Buckle Up! Ancillary Products & Amount Financed
As the ancient saying goes: New Year, New Car! (Unless you are Janice, who has had the same car since she was 16). When a member upgrades their vehicle they may choose to purchase (or be required to purchase) GAP insurance and vender single interest (VSI) insurance, and may have to pay for recording or DMV fees. We often get asked if these fees need to be stated on the member’s disclosures and included in the amount financed under Regulation Z. The answer is: it depends. So, buckle up and lets d[r]ive in!
Section 1026.18(b) states the amount financed is calculated by:
“(1) Determining the principal loan amount or the cash price (subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and are not part of the finance charge; and
(3) Subtracting any prepaid finance charge.”
A credit union determines the loan amount and adds any other amounts that are financed but are not a part of the finance charge. The official interpretation to 1026.18(b)(2) explains that “fees or other charges that are not part of the finance charge and that are financed rather than paid separately at consummation of the transaction are included in the amount financed.” To be included in the amount financed calculation the fee must be financed by the credit union and not already be a part of the finance charge.
First, a credit union determine whether the fee is a finance charge. Section 1026.4(d)(3) allows certain ancillary products, like GAP premiums, to be excluded from the finance charge if the credit union provides a written statement that the coverage is not required, the premium for the initial term of insurance coverage is disclosed in writing and the consumer signs or initials an affirmative written request for the insurance after receiving the disclosures. If the ancillary product meets the requirements of section 1026.4(d), the cost is not considered a part of the finance charge.
If the credit union determines the ancillary product is not part of the finance charge, the credit union must then determine if the amount is being financed by the loan, or if the member is paying the fee separately at consummation. If GAP insurance (that is not a finance charge) is being financed, the regulation would require the credit union to include it in the amount financed calculation. Alternatively, if the member is paying the GAP separately at consummation, the regulation would not require the credit union to add it to the amount financed.
Further, the regulation requires the credit union to subtract any prepaid finance charges to determine the amount financed calculation. Section 1026.2(a)(23) defines a prepaid finance charge as “any finance charge paid separately in cash or by check before or at consummation of a transaction.” If the credit union determines the ancillary product is a finance charge because it does not meet the requirements of 1026.4(d), and the fee is being paid separately at consummation, the regulation would require the credit union to consider it a prepaid finance charge, which would be subtracted from the cash price when calculating the amount financed.
If the credit union determines the ancillary product is not required to be included in the amount financed calculation, because it is not a finance charge and not financed by the loan amount, the official interpretation to section 1026.18(c) states that the itemization of the amount financed “may include amounts that reflect payments not part of the amount financed.” This seems to suggest that the credit union may choose to disclose the ancillary product fees in the itemization, even if it is not part of the amount financed. However, the credit union may want to work with local counsel to determine if there are any state laws that govern how the ancillary products may be disclosed and whether it would appropriate to include them as part of the amount financed itemization. If the credit union is not required to include the ancillary products as part of the items in the amount financed, section 1026.18(n) may require the credit union to disclose the ancillary products excluded from the finance charge as a separate line item.