If only there was a simple answer! Unfortunately, this seemingly simple question can be endlessly debated due to the complexity of Regulation Z.
§1026.4(a) states that a finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type that would be payable in a comparable cash transaction.
There are some charges that are always excluded from the finance charge calculation. These include:
- Application fees charged to all applicants for credit, whether or not credit is extended. In short, charged to all and never refundable.
- Late fees, over-the-limit fees, delinquency fees, and default fees.
- Fees for overdrawing an account unless the payment of such items and imposition of the charge were previously agreed upon in writing. (Does not apply to credit offered in connection with a prepaid account as defined in §1026.61.)
- Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.
- Seller’s points.
- Interest forfeited due to an interest reduction required by law on a time deposit used as security for an extension of credit.
- Taxes and fees for perfecting, releasing, or satisfying a security interest.
- The premium for insurance in lieu of perfecting a security interest.
- Example: The fee to perfect a security interest is $5.00 and the fee for releasing a security interest is $3.00. The Bank charges $10.00 for non-filing insurance (meaning the Bank will not perfect the lien on the security interest). Only $8.00 of the $10.00 is excludable.
- Taxes on security instruments
Simple – right? If only it were that simple.
If we ask the consumer auto loan staff whether appraisals and credit report fees are finance charges, the answer would be “yes.” If you ask the same question to a mortgage loan processor, their answer would be “no.” Surprisingly, they would both be correct. Why? – because Regulation Z provides for certain exemptions from finance charges when the transaction is secured by real property or in a residential mortgage transaction if the fees are bona fide and reasonable. These exempted fees include:
- Fees for title examination, abstract of title, title insurance, property survey and similar purposes
- Fees for preparing loan-related documents, such as deeds and mortgages (Document Preparation fees).
- Notary Fees.
- Credit report fees.
- Property appraisal, inspection, and valuation fees, if performed prior to closing, including fees related to pest-infestation (pest inspections) or flood hazard determinations. Note that only the flood determination is excluded; however, the life of loan coverage is a finance charge. If the Bank does not break out life of loan from the flood determination fee, the flood determination fee is included as a finance charge.
- Amounts paid into escrow if the amounts would not otherwise be included in the finance charge.
I am guessing your next question will be – “What’s considered bona fide and reasonable?” Unfortunately, Regulation Z does not define “bona fide and reasonable.” There is no absolute answer, but I believe you will know an unreasonable charge when you see it. For example, if document preparation fee by title companies averages $150-$350, and you see an invoice for a $1,500 document preparation fee, that amount is not going to appear reasonable. (These subjective parts of the Regulations give compliance folks headaches).
We have all heard the saying, “when in doubt count it as a finance charge.” While over-disclosing finance charges is less of a risk than under-disclosing finance charges, the truth is, we need to disclose them accurately. Tossing everything into the finance charge calculation will be a clear indication to regulators that we lack training on how to identify finance charges.
Since mortgage transactions are complex and contain several fees with different naming conventions, TCA has put together a list of common fees to assist in determining whether they are to be considered a finance charge in a real estate transaction or not.
