Question & Answer

Question: We occasionally get loan applications for two loans, a first and a second, brought to us by a mortgage broker. The broker charges a single fee for both loans. Sometimes it is a percentage of the loan amount and sometimes it is a fixed fee. Is this a finance charge for both loans? How do we disclose it on the HUD-1?

Answer: RESPA and Truth in Lending look at this charge differently. HUD's interpretation of RESPA is that this fee is a cost of each loan. HUD wants you to disclose this fee on both HUD-1s. Their concern is that disclosing it on one loan and not the other could misrepresent or understate the fees the customer is paying. In your example, it actually results in double disclosure but HUD would much rather have double disclosure than risk under-disclosure.

For purposes of Truth in Lending, the issue is somewhat different. The fee is a finance charge - no question about that. The truth is that the customer is paying the fee once. The question for you is which loan to put the fee on. But you don't use the full fee for each loan.

If the broker's fee is a percentage of the total loan amounts, the appropriate thing to do would be to split the fee proportionately between the two loans for purposes of the finance charge and APR. If the fee is a fixed sum, the solution is less clear. We think that placing the entire fixed fee on the first loan is the best solution. That is arguably the larger amount, the primary loan, and the first one that the customer will look at when carefully reading the disclosures. The fact that this makes the second loan look more like a bargain is less troublesome that attempting to invent a formula for splitting a fixed fee between two loans of different terms and amounts.

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 8, 7/99