The Bank's internal auditor stated that the Bank is not complying with Regulation Z because we are listing the entire amount charged to us (sales tax included) for flood determination/life of loan tracking and closing fees as prepaid finance charges. The auditor states we need to break out the sales tax and list it separately as a non-prepaid finance charge. Has anyone else ever heard of this, are you doing it, and if so, how are you listing it on the HUD and TIL?

From the Commentary to 1026.4(c)(7)

. . . If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.


As a side note, I've never heard of sales tax being charged on a flood determination. Must be a state tax law issue.

Thank you for your input. The auditor cited Reg Z 1026.4 (e) "(e) Certain security interest charges. If itemized and disclosed, the following charges may be excluded from the finance charge:

(1) Taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest."

Because of the word "may" I would think that it would be at the lender's discretion?

What does sales tax have to do with determining the existence of or for perfecting, releasing, or satisfying a security interest?

Your auditor doesn't deal with compliance much, do they? If this is their specialty, you need to find a new one.

Thanks. Would you recommend we contact someone from our FDIC field office to confirm that what we're doing is compliant? We are concerned that if we continue on with our current procedure and then have an FDIC auditor review the internal auditor's report, they may find that we willfully ignored the citation.

And the auditor strays further from the mark when you look at the fee in question -- it is a sales or use tax imposed on a flood zone determination. That has absolutely nothing to do with perfecting, releasing or satisfying a security interest, and the flood zone determination fee isn't being paid to a public official.

I second Randy's comment. The auditor is simply wrong.

FDIC auditor review the internal auditor's report

Sounds like the bank needs to send this auditor for additional training.

they may find that we willfully ignored the citation

If the auditor for some idiotic reason leaves the comment in the report just respond you reviewed the auditor's finding and have determined he doesn't know WTH he's talking about.

If you are having a hard time convincing him, print this thread and lay it on his desk and if he still feels confident that he is correct, have him contact your EIC from your last FDIC compliance exam and have him run it by the FDIC while on speaker phone with the audit committee present.

Considering the - ummm how many? - a hundred years of banking experience between John, Dan and I, I think we know of what we speak.