Finding Finance Charges

No matter how you count or measure compliance risk, Truth in Lending has led the list for decades. The number of errors that translate into violations is always high. But the worst thing about Truth in Lending violations is that they can cost money - lots of it. Restitution costs. And it is never a good thing to tell management about.

Vulnerability to restitution lies in several practices, the calculation of APRs and the calculation of the total finance charge. It is easy to make arithmetic mistakes here. Clerical errors happen. This always has to be checked. But the big mistake is missing a finance charge altogether.

The standard procedure in a compliance audit is to look at the numbers the lending staff has identified, and check the math. This isn't enough. For one thing, it assumes the lending staff knows what they are doing. When it comes to Regulation Z, this may not be the case. It also assumes that the documentation you are looking at is complete. Again, this may not be the case.

One step you should always take in a Truth in Lending audit is to check the thoroughness of lending staff in identifying fees and in deciding where those should go in the preparation of disclosures.

Identifying all those finance charges is a fundamental part of the calculating the finance charge. In order to check the accuracy of the finance charge disclosure, you have to find all the fees that lending staff found - and those they should have found and included. This means research - talking with staff that may order or arrange for services that involve fees and looking around the institution for tell-tale bills.

Another consideration is how the institution is using the allowed tolerances. Some lenders derive a sense of security from the tolerances, figuring that the tolerance will protect them if they make a mistake. But the compliance manger knows that the tolerance may be eaten up by small differences in fees and charges, such as the actual cost of a credit report and the amount actually charged to the customer.

The goal in the audit should be total accuracy. This gives you a measure of what is actually happening. It also gives you a measure of what degree of protection is left from the tolerances.

Start with the HUD-1. Identify everything that is a finance charge. Make sure that this is included in the finance charge calculation.
Don't stop here. You need to find charges that may be incurred but not captured correctly. Ask each loan officer to make a list of all the fees and charges they have ever imposed or seen in connection with a loan.
Make a finance charge chart using those fees. Be sure to use the names for fees that the loan officers use. If your loan officers use more than one name for the same fee, include all of those names in your chart. Don't give them any excuses.
Determine which fees are finance charges for mortgage and for consumer loans. Put this into a chart and give this to the lenders.
Introduce the chart in a training class. Use it as a handout and instruct the loan officers to use it.
In your conversations with loan officers, ask probing questions about referral practices that may have fees, such as broker referrals and home ownership counseling services that make referrals. Find out everything you can about these practices and fees. Think RESPA as well as Truth in Lending.
Review bills from service providers, such as credit bureaus, appraisal services and flood determination companies. Compare the actual charges for each loan with the fee charged to the customer. Look for any add-on fees that are finance charges.
Review any underlying contracts with those service providers. Contracts may specify or describe charges in ways that establish them as finance charges.
Talk with other compliance managers in your market. Networking is an excellent way to find out about new lending practices that may have Truth in Lending implications.