Something Old, Something New

The Federal Reserve Board has published its 1997 update to the Regulation Z Official Staff Commentary. Much of the final update is unchanged from the proposal, however, there are several significant changes.

Finance Charge Rules
Much of the update deals with clarifications for the changes to the finance charge rules including third party and broker charges, and debt cancellation or insurance disclosures.

Third party services are now part of the finance charge if the service is required by the creditor. This is the case even if the customer may choose the service provider. The rationale for this rule is that the service - and the cost of it - is a condition of getting credit. By making the service a condition of credit, the cost of the service becomes a finance charge. The commentary offers the example of PMI insurance which is a finance charge even if the consumer may choose the insurer. ?226.4(a)(1)-1 Similarly, requirements attached to reverse mortgages, such as purchase of an annuity or a surcharge for customers who do not purchase an annuity, are finance charges. The final language eliminates the term "effectively required" to provide a clearer test of when the charges for such products are finance charges. ?226.4(a)(1)-2

The Commentary now contains two new paragraphs to clarify how to treat charges incurred by closing agents. First, paragraph 226.4(a)(2)-1 provides the example of a courier fee. When the creditor requires the closing agent to use a courier, the courier fee is a finance charge.

However, paragraph 226.4(a)(2)-2 explains that fees for services incurred by the settlement or closing agent are only finance charges if the creditor required the particular service or retains a portion of the charge.

Fees that would otherwise be exempt, such as fees for real estate secured loans identified in ?226.4(c)(7) do not become finance charges simply because they are incurred by the closing agent instead of the creditor. In other words, exempt fees retain their exempt status, regardless of who charges them.

Per Diem Interest
Regulation Z now provides that changes to per diem interest that occurred after the disclosures were prepared but before closing-because the time of closing was changed - do not affect the accuracy of the finance charge. The Commentary now provides additional explanation of this and examples of how such changes would affect disclosures and tolerance calculations.

Tolerance errors are to be calculated after taking into account any effect of per diem interest. The amount of change to the per diem interest would be removed (subtracted) before calculating any errors to the finance charge and measuring those errors against the tolerance.

In addition, the impact of the change in per diem interest is also disregarded for any numerical calculation that is based on the finance charge, such as the APR and payment amount. ?226.17(c)(2)(ii)-1.

A similar provision appears in the commentary to ?226.31(d)(3) applying the same rule to high cost and reverse mortgages.

Early Disclosures
The commentary provision for this section is adopted substantially as proposed. It clarifies that the redisclosure rule turns on changes to the APR only and is not affected by the changes in finance charge tolerances. For example, a change to the APR that is greater than 1/8 of 1 percent must be redisclosed, even if the resulting finance charge is within the new finance charge tolerances.

This paragraph also explains that when redisclosures are prepared, they must take account of any change in the scheduled closing date to accurately reflect per diem interest. When redisclosures are prepared, they must be accurate as of the date of preparation. Thus, while the per diem interest resulting from a changed closing date would not trigger new disclosures, any changes must be taken into account when a new disclosure is in fact prepared. ?226.17(f)-1.

Itemizations and RESPA Disclosures
Regulation Z provides that the good faith estimate can constitute the itemization of amount financed. ?226.18(c). The correct application of this provision became confused when RESPA's definition of federally related mortgage loan altered the coverage of RESPA. The commentary now includes a provision to clarify that the good faith estimate and/or the HUD-1 constitute compliance with the requirement for an itemization of the amount financed as long as the lender in fact complies with RESPA's disclosure requirements. The paragraph also explains that the compliance with RESPA is sufficient even if the timing requirements are different for those of Regulation Z. ?226.18(c)-4.

APR Tolerances
The Commentary now includes examples of how to calculate tolerances caused by errors in the finance charge or the APR. Paragraphs 226.22(a)(4)-1 and 226.22(5)-1 provide calculation examples showing how different tolerances should be applied based on a finance charge error.

Rescission Rules in Foreclosures
Final Commentary explains the effect of errors in disclosing broker fees when the loan is rescindable. If the disclosure omits a broker fee from the disclosure, regardless of the amount, the loan is rescindable. However, if the mortgage broker fee is disclosed but an error is made in disclosing the amount, the error is subject to the permissible tolerance ($35) in determining whether the loan can be rescinded. ?226.23(h)(1)(i)-1.

Electronic Periodic Statements
The FRB explains that a broad review is underway to look at whether, when, and how all disclosures can be provided to consumers electronically. As a first step into sanctioning electronic disclosures, the Commentary provides that periodic statements may be provided electronically for customers. The creditor may also permit - but not require -the customer to pick up the statement. However, if there is a free-ride period, the creditor must make the disclosure available in compliance with the 14-day rule. ?226.5(b)(2)(ii)-3.

And More on "High Cost" Mortgages
Paragraph 226.32(b)(1)(i)-1 is rewritten to clarify the high cost mortgage rules on calculation of "total points and fees." The new paragraph states that interest - even per diem interest - is not a part of "total points and fees". However, other fees must be reviewed carefully when calculating "total points and fees." The commentary points out that charges exempted from the finance charge in 226.4(c-f) may be included in total points and fees.

Balloon payments on loans with terms of five years or more must be disclosed. Such payments are prohibited on loans of less than five years. 226.32(c)(3)-2

ACTION STEPS

Pull some loan files and review disclosures of third party charges. Make sure that charges for required services are included in the finance charge unless they are exempt under ?226.4(c)(7).
While you have the files out, look at how per diem interest was treated. Check to be sure it is in compliance with the new rule.
Review the redisclosure requirements with your lenders. Make sure they understand how the APR change works and know when to redisclose. If your procedure is to redisclose whether or not there is a change to the APR, make sure this is done consistently.
If you haven't already done so, schedule a training session to update your lenders and loan closers on these new rules. Include coverage of finance charge, tolerances, and disclosing the itemization of the amount financed.
Review your procedures and any other instructions to be sure they accurately reflect these rules.