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#1247109 - 09/09/09 02:48 PM Interest During Rescission Period
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Can you charge interest during a rescission period?

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Lending Compliance
#1247125 - 09/09/09 03:00 PM Re: Interest During Rescission Period Random
Deena Offline
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Yes - if it's not prohibited by your state law.

From the OSC 226.23(c)

3. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited, such as by state law, the creditor may, for example:

• Prepare the loan check.

• Perfect the security interest.

• Prepare to discount or assign the contract to a third party.

• Accrue finance charges during the delay period.
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#1247129 - 09/09/09 03:03 PM Re: Interest During Rescission Period Random
swiggles Offline
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Charge interest for funds your borrower does not have use of? I've had LO's argue that the funds are "committed" and therefore no longer available to lend to others. Therefore, the Bank has the right to charge the borrower for the committed funds. Our legal counsel said "absolutely not" and that under state law the practice would be considered usurious.
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#1247142 - 09/09/09 03:09 PM Re: Interest During Rescission Period swiggles
David Dickinson Offline
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As Swiggles points out, you should check state law. Some prohibit this. Federal law, as Deena posted, allows it. I'm seeing more and more of our clients charge interest during the rescission period. It's perfectly legal (in my area) and is a management decision.
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#1247256 - 09/09/09 05:00 PM Re: Interest During Rescission Period David Dickinson
swiggles Offline
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Originally Posted By: David Dickinson
As Swiggles points out, you should check state law. Some prohibit this. Federal law, as Deena posted, allows it. I'm seeing more and more of our clients charge interest during the rescission period. It's perfectly legal (in my area) and is a management decision.


If I were a customer, I'd be pretty PO'd about that......think I'd ask for closed-end line of credit and not draw until the rescission period is over. 'Course, I'm willing to bet that most don't realize it.....or want the loan so bad, don't care. Pretty soon, the legistslators will write a new rule into Reg Z prohibiting that practice all together. wink grin
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#1247288 - 09/09/09 05:18 PM Re: Interest During Rescission Period swiggles
David Dickinson Offline
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I don't disagree, this is a customer service issue. But for as long as I've known, Reg Z has allowed this and I've never known of an issue. You may be right about future legislation, but it's never been a problem before.
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#1247369 - 09/09/09 06:03 PM Re: Interest During Rescission Period David Dickinson
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Unless it was a jumbo loan at a high rate, three days isn't much anyway.....for example $50,000 at 8% would amount to about $33.....big deal.
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#1247687 - 09/10/09 01:27 AM Re: Interest During Rescission Period swiggles
Richard Insley Offline
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It's an abusive practice and the regulators can use their UDAP rules to stop it any time they wish. The "little bit pregnant" argument won't cut it with customers. They're being gouged and the dollar amount won't matter if they realize what's happening.

I once had a customer go ballistic over a penny difference in the interest we paid on identical husband/wife CDs. It seems our accrual software occasionally rounded the "wrong way" in order to avoid accumulating rounding differences which could be a target for theft by the programmer. Unfortunately, the logic chose one of these matched CDs for this special procedure. No matter how hard we tried to explain what happened, the customer was convinced there was foul play.
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#1247832 - 09/10/09 02:24 PM Re: Interest During Rescission Period Richard Insley
David Dickinson Offline
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While I have great respect for Richard (no one knows Reg Z as well as he), I don't agree it's an abusive practice. The Law allows it, it's not new and I've never heard of a regulator ever say a word about it. It does seem to fly in the face of today's mentality of UDAP, but it's perfectly legal and therefore, can't be seen as abusive.

Some may not like it (and you have the right to express your views), but I think it's wrong to tell other bankers that it's illegal or a UDAP issue.

I agree it may be a customer service issue and, as I stated above, it's a management decision.
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#1248520 - 09/11/09 02:26 AM Re: Interest During Rescission Period David Dickinson
Richard Insley Offline
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I did not say the practice is illegal (although some states may restrict or prohibit it.) Also, I didn't say that TILA had anything to do with the practice of charging interest on funds that have not been advanced.

