Discount for inducing payment without using credit 9.Other charges that always qualify include, but are not limited to: 5 Interest is the most obvious example and most common finance charge. We use this framework for thinking about how charges should be included in the finance charge and when to exclude them.įINANCE CHARGE RULES FOR CLOSED-END CREDIT Charges Always IncludedĪ key aspect of the finance charge definition quoted previously is that it captures charges borrowers incur only when they are financing their purchase instead of paying cash. The chart categorizes charges into several categories: 1) some charges that are always included in the finance charge, 2) some that are always excluded, 3) some that may be excluded if certain conditions are met, and 4) some that are excluded with respect to credit secured by real property or in a residential mortgage transaction (even though they would be considered finance charges in other types of credit transactions). Neither is exhaustive nor exclusive, nor does either substitute for the regulation or Official Staff Commentary (commentary). That said, the chart and this article are instructive but meant only as a guide. Table 1 displays the “Interagency Examination Procedures for Regulation Z,” which lenders may find helpful for identifying finance charges. While on its face this definition seems clear, it can be challenging to apply because of the wide range of fees and charges that can be incurred in credit transactions and because the definition is subject to several exceptions. It does not include any charge of a type payable in a comparable cash transaction.”

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. Section 1026.4(a) of Regulation Z defines a finance charge as “the cost of consumer credit as a dollar amount. The intent of this article is not to provide an exhaustive list of charges qualifying as finance charges under Regulation Z but to review the general principles for determining when a charge is a finance charge for closed-end credit. This article will focus solely on the disclosure of finance charges for closed-end credit transactions, which are among the violations most frequently cited. 4 To facilitate compliance, this article reviews the regulation’s requirements for determining when a charge must be included in the finance charge, identifies common pitfalls, and offers tips and tools to assist lenders with avoiding and detecting finance charge violations.Īlthough the definition of a finance charge disclosure is the same for closed- and open-end credit transactions, the disclosure rules are different. 3ĭespite the importance of the finance charge disclosure, violations continue to be frequently cited during Federal Reserve examinations. In addition, inaccurate finance charge and APR disclosures can result in restitution to the consumer if the errors exceed regulatory tolerances and can trigger the right of rescission in mortgage transactions subject to rescission. Accurately computing and disclosing the finance charge is important because consumers may rely on it as well as related disclosures whose calculations are based on it, particularly the APR, when shopping for credit and evaluating credit offers. 2 It is also used in calculating other TILA disclosures, including the annual percentage rate (APR). …” 1 The finance charge disclosure informs consumers about the cost of credit expressed as a dollar amount. The Truth in Lending Act (TILA) requires creditors to disclose key information about consumer credit transactions “so that the consumer will be able to compare more readily the various credit terms available” and “avoid the uninformed use of credit. It does not include any charge of a type payable in a comparable cash transaction.” - Regulation Z, 12 C.F.R. Louis “The finance charge is the cost of consumer credit as a dollar amount. Frogge, Former Examiner, Federal Reserve Bank of St. Consumer Compliance Outlook: First Issue 2017 Understanding Finance Charges for Closed-End Creditīy Leslie A.

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