QUESTION
I know this seems
rudimentary, but we are debating what causes any charge to become a finance
charge. What is a finance charge? When are we supposed to include charges by
third parties in the finance charge? And, what about finance charges associated
with closing agents; that is, is there a rule for whether closing agent charges
are included in the finance charge?
ANSWER
Simply put, the finance
charge is the cost of consumer credit expressed as a dollar amount. It includes
any charge payable directly or indirectly by the consumer and imposed directly
or indirectly by the creditor as incidental to or a condition of the extension
of credit. It is a matter of caution to consider the fact that the finance
charge does not include any charge of a type payable in a comparable cash
transaction. [12 CFR § 226.4(a)]
Further, participants to
residential mortgage transactions often have policies that vary as to whether a
particular fee is or is not treated as a finance charge. So it is advisable to
understand the relevant policies of the parties with whom they conduct
business.
Regarding third parties, the
finance charge includes third parties if the creditor requires the use of a
third party as a condition of or incidental to the extension of credit, even if
the consumer can choose the third party; additionally, third party charges are
included in the finance charge if the creditor retains a portion of the third
party charge, to the extent of the portion retained.
[12 CFR § 226.4(a)(1)]
Closing agent charges come
under a ‘special rule,’ with respect to including them in the finance charge.
Specifically, fees charged by closing agents are finance charges only if the
creditor (1) requires the particular services for which the consumer is
charged; (2) requires the imposition of the charge; or, (3) retains a portion
of the third party charge, to the extent of the portion retained. [12 CFR §
226.4(a)(2)]
Consider the fee charged by
the closing agent to conduct or attend a closing. Such a fee is a finance
charge, unless the charge is included in and incidental to a lump-sum fee
excluded under Regulation Z, Section 226.4(c)(7), which exempts certain fees in
real estate secured credit transactions from the finance charge. [12 CFR §
Supp. I to part 226 – Official Staff Commentary §226.4(a)(2)-2]
In any event, and
notwithstanding the above-cited exclusion, under the policies of many
participants in residential mortgage transactions a fee to conduct or attend
the closing is treated as a finance charge.
Jonathan Foxx
President & Managing
Director
Lenders Compliance Group
