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Settlement Fees - Attorney vs. Settlement Company
Question: We are having a debate about what fees to include in the finance charge when a settlement company or attorney closes the loan. Which fees become third party finance charges?
Answer: You are halfway there, simply by recognizing that some charges imposed by third parties are finance charges. The rule now in Regulation Z is that when the lender requires the borrower to use a third party, such as a loan closing service, the charges imposed by that third party are finance charges if they would be finance charges if imposed by the lender.
This presumption applies even if the lender did not require the specific service for which the fee is charged. For example, if the closer uses a courier service and charges the fee to the customer, it is a finance charge even if the lender did not require the use of a courier.
The other rule of thumb is that a fee charged by a third party is exempt from the finance charge if it would be exempt if charged by the lender. Any of the charges listed in 226.4(c)(7) are exempt whether charged by the bank or by a third party. They don't become finance charges just because of how they were billed.
Warning: we have seen situations where closing services (usually law firms) create some interesting names for charges that look suspiciously like they really are finance charges. The name doesn't matter. If you see odd charges coming in on the HUD-1, find out what they are. You really need to know, because if they are finance charges, you - not the closing service - owe the money back to the borrower.
Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 3, 3/99
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