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Truth in Lending: 3.9.6.2.8 Fees for post-consummation services

Another example of the trend to unbundle and pass on business costs as separately priced charges is the increase in fees for post-consummation services, such as monitoring the tax lien status of secured property, or checking whether contractually required property insurance has been maintained.

Truth in Lending: 3.9.6.3.1 Overview

According to Regulation Z, certain closing costs are excluded from the finance charge if they are “bona fide and reasonable in amount.”936 Neither the Act nor the regulations give any guidance on the meaning of this phrase.937 When this occurs, Regulation Z instructs that words have the meanings given to them by state law or contract.938 Although courts sometimes use the terms “bona fide” and “reasonable” interchangeably, case law offers some

Truth in Lending: 3.9.6.3.2 Definition of bona fide

Courts have looked to state law, dictionaries and the common-sense, ordinary meaning of the words, using definitions for bona fide such as: made or done in good faith, without deception or fraud, authentic, genuine, real, and sincere.939 In practical terms, a “bona fide” fee should, at a minimum, be one that was genuinely incurred in the amount charged, for the work described.940 For example, a duplicate charge or a charge for an appraisal that never took place would not be bona fide.

Truth in Lending: 3.9.6.3.3 Definition of reasonable

Reasonableness, on the other hand, should be determined by comparison with rates in the marketplace.950 If the creditor’s charge greatly exceeds the prevailing prices of the industry, then there may be a hidden finance charge, particularly if the creditor retains any of the excess or receives a rebate from a particularly expensive third party.951 The reasonableness of some fees may be governed by state law.952 The policies of a state’s title

Truth in Lending: 3.9.6.3.4 Determining if a fee is bona fide and reasonable

Generally, the bona fide and reasonableness requirements suggest that practitioners should seek discovery as to amounts actually paid and an accounting of services performed, particularly if the fees are higher than usual in the area. A practitioner also should seek closing settlement instructions regarding whether a fee was required and how much of the fee the lender approved. Note that any excess fee may have been reimbursed to the borrower at or after closing. Whether or not the excess was returned to the borrower may bear upon whether the fee is a finance charge.

Truth in Lending: 3.9.6.3.5 Average cost pricing

Rulemaking under the Real Estate Settlement Procedures Act (RESPA) complicates the determination of what is a bona fide and reasonable fee. As of October 3, 2015, the rules changed for closed-end consumer credit transactions secured by real property covered by the integrated TILA-RESPA disclosure rules.959

Truth in Lending: 3.9.6.3.6 Investigating third-party fees

Fees to closing attorneys or other settlement agents should be carefully scrutinized in particular when the consumer is also separately billed for the excludable services.977 For example, when investigating a notary fee it would be helpful to ask the following questions:

Truth in Lending: 3.9.6.3.7 How much of the fee is part of the finance charge?

Another issue that can significantly impact liability is whether the entire fee that is not bona fide and reasonable should be disclosed in the finance charge, or only the difference between the amount that is bona fide and reasonable and the amount that was charged. Given the tolerances built into TILA via the 1995 amendments,980 correctly assessing the amount of the undisclosed finance charge can make the difference between liability and exoneration.

Truth in Lending: 3.9.6.4.1 The HUD Settlement Statement and Good Faith Estimate forms

In November 2008 the Department of Housing and Urban Development released amendments standardizing the good faith estimate form and changing the settlement statement.995 While the changes improve consistency and clarity, they omit or obscure some charges relevant to calculating the finance charge.996 Particularly difficult may be determining the allocation of broker compensation.997 The use of these forms is required in all “federally related

Truth in Lending: 3.9.7.1 Overview

Some charges imposed in connection with a security interest may be excluded from the finance charge under prescribed conditions in both real-estate-secured loans and non-real-estate loans. This exclusion covers taxes and fees that meet the following criteria:

Truth in Lending: 3.9.7.2 Taxes; Recording and Filing Fees Prescribed by Law

This provision encompasses taxes and fees for determining the existence of or for perfecting, releasing, or satisfying a security.1045 It does not capture fees to record an assignment of the mortgage, or any other filing fees that relate to a transaction between the creditor and a third party, such as an assignee.1046 In order to be excluded from the finance charge, the fee should be necessary for perfecting the security interest and actually required by law.

