Refunding Consumer Loan Overpayments

Is a bank required to refund any overpayment on a consumer mortgage type transaction when a payoff is received? At the present time a refund check is cut and sent back for any amount including cents.  We are looking to establish a policy of setting a range of less than $4 (or a nominal amount) for collection of a short payoff or refund of an overage it that is allowed. If allowed please respond with your professional opinion on an amount.

For both open-end and closed-end consumer loans, Regulation Z requires a bank to do the following when a credit balance in excess of $1 is created in connection with a transaction:

• Credit the amount of the credit balance to the consumer’s account;
• Refund any part of the remaining credit balance, upon written request of the customer; and
• Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than six months, except that no further action is required if the consumer’s current location is not known to the bank and cannot be traced through the consumer’s last known address or telephone number. 12 CFR 1026.11, 21.

This requirement applies when the bank is holding funds in excess of the total outstanding balance due on a loan and not where the consumer has simply paid an amount in excess of the payment due for a given period. A credit balance might result when the consumer has paid off a loan by transmitting funds in excess of the total balance due on the account, or from the early payoff of a loan, entitling the consumer to a rebate of insurance premiums or insurance charges. The bank is not required to wait for a written request from the consumer or for six months to elapse, but can act immediately. Any rights the bank may have under contract or state law with respect to set-off, cross collateralization, or similar provisions are not affected by this provision. Official Staff Interpretations, Paragraph 21(a)-1.

For amounts of $1 or less for existing accounts, the bank should first look to the language of its loan documentation to see whether the question of overpayment has been addressed contractually. If it has, then the bank must honor that language. If it has not, and for loans that will be made in future, the bank can establish policy for what will be done with regards such excesses.

From the standpoint of simplicity and the enhancement of the bank’s reputation for fair dealing, we would recommend that any excess in any amount be refunded to a customer of the bank, with the cost of doing so considered merely the cost of doing business.

This entry was posted on Monday, April 14th, 2014 at 1:50 pm.