When the Bottom Line Isn't

The current TILA disclosure is not intuitive to consumers who finance their "prepaid" points. Dealers can use this confusion to mislead. If you finance points by borrowing the money from the lender, the "Amount Financed" in the familiar TILA disclosure box is no longer the "bottom line," as it is with most loan contracts.

Instead, the actual amount the consumer has borrowed does not appear in the TILA box at all. The consumer borrows the "principal outstanding balance" or "unpaid balance" listed in much smaller print in the "Itemization of the Amount Financed." This confusion leads many consumers to make angry calls to their lender and to the Office of Consumer Credit Commissioner when they get their first statement and the balance owed is thousands of dollars higher than the amount they thought they borrowed (eg the "Amount Financed.")
Alfred Williams of Atascosa, Texas got a letter from his lender annoucing a payoff amount more than $4,400 higher than he expected. "The contract clearly states I am to be financed for $40,821 after origination and funding and insurance was taken from my down payment," he wrote to the AG. But according to the company, he actually borrowed $45,292.44, listed on his loan agreement as the "Unpaid balance," while the amount he thought he owed was the Amount Financed listed in his TILA box. According to the lender's attorney, "Prepaid financed (sic) do not mean that the consumer actually prepaid those charges, as your letter implies. In fact, Mr. Williams did not "prepay" his "prepaid finance charges;" rather he financed those items as part of the loan."(1)

The official staff commentary to the TILA regulations directs lenders to use this 'now-you-see-it-now-you-don't' disclosure, where the Amount Financed is reduced by any "prepaid finance charges," even if those charges are not actually "prepaid."(2) The TILA disclosure does accurately describe the effect that financing prepaid finance charges has on the interest rate. According to Mr. Williams loan company, he must pay back $45,292.44 at 12.25%. This is mathematically the same as a loan of $40,821 at 13.809%, the interest rate and Amount Financed disclosed in his TILA box. The "prepaid finance charge" plus the interest on the prepaid finance charge must be incorporated into the total "Finance Charge" in the TILA disclosure, rather than the amount financed, and this has the effect of substantially increasing the disclosed APR interest rate.

1 Complaint to the Office of the Attorney General, 9/6/99, Lytle, Texas.

2 Official Staff Commentary to Regulation Z, 12 C.F.R. Sec. 226.18, Comment 18(b)(3).