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 is president and managing director of Lenders Compliance Group and Brokers Compliance Group, mortgage risk management firms devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or e-mail at [email protected].
