds to cover these fees. In our opinion even if we allow an overdraft if the first advance covers that we are still not properly disclosing on the first statement.

Has anyone else ran into this or do you have any advice on how to proceed should the customer not have sufficient funds in the account at the time of closing to cover prepaid fees?

Any help would be appreciated!

I would first be talking with your system vendor to see why their system is not compliant, OR are you allowing them to advance the funds and then pay you the fees instead of advancing them under the proper Tran codes?

IMO, and it is opinion only, by adopting the process you mentioned you are willingly circumventing the requirements of Reg. Z and headed for deeper trouble.

We have been in touch with our vendor (ITI) and will continue to work with them. However, our understanding is that they are unable to process it correctly to show the prepaid finance charges as finance charges on the first statement.

We are trying to avoid any futher problems with Reg Z and thus why I'm asking for assistance. We don't have an issue if we accept a check and the customer has the funds - it's just when the customer doesn't have funds prior to closing.

LaNae,
We use the same vendor that you do. We just became aware of this situation a couple of days ago through another compliance contact. We are starting the process to try to correct it. If you have any information on what your outcome was, would you mind sharing?

Delta, LaNae or anyone else with info...

Were you able to get help from ITI on this?

We process through FiServ and were recently told that some ITI banks are just making a separate principal advance with a special description to show the fees. I'm not certain this is an entirely correct method unless there is some special trancode that's being used so there is no interst accrued on the fees. A regular advance would just put the fee amount into the principal balance whereby interest would accrue on the charges. I don't believe you can charge interest on "interest" or finance charges.

I know you have to disclose any fees paid for from an initial advance on the first periodic statement. What I don't know is how that's supposed to look. Can it be as simple as making a principal advance with a special description (i.e. "closing costs" or "finance charges") or does the amount have to appear in the "finance charge" section of the statement as a separate line item from interest.

To my knowledge, ITI has not offered a fix yet. I've heard that one vendor offered a fix but was charging their FI's for the fix
We've opted for waiving our fees for the time being but have been made aware of another issue involving the average daily balance calculation and unpaid finance charges.

Are you talking about an issue with ITI regarding average daily balances and unpaid finance charges? If so, cOuld you elaborate?

Can someone tell me exactly how the finance charges paid out of the first advance are supposed to appear on the first statement? Can it be as simple as making a separate principal advance with a special description like "closing costs" or "finance charges" or do the fees have to show up in the finance charge section of the statement? I know there is a special tran code we can run so it shows up in the finance charge section but then the system will bill them for all of the fees plus accrued interest the next month. I doubt the customer intends to pay for all of the fees the following month when they needed to draw on the line in the first place to pay them.

What exactly isn't ITI able to do? I just need some help understanding how the fees need to appear on the first statement.

My branches are pushing for this...

This is what we do; however I do not yet know how the regulators feel about it (also, the only finance charge we have on HELOCs is the $3 flood fee, and occasionally a small orig fee).

Our customers finance these fees through the first loan advance. We do separate advances that would show up on the statement as, for example, "Finance Charge - Flood Fee $3.00".

These finance charges are not to be included in the APR, so that is not an issue. I believe all the reg requires is that we itemize the finance charges, which is what we are doing. Will it work? I have yet to find out.

We do the same thing -- itemize the finance charges on the statement. HOWEVER, they are not being added to the "total finance charge" calculation for the month. We had auditors here yesterday and mentioned that this needs to be done. Checked with our vendor, and they don't have the capability to do this. Anyone else run into this problem?

CSB1 - who is your vendor? Is your problem the one Rizz mentioned above or an additional problem?

Why, oh why, don't regulators check with vendors before implemeneting regulations. Or make their compliance date prior to ours. Even though this requirement in REG Z has been around a long time why aren't the vendors compliant? We brought this up with ITI some time ago.

We use Jack Henry. The auditors mentioned that we maybe can just have the customer write a check for the fees and then draw off the HELOC to pay themselves back. I don't know what the right solution is.

Other than the obvious fact that it could be confusing to customers (the total FC does match the itemized FC, which I agree could be an issue), I'd be interested to see why your auditors are saying this. It's been awhile since I researched this, but I remember the regulation only requiring that the fees be itemized and it did not say that they needed to be totaled.



Personally, I think this is bad advice as you would be intentionally circumventing the regulation requirements. When I was an auditor, we made sure banks were NOT doing this for that very reason.

On a positive note, I heard that Jack Henry is in the process of, or already has, created a fix for this. We don't use JH, but if you do I'd check into it!

I know there is a trancode that can be run so the amount shows up in the finance charge section of the statement - it's an "interest charge" and basically it's a way to add the money into the accrued interest field. It would probably work in terms of appearing on the statement in the finance charge section as a separate line item (if you change the description), but the problem I have is then the customer would be billed the next month for the accrued interest AND the fees that you added to the accrued interest so you could get it into the finance charge section of the statement.

If they had to advance on the line to pay the fees to begin with, they probably aren't in a position to pay them now a month later....so I don't think this option is viable either...

Maybe a call to my local examiner might be in order. They did bring this up as a hot spot last fall at a meeting. We have a good relationship and I'm sure they would be happy to elaborate on what they are expecting to see.