Truth in Lending: 3.7.4.4 Yield Spread Premiums
Although borrower-paid broker compensation is almost always considered a finance charge, the opposite is true for lender-paid broker compensation.
Although borrower-paid broker compensation is almost always considered a finance charge, the opposite is true for lender-paid broker compensation.
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
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.
The 1981 Cash Discount Act459 is part of TILA and establishes special rules for discounts offered to prospective credit card customers.
A creditor may require a consumer to purchase insurance that will protect the creditor against the consumer’s default or other credit loss. Common examples of such insurance are mortgage-guaranty insurance and repossession insurance.
One TILA category that people on both sides of the loan desk sometimes find confusing is the prepaid finance charge.
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.
Regulation Z specifically ties disclosure of the prepaid finance charge to the itemization of the amount financed,510 but the prepaid finance charge is always calculated as a component of the finance charge, never as a component of 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:
The official interpretations define an application fee as a charge to recover the costs associated with processing applications for credit.542 According to the official interpretations, this fee could cover costs of services, such as credit reports, credit investigations, and appraisals, even though such costs would otherwise be included in the finance charge.543
Over-the-limit fees are a major source of revenue for many credit card issuers, and the Comptroller of the Currency has termed them “interest” under the National Bank Act, the law controlling national banks.555 Yet Regulation Z excludes over-the-limit charges from its definition of “finance charge” under the Truth in Lending Act.556
So-called “courtesy” overdraft services are a form of disguised high-cost credit offered by banks and credit unions.559 Separate from explicit overdraft lines of credit—through these overdraft services—financial institutions offer short-term credit with fees that amount to triple-digit rates. When the financial institution covers an overdraft, the bank repays itself by deducting the amount of the overdraft plus a hefty fee, often up to $35, by setting off the consumer’s next deposit.
Insurance written in connection with a consumer credit transaction587 clearly meets the prima facie definition of a finance charge.
The federal McCarran-Ferguson Act596 leaves the “business of insurance” to state regulation and bars substantive federal regulation of insurance. However, TILA’s disclosure requirements do not rise to the level of substantive regulation of either the sale of insurance or the cost of insurance under the McCarran-Ferguson Act and so are not barred.597
Some states do not consider debt cancellation or debt suspension coverage to be insurance. Regardless, under TILA they are considered credit insurance for finance charge purposes, unless stated otherwise.602
Credit insurance is a form of insurance offered in connection with a loan where the policy terms are specifically related to the loan, and the creditor or the credit account is the beneficiary.607 Creditors must include charges for credit life, credit accident, credit health, or credit loss-of-income insurance in the finance charge if the insurance is sold in connection with a credit transaction, unless the transaction meets several conditions described below.608 In theory, the insurance pay
Facially, credit insurance protects the consumer, whose estate would be relieved of the obligation to repay the debt in the event of her death, or who does not have to make payments during a covered disability or loss of employment. But in practice the far greater benefit goes to the creditor for several reasons.
Where credit insurance is legal,619 premiums and other costs for credit insurance may be excluded from the finance charge only if the following conditions are met:
Insurance premiums are included in the finance charge only when the policy is “written in connection with a credit transaction.”630 Implicit in the official interpretations is the suggestion that “in connection with” should be interpreted to encompass insurance purchased contemporaneously for use in that transaction.631 Fees for debt cancellation coverage are practically per se written in connection with the credit.632 In general, if a premiu