RSK.IQ Question of the Week 3/14/16

Disclosing Refundable Interest Rate Lock-In Fee

Issue/Inquiry

The Bank collects a lock-in fee which is refunded by check after closing. The Bank asks whether such a fee must be included in the APR, and whether it would make a difference if the fee was refunded for all loans.

Response Summary

The rate lock-in fee would be considered a finance charge under Regulation Z and should be reflected in the APR of the Loan Estimate, which is the initial TILA disclosure provided to the consumer. The APR disclosed in the Loan Estimate is not the binding APR for the loan, but it should be accurate as of the time it is given. The Closing Disclosure provided at loan consummation reflects the final terms of the loan. If the lock-in fee is refunded, it will no longer be reflected in the finance charge or APR, resulting in the finance charge and APR being lower in the Closing Disclosure than in the Loan Estimate.

Response Detail

Under Regulation Z, a finance charge is the cost of consumer credit stated as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. 12 CFR §1026.4(a).

The Bank’s rate lock-in fee would be considered a finance charge, since it is a charge imposed upon the consumer by the Bank as an incident of the credit that is not comparable to the charges in a cash transaction. As such, it would be reflected in the annual percentage rate (“APR”), which is the cost of the credit stated as a rate. Official Interpretations, ¶1026.18(e)-1.

Ultimately, the consumer will not be responsible for the rate lock-in fee, though it is collected and held by the Bank. While Regulation Z does not require “seller’s points” to be included in the finance charge or APR, when the borrower will not be responsible for finance charges paid by the seller on the borrower’s behalf, there is no comparable exception for finance charges which should be refunded by the creditor. 12 CFR §1026.4(c)(5); Official Interpretations, ¶1026.4(c)(5)-2.

The lock-in fee would be reflected in the finance charge and APR of the Loan Estimate, which is the initial TILA disclosure provided to the consumer. The APR disclosed in the Comparison Table of the Loan Estimate is not the binding APR for the loan, but it is important that it accurately discloses the APR as of the time it is given.

At closing, the finance charge and APR will be disclosed in the Loan Calculations table of the Closing Disclosure. The purpose of the Closing Disclosure is to provide a statement of the final loan terms and closing costs. 12 CFR §1024.38(a)(2). If the Bank refunded the rate lock-in fee, the fee would no longer be a finance charge and would not be included in the final loan terms. The finance charge and APR disclosed in the Closing Disclosure would thus be less than the amount and rate disclosed in the Loan Estimate.

In the interest of clarity, it would be better if the refund was made at closing rather than at a later time, in order to avoid the implication that the finance charge and APR disclosed at closing should have reflected charges which had been collected from the consumer and which were still being held by the Bank.

As to whether refunding the lock-in fee for all loans would make a difference in the disclosures, it is true that Regulation Z excludes application fees from the finance charge, when an application fee is charged to all applicants, whether or not the credit is granted.  There are other fees specifically excluded as well (e.g., late charges and real estate-related fees for title insurance or title examinations or appraisals). 12 CFR §1024.4(c). No provision is made, however, for a rate lock-in fee, nor is there anything in the regulation excluding it from the general definition of the finance charge.

As a practical matter, if the rate lock-in fee is going to be refunded to every applicant, whether the loan closed or not, there would be little point in charging it in the first place. Doing so would not be analogous to the rule regarding application fees, since in that situation, the Bank would be keeping the fee paid by each applicant.

 

This entry was posted on Monday, March 14th, 2016 at 3:00 pm.

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