Compliance Blog

Written by JiJi Bahhur, Director of Regulatory Compliance

Recently, we discussed the Closing Disclosure’s timing and delivery requirements in this blog post.  Today, I’d like to take a look at when, for purposes of the Closing Disclosure, the credit union (creditor) may impose average charges on consumers instead of the actual amount received for particular settlement service(s).

General Rule

The general rule, located at 12 C.F.R. § 1026.19(f)(3)(i),  is that a consumer cannot be charged more than the service provider actually received for any settlement service.  However, under certain conditions, credit unions can impose an average charge instead of the actual amount a provider received for a particular service. 

Exception

Section 1026.19(f)(3)(ii) of Regulation Z provides the conditions where a credit union may impose an average charge rather than the actual amount received by the settlement service provider for that service.  A credit union may charge a consumer the average charge for a settlement service is the following conditions are satisfied:

1. The average charge is no more than the average amount paid for that service by or on behalf of all consumers and sellers for a class of transactions;
2. The credit union or settlement service provider defines the class of transactions based on an appropriate period of time, geographic area, and type of loan;
3. The credit union or settlement service provider uses the same average charge for every transaction within the defined class; and
4. The credit union or settlement service provider does not use an average charge:

•  a. For any type of insurance;
•  b. For any charge based on the loan amount or property value, such as transfer taxes; or
•  c. If doing so is otherwise prohibited by law, including state and local law as well.

The staff commentary in Regulation Z goes on to explain that if these conditions – above –  are met, a credit union may develop representative samples of specific settlement costs for a particular class of transactions. This would allow the credit union to charge the average cost for that settlement service instead of the actual cost for such transactions. However, a credit union cannot use an average-charge program in a way that inflates the overall cost of settlement services.

For further information on average-charge pricing and the conditions above, the staff commentary is worth reviewing since it includes helpful clarifying information such as the definition of “class of transactions” and guidance and examples on the other conditions as well.  Also, the staff commentary includes record retention requirements – “at least three years after any settlement for which that average charge was used” – for all documentation used to calculate the average charge for a particular class of transactions.

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