The Federal Reserve Board's revised commentary on Truth-in-Lending, which went into effect last week, better defines "finance charge" to give bankers a clearer idea of what disclosures are required.
Under Regulation Z, banks must tell borrowers certain information about their loans, including the amount financed, the finance charge, and the annual percentage rate. Not giving the correct disclosures could allow the borrower to back out of his loan.
According to the Fed's commentary, a finance charge is money that is to be paid over the life of the loan. The fees customers pay up front are not finance charges, the Fed said.
This clarification was spurred by a Florida appeals court's ruling last year.
That decision allowed a borrower, Martha Rodash, to rescind a loan made against her home because two closing costs were not properly disclosed in the settlement report. Ms. Rodash's mortgage company listed a $22 shipping tax and a Florida intangible tax of $204 as "amount financed" rather than a "finance charge."
The Fed's rule contradicts the Rodash decision by saying that the fees in that case would not be considered finance charges.
Bankers also have been confused over which closing costs regulators consider to be finance charges.
The Fed said if a fee paid at closing covers both the initial credit decision and services to be performed over the term of the loan, it may be treated as a finance charge.
The commentary also clarifies that advertisements of home equity loans must disclose whether balloon payments are triggered if the borrower makes only the minimum payments.
Compliance with the Regulation Z commentary is optional until Oct. 1.