Overstated Finance Charge

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Question:

We have reviewed several TILs dating back 6 months to a year for construction loans that had a six month construction period. The TIL was for the construction period only. In almost every case, the APR disclosed was accurate, and the Finance Charge was overstated substantially. My question relates to the overstatement of the finance charge. Is the overstatement of the finance charge a violation of Reg Z?

Answer:

Answer by Andy Zavoina:

While not accurate, it is no longer a violation to overstate the FC.

12 CFR Section 226.18 Content of disclosures.
(d)(1) Mortgage loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) shall be treated as accurate if the amount disclosed as the finance charge:...

(ii) is greater than the amount required to be disclosed.

Answer:

Answer by Richard Insley:

You must have no other type of Finance Charges for these loans. Normally when you overestimate the interest part of the FC, the APR becomes understated. If you DO have prepaid FCs for these loans, recheck the APR--it's probably understated by more than the reimbursement tolerance.

First published on BankersOnline.com 7/1/02