What is a Finance Charge?
money, in turn, borrowers can purchase a new home, automobile, etc. Moreover, credit card companies make it possible for consumers to “buy now, and pay later.” In order for these types of business to continue lending money, they must charge borrowers a fee. This fee is called a finance charge, and it includes any interest added to the loan balance, service fees, late fees, balance transfer fees, etc. Finance charges vary, and depend on the amount borrowed and the interest rate received.
Written by Melanie A. Feliciano With this article, Document Systems, Inc.’s (“DSI’s”) Compliance Department launches a three-part series on the rudiments of the Finance Charge, as defined under the Truth in Lending Act1, to respond to a growing number of telephone calls from customers inquiring into whether a particular fee, cost or charge may be excluded from the calculation of a Finance Charge. The federal Truth in Lending Act (“TILA”) requires both lenders and brokers to accurately disclose the Finance Charge to the borrower before the borrower commits to accepting the obligations under a home loan. Additionally, the Finance Charge forms the basis for calculating the Annual Percentage Rate (“APR”), which, in turn, determines if a particular loan is a high-cost or “Section 32” loan. A loan that qualifies as a high-cost loan requires additional compliance. So, knowing which charges the lender can exclude from the calculation of the Finance Charge could be critically helpful to avoidin
It’s easy to forget that banks and other lending institutions actually need to earn money themselves. One way credit card companies and banks make a profit is by charging customers for the privilege of borrowing their money. Any additional fee added to the original amount of a loan can be called a finance charge. This definition of finance charge includes the interest added to the balance, service fees for transactions, late fees, and balance transfer fees. When a customer receives a $1000 USD loan from a bank, for example, the bank has the legal right to charge interest based on the current federal prime lending rate. If this interest rate were a fixed 10%, the eventual ‘cost’ of borrowing the original $1000 would be at least $1100, the amount of the loan plus a $100 finance charge. But this isn’t the end of the finance charge story. Banks and credit card companies also expect a minimal payment to be made by a specified time of the month. Customers may have a few days after that date
Written by Melanie A. Feliciano In this final part of our series on the rudiments of the Finance Charge, as defined under the Truth in Lending Act, we describe the process for determining whether a particular cost or fee is a Finance Charge. If you recall, in our March 2005 issue of The Compliance Wizard, we defined, in general terms, what a Finance Charge is relative to home equity lines of credit (HELOCs) and residential mortgage transactions. Our April 2005 issue discussed the types of charges, fees, and costs that must be excluded from the definition and calculation of a Finance Charge pursuant to Regulation Z Section 226.4 and the Official Board and Staff Interpretations issued by the Federal Reserve Board. The Finance Charge and the Annual Percentage Rate (APR) are two of the most important disclosures required under the Truth in Lending Act (TILA). These two items are required by TILA to be disclosed more conspicuously than any other item. An accurately calculated Finance Charge
