8.1 Closed-End Credit: Disclosures, Finance Charges and APR

---

1. Core Closed-End Disclosures (§1026.17, §1026.18)

For closed-end credit transactions not subject to the TRID rule (such as personal installment loans, auto loans, and other covered non-TRID consumer credit), creditors must provide five core disclosures clearly and conspicuously in writing before consummation:

1. Amount Financed (§1026.18(b)): The net dollar amount of credit provided to the consumer. Calculated as: Principal loan amount minus prepaid finance charges, plus any other charges financed that are not part of the finance charge.
2. Finance Charge (§1026.18(d), §1026.4): The total dollar cost of consumer credit, representing the sum of all charges 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.
3. Annual Percentage Rate (APR, §1026.18(e), §1026.22): The cost of credit expressed as a yearly rate, measuring the true economic cost of borrowing by relating the finance charge to the amount financed over time.
4. Total of Payments (§1026.18(h)): The total dollar amount the consumer will have paid after making all scheduled periodic payments as agreed. (Amount Financed + Finance Charge).
5. Payment Schedule (§1026.18(g)): The number, amounts, and timing of payments scheduled to repay the obligation.

---

2. Finance Charge Rules: Inclusions & Real Estate Exclusions (§1026.4)

Accurate APR calculation hinges on the correct classification of every settlement fee as a finance charge. Misclassifying even a minor fee causes finance charge and APR understated disclosures, triggering statutory violations and rescission extension risks.

Included Finance Charges (§1026.4(a), (b))

Unless specifically excluded by regulation, the following fees are always finance charges:

• Interest, time-price differentials, and discount points paid by the consumer;
• Loan origination fees, processing fees, underwriting fees, and administration fees;
• Mortgage broker fees (paid directly or indirectly by the consumer, even if creditor does not retain them);
• Credit life, disability, or unemployment insurance premiums, unless the creditor discloses that insurance is optional, provides cost disclosures, and obtains the consumer's affirmative written opt-in;
• Credit report fees in non-real-estate transactions.

Statutory Real Estate Exclusions (§1026.4(c)(7))

In transactions secured by real property or a dwelling, the following fees are expressly excluded from the finance charge, provided they are bona fide and reasonable in amount:

• Fees for title examination, abstract of title, title insurance, property survey, and similar title-related fees;
• Fees for preparing loan-related documents (deeds, mortgages, notes);
• Notary fees. Settlement-agent charges must be analyzed under § 1026.4(a)(2) and the separate exclusions; a general closing fee is not automatically excluded;
• Property appraisal fees and credit report fees;
• Amounts required to be paid into escrow accounts for future property taxes and hazard/flood insurance.

Compliance Danger Point: If an excluded fee is inflated above its actual, bona fide market cost (e.g., charging $950 for an appraisal that cost $450 and retaining the difference), the unreasonable excess is recharacterized as a finance charge, invalidating the disclosed APR.

---

3. APR Accuracy & Statutory Tolerances (12 CFR §1026.22)

The APR must be determined using either the actuarial method or the United States Rule. Regulation Z establishes strict legal tolerances for APR accuracy:

Distinguish disclosure accuracy from rescission accuracy

For real-property or dwelling-secured closed-end disclosure purposes, § 1026.18(d)(1) treats the finance charge as accurate if understated by no more than $100 or overstated. The separate rescission tolerance in § 1026.23(g) is generally the greater of 0.5% of the face amount of the note or $100; qualifying new-creditor refinancing transactions can receive the 1% rule. After foreclosure begins, § 1026.23(h) generally uses a $35 understatement tolerance. These are different tests. An APR may also be accurate under the mortgage finance-charge tolerance rules of § 1026.22(a); an overstatement is not automatically an inaccurate APR. Do not use a single tolerance number for all three purposes.

4. Right of Rescission (12 CFR §1026.23)

The right of rescission provides consumers with a cooling-off period to cancel certain credit transactions secured by their primary residence.

A. Scope and Covered Transactions

• Covered: Consumer credit transactions secured by the consumer's principal dwelling (refinance mortgages, home equity closed-end loans, debt consolidations, home improvement loans).
• Statutory Exemptions (§1026.23(f)):
  1. Residential Mortgage Transactions: A loan to finance the acquisition or initial construction of the consumer's principal dwelling (purchase money mortgages).
  2. Refinancing by Same Creditor with No New Money: A refinancing or consolidation by the same creditor already holding the note, provided no new money (additional advance) is extended. (If new money is advanced, rescission applies only to the new funds).
  3. Transactions with State Creditors: Transactions in which a state agency is the creditor.
  4. Commercial Purpose Credit: Any extension of credit primarily for business, commercial, or agricultural purposes (§1026.3).