Just because something is legal doesn't guarantee it's not abusive. UDAP is so broad that ANYTHING can be seen as unfair or deceptive and the agencies pointed out that they could reach such a conclusion even though a practice is clearly legal.

I consider it unethical and abusive to charge customers without providing a service or product. How would you react if your gas station started the pump running with the cost of 3 gallons of gas already on the meter?

You are right that this is a management decision. Since there are no governing regulations, it is a matter of business ethics.
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#1248625 - 09/11/09 02:08 PM Re: Interest During Rescission Period Richard Insley
David Dickinson Offline
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My point was you consider it unethical and abusive (as you stated), but that doesn't make it so. My point is that this is "endorsed" by the federal government (as it is specially allowed in Reg Z). How could something that is not just silent, but specifically allowed, be deemed an UDAP issue?

You say "there are no governing regulations". But there is. As already stated, Reg Z specifically addresses this and allows it.

That said, I too, think this is not a good customer service issue and would holler if interest was charged to me, but I'm trying to be careful and not add rules that don't exist. My job is to inform & educate on what the rules say. I give my opinion but also try not to add burden to existing rules.
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#1249365 - 09/13/09 11:28 AM Re: Interest During Rescission Period David Dickinson
Richard Insley Offline
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I see no endorsement in Regulation Z for charging interest on funds that have not been advanced. Unless I'm forgetting comments elsewhere in the OSC, this question turns on the following:
3. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited, such as by state law, the creditor may, for example:
...
• Accrue finance charges during the delay period.


This is a "no contest" statement, not permission or an endorsement of any practice. All this says is that the scope of Regulation Z does not prevent creditors from engaging in the practice of accruing FCs during the rescission period. This is the Fed's way of telling us that Reg. Z does not stand in the way because Congress did not choose to address this practice in the TILA. I don't consider a "no contest" statement to be a "governing regulation" or permissive.

Reading permission out of this comment is a stretch. The comment isn't limited to interest and it isn't specific to the question we are discussing. The comment has meaning, but in no way does it grant permission for unearned interest charges. As we all know, the Finance Charge includes a wide range of fees associated with loan origination. Pursuant to the ROR rules, none of these up-front FCs may be collected until the rescission period has expired--but this comment says that a lender may book them to an accrual account until they can be collected.

Even if Regulation Z was permissive, there could be problems on the UDAP side. From FIL 26-2004:

Relationship to Other Laws
...there may be circumstances in which an act or practice violates section 5 of the FTC Act even though the institution is in technical compliance with other applicable laws, such as consumer protection and fair lending laws.


Turning to Section 8 of RESPA for an example of the Congressional view of unearned charges, we find the harshest of penalties: one year in prison and a $10,000 fine. Conceptually, what's the difference between bogus fees and bogus "interest"? If a lender does nothing and provides nothing of value to justify 3 days' of interest it all looks the same to me.

I'm not making up rules, merely taking a cautious view of the ones that exist.
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#1249459 - 09/14/09 01:44 PM Re: Interest During Rescission Period Richard Insley
biz Offline
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So in the case of a refinance within your own institution-which 90% of ours are, what day would you stop collecting interest on the mortgage in place which is being refinanced, Mr. Insley? Would you continue to charge what is likely the higher rate for the three days on the mortgage you are refinancing? This too could be considered unethical- We're darned if we do and darned if we don't!

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#1249552 - 09/14/09 03:11 PM Re: Interest During Rescission Period biz
David Dickinson Offline
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Richard: Interesting and well thought out comments. Have you ever seen or heard of a bank getting into trouble for this?
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#1250066 - 09/15/09 01:50 AM Re: Interest During Rescission Period David Dickinson
rlcarey Offline
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Here is one interesting case. Flannick and the class ended up winning a large settlement.

http://www.paed.uscourts.gov/documents/opinions/02D0240P.pdf

Interesting dessenting opinion in this suit:

http://www.sconet.state.oh.us/rod/docs/pdf/1/2006/2006-ohio-1216.pdf
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#1250078 - 09/15/09 02:49 AM Re: Interest During Rescission Period rlcarey
David Dickinson Offline
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The first link Randy provides is about North Carolina law.

