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Costs and Fees Which Are Not Finance Charges
The following types of charges are excluded from the finance charge:
� Application fees charged to all applicants for credit
� Charges for unanticipated late payments, for exceeding a credit limit, or for delinquency
� Charges imposed by a financial institution for paying items that overdraw an account
� Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis
� Seller's points
� Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit
� Real-estate related fees such as fees for title examination, charges for the preparation of loan documents, credit report fees, notary fees, appraisal fees, and amounts paid into escrow, if these fees are bona fide and reasonable
� Discounts offered to induce payment of a purchase by cash, check, or other means
12 CFR Section 226.4(c)
Insurance and debt cancellation coverage can also be excluded from the finance charge if the coverage is not required by the creditor, the premium for the initial term of insurance is disclosed, and the consumer signs or initials a written request for the insurance. If itemized and disclosed, certain taxes and fees prescribed by law are also excluded from the finance charge.
Amount Financed
Another significant number for consumers is the "amount financed." In calculating the amount financed, creditors must determine the principal loan amount, add amounts that are financed by the lender and that are not a part of the finance charge, and subtract any prepaid finance charge. As noted in the above list, costs and fees such as reasonable fees for settlement services are not finance charges, and are therefore included in the calculation of the amount financed. Regulation Z�s long list of finance charges are not included in the calculation of the amount financed. Therefore, the "amount financed" is always lower that the loan amount.
How Consumers Can Use the APR and the Amount Financed to Evaluate the Cost of Credit
Consumers are understandably confused by the fact that the cost of credit is represented in more than one way. However, lenders and mortgage brokers can show borrowers how to cross reference some of these numbers to verify the cost of credit. For example, the following two formulas can reveal errors in calculations of the cost of credit:
(Loan Amount) x (Interest Rate over term of the loan) = _____
(Amount financed) x (APR over term of the loan) = _____
Both of these formulas should result in the same answer, thereby allowing creditors and borrowers to determine if there are any mistakes in the calculation of the cost of credit.
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