Prepaid Finance Charges: Another Truth in Lending Lie?

June 9, 2003, Revised January 5, 2008

The way in which finance charges are disclosed on the Truth in Lending form lends itself to a deception where borrowers are led to believe that the charges don't have to be paid.

"My loan officer said not to worry about the finance charges, that they would be deducted from the amount financed. Does that mean I won’t have to pay them?"

No, you have to pay them all right. Lenders don’t charge fees that they don’t expect to be paid.

I have been asked this question numerous times, puzzled each time as to why it was asked, since it makes no sense. Then one day it hit me. It is another misuse of Truth in Lending (TIL) to confuse the borrower.

Among the pieces of misinformation contained on the TIL is one called "Amount Financed." It is the loan amount less prepaid finance charges, which are the charges paid at closing. For example, if the loan is $100,000 and the borrower pays 3 points, or $3,000, the amount financed is $97,000. The geniuses designing this form thought that you should be told that the lender wasn’t "really" advancing you $100,000 because they got $3,000 of it back from you at the outset.

I now realize that this piece of misinformation is not just useless, it is less than useless. It allows loan officers to say, with a straight face, "the finance charges are deducted from the amount financed." And you are supposed to say to yourself, "Oh, that’s all right then", as if that meant that you won’t have to pay the charges. You didn’t swallow the bait, but I wonder how many have?