Question & Answer

Question: Our flood insurance vendor charges a single fee for the initial certification and the life of loan service. They will not give us separate cost figures for the two parts of the service. How should we treat the fee for purposes of Truth in Lending?

Answer: Truth in Lending's Regulation Z treats the initial flood hazard area search fee differently from the life of loan fee. The initial fee is not a finance charge, however the life of loan fee is a finance charge. The Commentary, ?4(c)(7)-3, explains that the fees in connection with real estate loans, including the flood hazard fee, are exempted only in connection with the initial decision to grant credit. Because the life of loan fee is not connected to the decision, it is not exempted. The problem, when the vendor won't do it for you, is how to allocate the total fee into portions for these two different services. First, you may treat the entire fee as a finance charge. Not only is there no longer a penalty for over-disclosure, the commentary gives specific permission to include this fee as a finance charge.

Alternatively, you may allocate the fee to the initial and life of loan phases. If your vendor won't do it for you, you should follow a reasonable basis for how you divide the fee. Remember that what you do not want to do is under-disclose the finance charge so when in doubt, be generous with the life of loan portion of the fee.

To reasonably divide the fee, you could check with other vendors to see what they are charging. You might also check with other lenders in your market to see what they pay for the two services. A general rule of thumb is that about 60% to 66% of the fee is for the initial service with the remainder for life of loan.

Many lenders show the two fees as separate on the HUD-1 because their software picks up fees entered on specified fields and carries them over to the finance charge calculations. If you do this, it is a good idea to describe each fee on the HUD-1. For example, one fee (exempt from the finance charge) is the "initial search fee." The other fee (included in the finance charge) would be the "life of loan search fee." This can help to minimize customer confusion and prevent them from thinking they are being charged twice for one service.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 3, 3/97