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If a customer is required to get housing counseling due to a special loan program our bank offers, is the housing counseling fee charged to the customer considered a prepaid finance charge? In a cash transaction, this loan program would not be used. – IBA Compliance Connection

IBA Compliance Connection

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If a customer is required to get housing counseling due to a special loan program our bank offers, is the housing counseling fee charged to the customer considered a prepaid finance charge? In a cash transaction, this loan program would not be used.

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Yes, we believe that the fee would be considered a prepaid finance charge under Regulation Z, as the housing counseling and payment of the associated fee is required as part of your special loan program and because the fee would not be paid in a comparable cash transaction.

Under Regulation Z, a finance charge is “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit” that would not be paid in a comparable cash transaction. The finance charge includes charges by third parties when you require the use of a third party “as a condition of or incident to the extension of credit.” “Prepaid” means the charge is paid before or at consummation of a transaction.

Consequently, we believe the housing counseling fee would be considered a prepaid finance charge, as the customer must pay the fee before consummation, your bank requires the customer to use the housing counseling services as a condition of making the loan under your special loan program, and the fee would not be payable in a comparable cash transaction — our understanding is that much of the material covered would be irrelevant for a cash buyer who is not financing the home purchase.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.4(a) (“The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”)
  • Regulation Z, 12 CFR 1026.4(a)(1) (“Charges by third parties. The finance charge includes fees and amounts charged by someone other than the creditor, unless otherwise excluded under this section, if the creditor: (i) Requires the use of a third party as a condition of or an incident to the extension of credit, even if the consumer can choose the third party; or (ii) Retains a portion of the third-party charge, to the extent of the portion retained..”)
  • Regulation Z, 12 CFR 1026.2(a)(23) (“Prepaid finance charge means any finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time.”)