Prepaid Finance Charges and Truth in Lending

The Truth in Lending Act (TILA) aims to protect consumers by requiring lenders to disclose the terms and costs of credit in a clear and uniform manner. A key component of this disclosure involves accurate accounting for and disclosure of prepaid finance charges.

What are Prepaid Finance Charges?

Prepaid finance charges are specific fees charged by a lender that are paid either before or at the time the loan is consummated (finalized). These charges are considered part of the overall finance charge, the total cost of credit expressed as a dollar amount. Common examples include:

• Loan Origination Fees: Charged for processing and underwriting the loan.
• Discount Points: Fees paid to lower the interest rate. One point is equal to 1% of the loan amount.
• Private Mortgage Insurance (PMI) Premium (Upfront): If paid upfront, rather than monthly.
• Mortgage Broker Fees: Fees paid directly to a mortgage broker.
• Certain Credit Insurance Premiums: Only those required by the lender.

It is crucial to understand that not all fees are considered prepaid finance charges. For example, appraisal fees, credit report fees, and recording fees are generally not included if they are bona fide and reasonable in amount.

TILA's Requirements for Disclosure

TILA mandates that lenders clearly and conspicuously disclose prepaid finance charges to the borrower before the loan is finalized. This disclosure is typically found on the Loan Estimate (for mortgage loans) and the Truth in Lending Disclosure statement. The disclosures must include:

• Itemized List: Each prepaid finance charge must be individually listed and described.
• Amount: The exact dollar amount of each charge must be disclosed.
• Finance Charge: The total finance charge, which includes all prepaid finance charges, must be clearly stated.
• Annual Percentage Rate (APR): The APR reflects the true cost of credit, including the interest rate and all finance charges, expressed as a percentage. Prepaid finance charges have a direct impact on the APR. A higher APR indicates a more expensive loan.

Why are Prepaid Finance Charge Disclosures Important?

Accurate disclosure of prepaid finance charges is essential for several reasons:

• Informed Decision Making: Consumers can compare loan offers from different lenders and choose the option that best suits their needs and budget. By knowing the true cost of credit, including all prepaid charges, borrowers can avoid being misled by seemingly low interest rates.
• Avoiding Hidden Costs: Transparency prevents lenders from hiding fees or misrepresenting the total cost of the loan.
• Legal Compliance: Failure to accurately disclose prepaid finance charges can result in legal penalties for the lender, including fines and potential lawsuits.

What to Do if You Suspect Errors

If you believe that a lender has not accurately disclosed prepaid finance charges, you should:

• Review your Loan Estimate and Closing Disclosure carefully.
• Contact the lender directly to request clarification and corrections.
• File a complaint with the Consumer Financial Protection Bureau (CFPB) if you are unable to resolve the issue with the lender.
• Consider seeking legal advice from a consumer protection attorney.

By understanding prepaid finance charges and your rights under TILA, you can protect yourself from predatory lending practices and make informed borrowing decisions.