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Wednesday, November 26, 2014

Corrective Actions for Understated APR

QUESTION
We are a lender that made a USDA Rural Development loan to a borrower. We provided the borrower with a Truth-in-Lending Act (TILA) disclosure statement that disclosed the RD guarantee fee.

However, we failed to include the RD guarantee fee as a prepaid finance charge in annual percentage rate (APR) calculation. This failure to include resulted in an understated annual percentage rate (APR) in excess of 0.125% of the disclosed APR. We closed on the loan less than 60 days ago and borrower has not yet made any payments with respect to the loan.

What can we do to rectify the situation?

ANSWER
Under the provisions of the TILA, there will be no civil or regulatory liability if, within 60 days of discovering the error, the lender notifies the consumer of the error and “makes adjustments necessary to assure that the person will not be required to pay an amount in excess of the charge disclosed or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower”. [15 U.S.C. § 1640(b)] 

Thus, the consumer is to pay no more than the lesser of the finance charge actually disclosed (which would require the reimbursement of the undisclosed guarantee fee) or the dollar equivalent of the APR actually disclosed. In the scenario outlined above, you must notify the borrower and reimburse the borrower for the RD guarantee fee.

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group