Truth in Lending: 3.9.7.3 Nonfiling Fees

Sometimes a creditor will find it easier or less expensive to pay an insurance premium in lieu of perfecting the security interest. A nonfiling insurance policy will pay the creditor if the collateral is lost to it because the security interest was not perfected.

Truth in Lending: 3.10.1 Overview

Creditors, third parties, and sellers may agree to pay some of the closing costs for the borrower. This is more common in consumer credit transactions secured by real estate than in other types of consumer credit. Seller credits occur only when the consumer is buying the real property and the seller agrees to cover some of the consumer’s closing costs.

Truth in Lending: 3.10.2.1 Lender Credits

The CFPB determined that a credit provided by the creditor can offset a specific fee if the legal obligation so provides in the TILA-RESPA context.1083 Note that the TILA disclosure itself does not constitute the “legal obligation.” Rather, the legal obligation includes the loan note and any other documents relevant under state law. When the legal obligation so provides, the creditor can apply the credit to a specific fee.

Truth in Lending: 3.10.2.2 Seller Credits

Like creditor offsets, seller credits will be treated as general or specific depending on the terms of the purchase and sale agreement and other relevant documents between the seller and borrower in the TILA-RESPA context.

Truth in Lending: 3.10.2.3 Third-Party Credits

This category of credits includes those from a real estate agent or real estate developer. Under the TILA-RESPA rules, the CFPB treats these in the same fashion as lender and seller credits. If the credit is paid to cover a specific fee owed by the borrower, the credit is listed in the “Paid by Others” column in the “Closing Cost Details” table on the closing disclosure.1088 The finance charge total can be reduced by the amount of any credit applied against a specific fee that constitutes a finance charge.

Truth in Lending: 3.10.3 Treatment of Credits in Other Loan Contexts

Credits rarely appear in the non-mortgage loan context. Nonetheless, the same principles should apply and consumers should look to the contract and other relevant documents between the consumer and the third party to assess whether a credit against a particular fee is permitted.

Truth in Lending: 3.11.1 Overview

One of the underlying assumptions for the “more than four installments” rule1092 is that merchants might circumvent the objective of TILA by “burying the cost of credit in the price of the goods sold.”1093 The mere fact that a transaction falls within the more than four installment rule does not necessarily mean that a finance charge is involved.1094 But a transaction within the scope of TILA that has no finance charge, a nominal finance char

Truth in Lending: 3.11.2 Proving the Credit Mark-Up

Some sellers may actually admit a differential pricing structure, and certainly this information should be sought in discovery if the practitioner suspects a hidden finance charge.1117 Or a credible witness may be sent to the business to obtain price quotes for a cash purchase, and a second to obtain a price quote after making it clear to the seller that the shopper wants seller financing.1118

Truth in Lending: 3.12.1 Collecting the Papers

While a Truth in Lending analysis has to start with the Truth in Lending disclosures, it frequently does not end with them. Some lenders incorporate everything—note, security agreement, and all TILA disclosures—on one piece of paper. Most car loans and some finance companies (at least on non-mortgage loans) will use this single, integrated document. Other lenders have disclosure statements separate from the note and mortgage or security agreement.

Truth in Lending: 3.12.2.1 Level One

A thorough check of the disclosed figures takes place on three levels.

Do a basic check, taking the creditor’s disclosed figures at face value. Just assume for the moment that the component parts of the loan are all legitimate, and it has allocated them correctly.

Doing a basic arithmetic check on Friendly Finance’s disclosure statement, we see that:

Truth in Lending: 3.12.3 Looking Behind the Papers

Most often, the paper analysis is not the end of a compliance check. More common are charges that are the subject of the exclusionary rules, where the preconditions necessary to qualify are questions of fact. Similarly, there are the “mystery” charges, which you cannot identify. Moreover, occasionally the most innocent-looking item on the list—such as “check to borrower”—can be concealing hidden finance charges, if not outright fraud. The next level of analysis, therefore, is factual investigation. Some of it can be learned from a careful client interview and some from public records.