From the 2nd court case Randy provided:
9. A plain reading of the relevant language indicates that Wixom is incorrect. These two provisions concern separate issues and are not required to be read in conjunction. Wixom is attempting to create a limitation that simply does not exist. The accrual of finance charges applies to all funds, not merely to those placed in escrow, and is permissible so long as not otherwise prohibited.

10. Because we have concluded that Regulation Z clearly permits interest to be charged on all funds during the rescission period unless prohibited by state law or other means, we must now determine whether there exists in Ohio any law that would prohibit this practice.

13. We conclude that a contract provision allowing for interest to be charged during a rescission period is commercially reasonable and is not substantively unconscionable.

14. Further, the contract had already been signed and Union Savings Bank had already committed to refinancing Wixom’s mortgage. It was commercially reasonable for the bank to charge interest on funds committed to and designated for Wixom.

21. The trial court correctly granted summary judgment to Union
Savings Bank. There is no applicable law or regulation that prohibits the accrual of interest before the disbursement of loan proceeds when a mortgage is refinanced, and a contract term permitting such accrual is not unconscionable. Because there existed no genuine issue of material fact and Union Savings Bank was entitled to judgment as a matter of law, we affirm the trial court’s judgment.

23. Regulation Z allows just what happened here, unless state law directs otherwise. The Ohio General Assembly, in its wisdom, has decided not to intervene. That is the end of the case, in my judgment.
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#1250080 - 09/15/09 03:01 AM Re: Interest During Rescission Period David Dickinson
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David - I was talking about the dissenting opinion from the presiding judge on the appellate court. That is what I found interesting and dangerous. This case was not a slam dunk or unanimous and the environment has shifted even more against banks and for consumers in the last few years - even though judges are suppose to decide based on the law. Either way it most likely cost both of these banks more in legal fees than they ever collected.

GORMAN, Presiding Judge, dissenting.

24. Something seems terribly wrong if a bank can require payment of interest by its customers on a loan before the bank disburses the money. But Union Savings Bank, by charging interest during the three-day rescission period required by Regulation Z of the Federal Truth in Lending Act, is doing exactly that to borrowers who refinance their note and mortgage. In my opinion, this practice is substantively and procedurally unconscionable.

25. The practice of allowing the lender to accrue finance charges during the rescission period is not authorized if it is “otherwise prohibited, such as by state law.” See Part 226, Supplement 1, Title 12, C.F.R. The majority correctly observes that unlike small loans and second mortgages, Ohio has no statutory prohibition against collecting interest before disbursing the loan funds. Furthermore, R.C. Chapter 1161,
governing state savings banks, is silent.

26. However, the phrase in Part 226, Supplement 1, Title 12, C.F.R. “otherwise prohibited, such as by state law” is not limited to legislative enactments. The equitable defense of unconscionability has long been recognized under Ohio’s common law. See Collins v. Click Camera & Video, Inc., 86 Ohio App.3d at 834-835, 621 N.E.2d 1294. Surely, the object of Regulation Z is not to turn a blind eye to a banking practice that is so unconscionable that it undermines fair standards and the integrity of the banking industry.

27. What is commercially reasonable about the bank’s practice that generates two streams of interest on a single sum during the three-day rescission period? The bank’s interpretation, allowing it to earn interest by investing the sum it retains for three days while simultaneously charging interest to the customer, is at odds with the purpose of the Truth in Lending Act, which is to protect consumers. See Section 226.1(b), Title 12, C.F.R. Had the bank placed the sum in a non-interestbearing escrow account during the rescission period, arguably there would have been justification for charging interest to the borrower as a finance charge under Section 226, Title 12, C.F.R., Supplement 1, Section 23(c)(3). See, generally, Forgus v. First Fed. S. & L. Assn. of Lakewood (Dec. 6, 1979), 8th Dist. No. 39664.

