Finance charges are defined and set forth in 12 CFR §1026.4 and are included as a part of the Annual Percentage Rate (APR; see Ibid. §§1026.14, 1026.22, & Pt. 1026, App. J,), both of which are disclosed in the Truth-in-Lending Disclosure and other documents.
According to Ibid. (b)(5), “[consumer-paid] premiums or other charges for any guarantee or insurance protecting the creditor against the consumer’s default or other credit loss” can be considered a finance charge and, as such, be included in the APR. The Official Staff Commentary to this clause also confirms this, as follows:
“Common examples of the insurance against credit loss mentioned in § 1026.4(b)(5) are mortgage guaranty insurance, holder in due course insurance, and repossession insurance. Such premiums must be included in the finance charge only for the period that the creditor requires the insurance to be maintained.” (12 CFR Pt. 1026, Paragraph 4[b])
Mortgage insurance (MI) premiums can also be considered prepaid finance charges, according to the following guidance from the “TILA Handbook” published by the Federal Reserve Board in 2006 (available at www.federalreserve.gov/boarddocs/supmanual/cch/200601/til.pdf):
“Examples of finance charges frequently prepaid by consumers are . . . mortgage guarantee insurance fees paid to the Federal Housing Administration [and] private mortgage insurance paid to such companies as the Mortgage Guaranty Insurance Company . . .”
MI premium escrow reserves are disclosed in line 1003 of the HUD-1 Settlement Statement. In the past, DocuTech has allowed clients the option of setting the amount in this line as an APR item. However, since it is apparent under Regulation Z that MI cushion is considered a (prepaid) finance charge, DocuTech will be changing its indicator to always have borrower-paid MI cushion on 1003 included both as an APR item and as a part of the prepaid finance charge calculation.
This change will take effect on April 12, 2012. If you have any questions or concerns about this change, please contact Client Support at 1.800.497.3584.
April 10, 2012