I am reviewing some combined TIL/Note/Security Agreements and noticed that our old lending software, which had static documents where we just marked the box if it applied, included "Prepayment - If I pay off this note early, I will not be entitled to a refund of part of the finance charge."

The new system has dynamic documents and doesn't include this disclosure. However, in the Note section there is a place where we disclose nonrefundable fees and charges. But this section doesn't disclose all of the fees for the transaction. For example, it will not include SII even though the parameters for that fee is marked that it is nonrefundable. In any case, I don't think this disclosure counts for the requirement at 1026.18(k)(2) because it doesn't say the disclosure can be in another location.

The problem is that I really don't understand what fees 1026.18(k)(2) applies to.

Paragraph 18(k)(2)
1. Rebate of finance charge. i. This applies to any finance charges that do not take account of each reduction in the principal balance of an obligation. This category includes, for example:

A. Precomputed finance charges such as add-on charges. This includes computing a refund of an unearned finance charge, such as precomputed interest, by a method that is less favorable to the consumer than the actuarial method, as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 U.S.C. 1615(d). For purposes of computing a refund of unearned interest, if using the actuarial method defined by applicable State law results in a refund that is greater than the refund calculated by using the method described in section 933(d) of the Housing and Community Development Act of 1992, creditors should use the State law definition in determining if a refund is a prepayment penalty.

B. Charges that take account of some but not all reductions in principal, such as mortgage guarantee insurance assessed on the basis of an annual declining balance, when the principal is reduced on a monthly basis.

Does this apply to finance charges as in those that affect the APR? So would this include something like our processing fee that is nonrefundable if the loan is paid off early?

I'd appreciate it if someone could explain what fees would trigger this disclosure?

Thanks in advance.

The disclosure relating to prepayment rebate began life (in original Reg. Z) as an item tied to precomputed (add-on) loans. When the reg was overhauled in 1981, the scope of this requirement was widened--but still primarily applicable to add-on loans. I've been away from this too long to help with examples outside of add-on lending...expect others will chime in and identify common situations when a rebate disclosure would apply in a loan that is not precomputed.

You will need to look to state law for any fees that are refundable and to be sure your contract is in compliance with state law. If you are simply stating the fees are non-refundable without referencing state law then you may have invalid contracts if they are contrary to your state law.

As an example In IN you are allowed to charge a $50 processing fee that is non-refundable for consumer loans not secured by real estate. If you charge a $100 processing fee and the loan pays off early the "excess" $50 is subject to a prorated refund therefore we have to disclose that some of the finance charges may be refundable.

The state law here does not require us to refund any fees if the loan is paid out early. The contract itself lists the nonrefundable fees stating that these are earned when collected and will not be refunded if prepaid before the maturity date. But this is outside of the TIL section of the combined TIL/Note. Well, it lists all the fees except for SII even though the parameters for that fee show it is nonrefundable - we are putting in a case with the vendor to ask about that fee.

But it doesn't seem that this information in the Note would meet the requirements of 1026.18(k)(2) since it doesn't indicate it can be in a different location or that that it has to be separate like it does for other disclosures under 1026.18.

I'm not even sure that these typical fees would even apply to 1026.18(k)(2) but looking at it again, it would be any finance charges that do not take account of each reduction in the principal balance of an obligation. Our processing fee doesn't take account of each reduction in the principal balance. But actual interest assessed does since it is assessed on the balance as it decreases.

In any case, we don't have to refund anything. So the TIL really should say that, correct?