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TILA and Regulation Z: Top 10 Material Violations
By: Justin Hosie[1] and Cliff Cook[2]
June 5, 2022
Excerpt from presentation at the 2022 ACUIA Convention:
#1: Failure to treat loan fees, credit report fees, document prep fees, and other fees as prepaid finance charges
If a finance charge is paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time, then it’s a “prepaid finance charge.” In most loans, even if you call an amount a “loan fee,” a “credit report fee,” a “document preparation fee,” an “origination fee,” or some other creative name, if it meets that definition, it’s a prepaid finance charge. Renaming your fee doesn’t change the treatment under TILA. If it looks like a duck, swims like a duck, and quacks like a duck…well, you know the rest.
The most common examples of prepaid finance charges included buyer’s points, service fees, loan fees, finder’s fees, loan-guarantee insurance premiums, and credit investigation fees. When finance charges are paid separately or withheld from the proceeds, they are prepaid finance charges.
There are numerous reasons that getting this right is critical. One is that prepaid finance charges must be taken into account in computing the disclosed “amount financed.” Like a bad math student who stays up too late watching comedy, if you start with the wrong figures, you’re going to end up doing all of the math wrong. In this case, an incorrect amount financed may result in an understatement of both the disclosed finance charge and APR. Stay tuned for the rest of the article in our upcoming blog posts!
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