The Federal Reserve Board has moved--if belatedly--to clarify when third party fees in mortgage financings are not financings for purposes of Regulation Z.
In changes to the staff commentary on Truth-in-Lending published for comment Dec. 8, the agency said that third party charges paid by consumers are not finance charges if the creditor does not retain the charges or require the service.
The issue of what is a finance charge and what is an amount financed is becoming more important because of the Rodash line of cases that is bedeviling the mortgage lending industry.
The Rodash case deals with a decision by a Florida mortgage lender to list a $22 Federal Express charge for carrying a payoff of an existing mortgage and a $204 Florida intangibles tax as a closing fee and not a "finance charge." In a case potentially devastating to mortgage lenders, the 11th Circuit Court of Appeals ruled that both levies were "finance charges," and because they were not listed as such were subject to recession for up to three years.
An estimated 50 class-action suits have been filed on issues similar to Rodash, according to comments on the Senate floor Dec. 1, and more are likely. These suits have been filed in Florida, Illinois and Pennsylvania.
The Congress has proposed dealing with the issue as early in the next Congress as it can, but all fixes are seen as prospective, that is, not stopping the current slew of lawsuits against lenders.
Under the Fed's proposed commentary, such charges as a state or local tax on the credit transaction paid by the consumer, even if the tax is collected by the creditor, would not be a finance charge, language directly related to the issues in Rodash.
Also dealing specifically with Rodash is the other example, a fee for courier charged by an independent closing agent to send a document to the title company or some other party, provided that the creditor has not required the use of the courier.
In contrast, the proposal states, third party charges are finance charges (unless otherwise excluded) if the creditor requires the service as a condition of making the loan, even if the consumer can choose the service provider.
The proposal cites such examples as the cost of required mortgage insurance, even if the consumer is allowed to choose the insurer, and when a mortgage broker fee is levied because use of a broker is required, "such as when a consumer cannot get the same loan terms and conditions directly through the creditor (for example, the consumer is offered a loan for 8% only by using a broker; otherwise, the particular loan is offered at 90/0.)"
The comment period on the proposal, Docket No. R-0863, ends Feb. 1. In most cases, a final staff commentary is published before April 1, and it must be incorporated in Reg Z rules by Oct. 1, although lenders have the right to revise their policies immediately.
Other clarifications included say that recurring administrative fees paid by consumers to protect a creditor's security interest in residential mortgage transactions would be required to be listed as finance charges.