Academic journal article ABA Banking Journal

Getting "No-Cost" Loans Right under Reg Z

Academic journal article ABA Banking Journal

Getting "No-Cost" Loans Right under Reg Z

Article excerpt

Q. I am performing a truth in lending compliance review of our mortgage department, I have come across a "no-cost" loan. I am unsure about Regulation Z and the calculation of the APR for this type of loan. If the bank pays a typical finance charge item (i.e. loan origination fee) should it still be included in the finance charge and the APR calculation?

A. No. Items paid for by other than the borrower or otherwise not imposed upon the borrower are typically exempt from the finance charge, especially if the borrower is not obligated to pay for it. For examples, see the Regulation Z Commentary, Section 226.4--Finance Charge, at 4(a)-2 and 4(c)(5)-1 and 2.

1. Comment 4(a)-2, costs of doing business: "Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or service sold."

2. Comment 4(c) (5)-1, Seller's points: "The seller's points mentioned in Section 1026.4(c)(5) include any charges imposed by the creditor upon the noncreditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A commitment fee paid by a non-creditor seller (such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges."

3. Comment 4(c)(5)-2, Other seller-paid amount: "Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a non-creditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available." (Response provided December 2012. …

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