TIL Amendments: Fixing "Rodash" and other problems

On September 30, 1995, President Clinton signed into law amendments that will bring an end to >
Subject to three conditions, fees imposed by third parties such as attorneys, closing agents, or title companies, are not finance charges. The three conditions relate to customer choice and fees or situations that are not under the control or influence of the creditor. Third party charges are not finance charges if:

the bank did not require the charges, or
the bank did not require that service, and
the bank does not retain any part of the fee charged by the third party.

Two elements in this provision are fundamental to Regulation Z. First, fees or charges that the applicant must pay in order to obtain credit are finance charges. They are a condition of obtaining credit. Moreover, they are usually fees that the applicant would not necessarily pay in a cash transaction. Second, the creditor must not retain any part of the charge.

This provision will take effect on the earlier of 60 days after the FRB issues final regulations or on September 30, 1996.

Second, Congress has given with one hand and taken with the other. Now included in the finance charge are borrower paid mortgage broker fees. These fees will be finance charges whether they are paid directly to the broker or to the lender and whether they are paid in cash or financed. The FRB must issue regulations to implement this provision by March 30, 1996.

For loans secured by real estate, the new act also exempts fees charged for pest infestation (usually termites) and flood hazard determinations conducted prior to closing. These fees are charged for services that help to determine the value and condition of the property and are to be treated in the same way that appraisal fees are considered.

Also exempted are filing fees and taxes of the type involved in Rodash v. AIB Mortgage Co.

Perhaps the best news in the increased tolerances for closed end loans secured by real estate (or by a dwelling). For these loans - and these loans only - the finance charge tolerance has been increased to $100. Also, over-disclosure - disclosing an amount greater than the actual finance charge - is no longer a violation for real estate secured loans.

These disclosure errors will be considered accurate for purposes of the law if they are within a second tolerance formula. If the difference between the finance charge disclosed and the actual finance charge is less than 0.5% of the total amount of credit extended, the error is within this second tolerance. However, if the loan is a refinancing of a residential mortgage and does not include financing of any advances other than accrued and unpaid finance charges, then this formula uses 1% of the amount financed to determine whether there is a violation.

An additional provision in this act requires the FRB to study charges related to consumer credit and report to Congress on ways that Truth in Lending could be amended to more accurately reflect the cost of credit. This is an excellent time to raise questions and to bring fee practices to the attention of the FRB. The quality of their report will be improved by information they get from you.

Protection from liability
The new act provides creditors with protection from lawsuits and, in some cases, rescission, for Truth in Lending disclosures involving the taxes, filing fees, or finance charges that are affected by this act if the disclosures were made prior to September 30, 1995 and are otherwise in compliance with Regulation Z.

The Act establishes more liberal tolerances for these disclosure problems. The act protects creditors from liability if the disclosed finance charge is within $200 of the actual finance charge, is within 0.5% of the amount financed, or is greater than the actual amount or percentage.

ACTION STEPS

Interview your loan officers to determine whether your bank is receiving broker referrals. Pull loan files brought to the bank by brokers and review the fee structure of the brokers. Determine how any fees are charged and disclosed.
Interview senior lending staff and review a broad sample of loan files to determine whether your bank is retaining any fees or part of any fees charged by third parties. Look particularly for fees related to insurance, appraisals, flood hazard certifications, and similar types of services. If the bank is retaining parts of any fees, establish correct disclosure procedures.
Advise your loan officers of the changes in the finance charge rules. Alert them to the fact that they will need to collect information about loan broker fees and other third party charges.