CHART OF COMMON FEES FOR TRANSACTIONS SECURED BY REAL PROPERTY
|203K Consultant Fee||X|
|203K Inspection Fees||X|
|203K Supplemental Document Fee||X|
|203K Title Update Fee||X|
|203K Supplemental Origination Fee||X|
|Abstract or Title Fee||X|
|Application Fee (charged to all persons, not refundable)||X||Fee retained regardless of whether loan is granted.|
|Appraisal Review||*||X||*If payable to the Bank, include in the finance charge.|
|Attorney Fee (Seller)||X|
|Attorney Fee for Closing/Settlement||X||Considered a settlement fee.|
|Attorney Fee for Document Preparation||X||Excluded under Document Preparation|
|Attorney Fee for Document Review||X|
|Attorney Fee retained by Borrower for personal review||X||Not required by lender or title company.|
|Automated Underwriting Fees||X|
|City or County Deed/Mortgage Tax Stamps||X|
|Closing Coordination Fee||X|
|Condo Certification (Required by Lender)||X|
|Condo Questionnaire (Required by Lender)||X|
|Construction Disbursement Fees||X|
|Construction Draw Fees||X|
|Construction Draw Inspections||X||Inspection performed after consummation|
|Construction Escrow Fees||X|
|Credit Alert (CAIVRS)||X|
|Credit Life Insurance (If Required by Lender)||X|
|Credit Report Fee||X|
|Customer Identification Program (CIP) US Patriot Search||X|
|Document Fees for email, processing, handling, maintenance)||X|
|Document Preparation Fee||X||*If bona fide and reasonable, although this can vary if selling on the secondary market and should be verified with your investor|
|Engineers Report (if NOT required by Lender)||X|
|Engineers Report (if required by Lender||X|
|Escrow Fees to Lender||X||This is the fee to collect the escrow. It does not include the amount collected for escrow.|
|Escrow Fees to Title Company||X||This is the fee to collect the escrow. It does not include the amount collected for escrow.|
|Escrow Fees for Repairs||X||This is the fee to collect the escrow. It does not include the amount collected for escrow.|
|Escrow Waiver Fee||X|
|Express Mail / Overnight Fees||X|
|FHA Upfront MIP||X|
|Final Inspection Fee||X||If inspection is performed prior to closing.|
|Final Inspection Fee – Post closing||X|
|Flood Certification/Flood Determination Only||X|
|Flood Determination and Life of Loan (Combined Fee)||X|
|Flood Determination Life of Loan Only||X|
|HOA Certification – (Required by Lender)||X|
|HOA Transfer Fee||X|
|Home Inspection (Required by Lender)||X|
|Home Warranty (Required by Lender)||X|
|Homeownership Counseling Fee||X|
|HUD Review Fee||X|
|Inspection Fees required by Lender (Prior to Closing)||X|
|Inspection Fees required by Lender (Post Closing)||X|
|Insurance – Homeowner’s/Hazard||X|
|Insurance – Flood||X|
|Lender’s Inspection Fee||X||If completed post consummation. If completed prior to closing the loan, the inspection fees are not a finance charge.|
|Loan Delivery Fee||X|
|Lock Extension Fee||X|
|Lock In Fees||X|
|Mobile Notary Fees||X|
|Mobile Signing Fee||X|
|Per Diem Interest (Prepaid Interest)||X|
|Plan Review Fee||X|
|Points||X||Paid by borrower. Seller points are not a finance charge.|
|Private Mortgage Insurance||X||Up front/initial premium or any escrow cushion; month-to-month calculated would not be a finance charge|
|Rate Lock or Extension Fee||X|
|Recertification Fee to Appraiser||X|
|Recording Fee/Filing Fee Paid to Government Entity||X|
|Recording Fee/Filing Fee paid to other than Gov’t Entity||X|
|State of Ownership and Location Application (SOL)||X|
|State Tax Stamps||X|
|Tax Deletion (To Title Company)||X|
|Tax Report Fee (if same as Tax Service Fee)||X|
|Tax Search Fee||X||Part of title and initial Examination|
|Tax Service Fee||X||Post-Closing Tax Monitoring|
|Tax Transcripts (4506-T)||X|
|Title – Abstract Fee||X|
|Title – Attorney Fee||X||Does not include attorney representing Borrower at closing (see Attorney Fees above)|
|Title – Binder Fee||X|
|Title – Bring Down Fee||X||Same as title update|
|Title – Closing Agent Recording Fee||X|
|Title – Closing Fee||X|
|Title – Closing Protection Letter||X|
|Title – Courier Fee||X|
|Title – Document Preparation Fee||X|
|Title – Electronic Documentation/E-Doc Fee||X|
|Title – Electronic Recording||X|
|Title – Endorsements||X|
|Title – Examination Fee||X|
|Title – GAP Check Fee||X||Part of title exam|
|Title – Guaranty Fee||X|
|Title – Lender’s Title Insurance||X|
|Title – Memorandum of Title – or Title Opinion||X||Part of title search and exam.|
|Title – Owner’s Title Insurance||X|
|Title – Processing Fee||X|
|Title – Recording Fee||X||Payable to title company to facilitate recording.|
|Title – Search||X|
|Title – Settlement Fee||X|
|Title – Tax Record Fee||X||Not a finance charge if part of title search/exam process|
|Title – Title Exam Fee||X|
|Title – Update Fee||X|
|Transfer Tax Fee||X|
|USDA Guarantee Fee||X|
|USDA Technology Fee||X|
|VA Funding Fee||X|
|Verification of Employment||X|
|Warranty Deed Preparation Fee||X||Same as Document Preparation Fee|