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Truth in Lending: 3.7.2.1 The Basic Interest Cost

Ordinarily, interest will be the largest component, and sometimes the only component, of the finance charge.303 This is consistent with the notion that interest is the basic cost of credit. The “interest” component of the finance charge disclosure includes “prepaid” or “per diem” interest. This is the amount of interest that accrues from the date of the contract to the date on which the interest begins to accrue for purposes of the first scheduled payment.

Truth in Lending: 3.7.2.3.1 General

One logical outgrowth of the characterization of basic interest as a finance charge arises in the context of credit transactions that refinance earlier ones prior to their scheduled maturities.323 If, in calculating the balance of the prior transaction to be paid off, the creditor fails to rebate any unearned charges, the portion of the pay-off representing the unearned charges is part of the finance charge in the new loan.324 Thus it is necessary for the practitioner to scrutinize carefully

Truth in Lending: 3.7.2.3.3 Federal rebate law prescribes method of calculating unearned interest in long-term transactions

The Housing and Community Development Act of 1992342 requires a rebate of unearned interest upon prepayment in full of any consumer credit transaction.343 More importantly, that Act further prohibits the use of the Rule of 78s to calculate rebates in long-term consumer credit transactions. Codified in TILA section 1615, this is a significant protection for consumers because the Rule of 78s is an anachronistic formula that skews refund calculations in favor of creditors.

Truth in Lending: 3.7.3.1 General

All “service, transaction, activity, and carrying charges” are finance charges under TILA.351 The FRB reiterated this position with respect to credit cards in the official interpretations effective 2010.

Truth in Lending: 3.7.3.3 Membership or Participation Fees

Many creditors will charge consumers a fee to participate in their credit plans. A classic example is the annual or semi-annual membership fee paid by credit cardholders to card issuers. Despite the fact that this fee is clearly incident to or a condition of the extension of credit and could logically fall within the scope of section 1026.4(b)(2), Regulation Z specifically excludes a participation fee from the finance charge via section 1026.4(c)(4).362

Truth in Lending: 3.7.3.4 Courier and Express Delivery Fees

Despite the warning of one of the first treatises on Truth in Lending that “the listing of charges that are excludable from the finance charge in real estate and residential mortgage transactions is an exhaustive list and not merely a list of examples,” and that a “courier expense” charge would therefore be a finance charge,369 many creditors have imposed charges for courier fees or express delivery fees and included them in the amount financed.

Truth in Lending: 3.7.4.1 Generally

Although brokers may be involved in many types of loans, this section focuses on mortgage brokers. Because payments to mortgage brokers are subject to special rules under TILA, practitioners will want to investigate carefully the role of every party in a home mortgage transaction to determine whether they should be treated as a mortgage broker.379 Charges imposed by other types of loan brokers are subject to the same finance charge rules as other third parties.380

Truth in Lending: 3.7.4.2 General Rule

The treatment of mortgage broker fees under TILA has evolved from a complex, fact-based analysis to a nearly bright-line rule.384 Since 1995,385 all borrower-paid fees charged by mortgage brokers are considered finance charges.386 This is the case irrespective of whether the fees are paid directly to the broker or via the lender, whether paid in cash or financed, or whether the creditor requires the use of a broker or retains any of the fees.

Truth in Lending: 3.7.4.3 Hidden Broker Fees

Sometimes broker fees are disguised as other types of payments.397 The plain text of the statute requires the inclusion of all fees paid to a mortgage broker, whether individually, in a corporate capacity, or even paid to multiple mortgage brokers. Common sense dictates that padded broker fees or broker fees fraudulently labeled as something else are also finance charges.

Truth in Lending: 3.7.5.1 General

Generally, “points,”406 loan fees,407 assumption fees,408 finder’s fees, and similar charges are finance charges.409 This is consistent with the general definition of finance charge because these charges are imposed by the creditor as an incident to or as a condition of the extension of credit.

Truth in Lending: 3.7.5.2 Exception for Seller’s Points

The exception to the otherwise absolute and unambiguous rule that points are finance charges is the case of “seller’s points,” which are excluded from the scope of Regulation Z’s definition of finance charges.415 Seller’s points are charges imposed by the creditor on the non-creditor seller for providing credit (or credit on certain terms) to the buyer.416 For example, a bank may be willing to give a mortgage loan to a consumer buying a house for $25,000 only if the seller pays the bank two

Truth in Lending: 3.7.1 General

As § 3.2.4, supra, discusses, TILA and Regulation Z create a road map for analyzing any given charge to determine whether it should be considered a finance charge.295 Following the general definition,296 there is a nonexclusive list of examples.

Truth in Lending: 3.7.11.1 General Rule

Generally, if a creditor offers any discount to a consumer to induce the consumer not to pay by credit, the amount of that discount is considered a finance charge.456 For example, if the price of a piece of land is $9,000 if paid in cash or $10,000 if financed, the $1,000 difference is a finance charge for credit customers.457 In the car dealer rebate program scenario, the dealer may offer a rebate to customers who pay in cash or offer a lower interest rate to those who finance the sale.

Truth in Lending: 3.8.2 Prepaid Finance Charges

Prepaid finance charges are part of the total finance charge that must be disclosed. The term prepaid finance charge is an umbrella term for “any finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time.”496 Consequently, prepaid finance charges are simply a subset of the finance charges imposed by the creditor.

Truth in Lending: 3.8.4 Calculating the Amount Financed

Regulation Z’s instructions for calculating the amount financed can make one yearn for the clarity of Alice in Wonderland. To calculate the amount financed, Regulation Z provides as follows:516

Step One:

determine the principal of loan, or, in a sale, the cash price less the down payment

Step Two:

Truth in Lending: 3.9.1 Overview

When it comes to accuracy in calculating the full cost of credit, what TILA giveth, TILA also taketh away. Even if a charge is specifically listed as a finance charge example,535 the charge may be subject to one (or more) of TILA’s exclusionary rules.536