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Wednesday, December 24, 2014

Finance Charge: Foreclosure Refinance

QUESTION
It is my understanding that TILA provides the finance charge tolerances on all residential mortgage loans. Recently, however, we originated a foreclosure refinance loan that was kicked back to us by our investor for a tolerance violation. What caused this violation?

ANSWER
The investor no doubt saw the disclosed finance charge as a tolerance violation with respect to a consumer’s right to rescind. With respect to the rescission right, Regulation Z (the implementing regulation of the Truth in Lending Act, or “TILA”), mandates a higher tolerance for certain loans and a lower tolerance in foreclosure situations, such as in the case of a foreclosure refinance.

For purposes of the right of rescission of certain residential mortgage loans, the disclosed finance charge is accurate if:
  1. It is understated by no more than 1/2 of 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than one-half of 1% of face amount of the note or $100, whichever is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the disclosed finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(1)] 

However, there is a lower tolerance in foreclosure situations, where (a) there is a new creditor, (b) the loan is not a HOEPA loan, and (c) there is no new advance or a consolidation of existing loans.

Given the foregoing caveat, for purposes of the right of rescission in a foreclosure situation, the disclosed finance charge is accurate if:
  1. It is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than 1% of the face amount of the note or $100, which is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(2)] 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group