Reg Z: Possible "Finance Charge" Violation

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Question:

We are offering Closed End Home Equity loans which have closedend monthly outstanding balance (cemob)credit insurance premiums on them. We have been told that we may be in violation of Reg Z with respect the "Finance Charge" since the "Total of Payments" includes the PandI plus the monthly insurance premiums. The insurance premiums are exempt from the Finance Charge (not required to obtain the loan and according to HOEPA rules). However when auditors use the conventional TruthinLending testing tools, the loans show up as a Reg Z violation due to the "Total of Payments" including the Insurance Premiums. I would appreciate any information you may have on this subject.

Answer:

The auditors don't know what they are doing. You are permitted to include items such as this in the payment schedule, the Total of Payments must equal the sum of the payments, but nothing says it must also equal the Amount Financed plus the Finance Charge. In order to audit such a disclosure, you must eliminate the amounts from the payments that are neither repayment of the "amount financed" nor collection of the "finance charge."

First published on BankersOnline.com 7/21/03