28. Since the borrower does not routinely learn of the terms of the bank’s refinancing agreement until the closing, this one-sided situation places the borrower in an unequal bargaining position with the bank. The majority’s conclusion that the borrower can “look elsewhere for a bank that could provide a similar loan” amounts to nothing more than speculation. How realistic is it for the borrower to obtain a loan from another lender with an identical interest rate and the same points during the three-day rescission period?

29. The majority also justifies the interest charged by the bank over the three-day period as not an “overly burdensome amount of money” to the consumer. The focus of an unconscionability analysis, however, is on the bank’s practices and not their effect upon the consumer. In the context of sheer numbers, the advantage to the bank can be significant when a period of steadily declining interest rates, as has occurred over the last five years, provides incentive for a large number of the bank’s customers to refinance their mortgages for a better interest rate.

30. I would reverse the trial court’s order granting summary judgment in favor of the bank and remand this case to the trial court for further proceedings.
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#1250110 - 09/15/09 12:31 PM Re: Interest During Rescission Period rlcarey
M Cockrell Offline
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So, although the practice may be legal (unless "otherwise prohibited"), it does not appear to be prudent based on the potential negatives.
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#1250165 - 09/15/09 02:00 PM Re: Interest During Rescission Period M Cockrell
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While it may not be prudent based on case law that is popping up, it is, at least in the six states I work in, SOP. All the states' laws allow it and the banks collect it.

As a side comment, IF I were a lawyer defending a bank in this instance, I might try the argument that the ROR was mandated by law to protect the customer. Having the customer pay for the bank to hold money in suspense while they decide whether or not to proceed with the loan is not an unfair practice, imho. Might this be better served by a 'holding fee' instead of daily interest accrual over the three days? confused

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#1250826 - 09/16/09 01:58 PM Re: Interest During Rescission Period David Dickinson
Richard Insley Offline
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Sorry for the delayed response, David, I had to go fishing the past two days. grin

Unlike other posters who have studied this more than I have, my concern isn't based on actual cases, but rather the analysis of the fairness of the practice from the consumer's point of view. I've always taken conservative positions during the planning stage of a project or product. When a gray issue turns into a black eye for someone, my goal was that it be someone other than my bank. I've always seen "double interest" along the lines of the dissenting opinion that Randy cited. Until this discussion, I hadn't considered the parallel between Section 8 and "double interest", but that pushes me even further away from the practice.

Biz- The new terms cannot go into effect until the ROR period expires, so interest should continue to run at the rate provided in the old note until the end of the rescission period. Think about what you'd have to do if you moved to the new pricing and then the borrower rescinded the new agreement!
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#1251748 - 09/17/09 03:15 AM Re: Interest During Rescission Period Richard Insley
David Dickinson Offline
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I absolutely agree with not charging double interest.

Hope you had a great time fishing Richard.
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#1251767 - 09/17/09 11:33 AM Re: Interest During Rescission Period David Dickinson
Richard Insley Offline
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Originally Posted By: David Dickinson
Hope you had a great time fishing Richard.

Monday's destination was scenic, but slow. Tuesday's lake was fantastic! My buddy & I kept 45 crappies (10" min.) and 11 nice-size white perch. We guesstimated our total for the day at 250 to 300 fish. The water's still hot & the level's down, so this lake will get better as the weather cools.
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#1251873 - 09/17/09 01:36 PM Re: Interest During Rescission Period Richard Insley
WHEDA Offline
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From Truffle Royale - "Having the customer pay for the bank to hold money in suspense while they decide whether or not to proceed with the loan is not an unfair practice, imho. Might this be better served by a 'holding fee' instead of daily interest accrual over the three days?"

For what it's worth - using the argument that a lender may charge interest during the rescission period because they have committed (are holding) the funds is morally and ethically wrong in my mind. Do these institutions accrue interest on HELOC funds that are "committed" but haven't been drawn down by the borrower? I think not.

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#1252080 - 09/17/09 03:54 PM Re: Interest During Rescission Period WHEDA
Richard Insley Offline
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Originally Posted By: WHEDA
Do these institutions accrue interest on HELOC funds that are "committed" but haven't been drawn down

Do these institutions pay interest on float on the deposit side?
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