VIDEO: TRID Prepayment Penalty to Recoup Costs
In this Compliance Clip (video), Adam answers a questions about disclosing a prepayment penalty on the Loan Estimate (and Closing Disclosure) when the note allows for a fee to recoup some costs if the loan is paid off with the first 36 months after consummation. While this shouldn’t be a day-to-day TRID question for any lender, this is something that should be looked at as this could be a systemic violation of Regulation Z if not disclosed properly.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about TRID prepayment penalties and whether or not a recoupment fee is actually a prepayment penalty the needs disclosed on the Loan Estimate and Closing Disclosure.
The question I received was this, it says, “We charge a “recoupment fee” if you pay off a loan within 36 months of origination, but we answer “NO” to whether the loan has a prepayment penalty on page one of the Loan Estimate and Closing Disclosure in the loan terms box. Is this correct or should we be listing “YES” we have a prepayment penalty?” Basically they're charging a fee if a loan is paid off early and they want to know if this is a prepayment penalty?
Well, the answer to this of course is going to come from TID in Regulation Z. It's actually found in part 1026.37(b)(4) at least this is the portion for the loan estimate that does apply to the closing disclosure as well. We also have to look at the commentary. So there's quite a bit to look at here.
First of all, 1026.37(b)(4) defines a prepayment penalty. It defines a prepayment penalty as a charge imposed for paying all or part of a transaction’s principal before the date on which the principal is due. But we don't have a period here, we have a comma. So if that was it, we'd have one answer. But in fact, it goes on to say this. It says, “other than a waived bona fide third-party charge that the creditor imposes if the consumer prepays all the transaction’s principal sooner than 36 months after consummation.” So what we're talking about here is a waived bona fide third-party charge. We're not talking about a bank charge, like an origination fee. We're talking about a bona fide third-party charge. So if you have an origination fee and you charge that, if they pay early, that is considered a prepayment penalty. If it's a bona fide third-party charge, then in that case, it could potentially not be. Fortunately for us, the commentary gives us a number of examples of what is, and what is not a prepayment penalty.
The original question doesn't really tell us what's included in this recoupment fee so you would have to actually dig in to understand what it's recovering. What is it recouping? Is it a third-party bonafide charge or is it a bank charge? But once you figure that out, we can take a look at the commentary here cause it expands on this just a bit and tells us a couple of things. It gives some examples. It says, “For example, assume that at consummation, the creditor waives $3,000 in closing costs to cover bona fide third-party charges but the terms of the loan agreement provide the creditor may recoup the $3,000 in waived charges if the consumer repays the entire load balance sooner than 36 months after consummation.” The note basically has a recoupment fee, just like our question, built into the note saying it can recoup this cost if the loan is paid off within 36 months after consummation. In this case, the $3,000 charge is not a prepayment penalty. You don't have to disclose it that way. So you would say no on that loan terms box on your page one of your Loan Estimate and Closing Disclosure.
Now it goes on, it says there's some instances where we may have to say yes. “In contrast, for example, assume that at consummation, the creditor waives $3,000 in closing costs to cover bona fide third-party charges but the terms of the loan agreement provide the creditor may recoup $4,500 in part to recoup waived charges if the consumer repays the entire loan balance sooner than the 36 months after consummation. Of course, the $3,000 that the creditor may impose to cover the waived bona fide third-party charges is not a prepayment penalty, but the additional $1,500 charge is a prepayment penalty and therefore, in this case, you would have to disclose that as a prepayment penalty on the Loan Estimate and Closing Disclosure.
The comments that are here at 1026.37(b)(4) actually give us quite a few examples of things that are a prepayment penalty and things that are not. So if you have a question on this, take a look at the commentary, dive in a little bit deeper to the rules and be a compliance geek just like me.
That's all we have for today. I hope you enjoyed this Compliance Clip.