How would you respond to the following statement?

"Even if the lender is paying the closing costs, the same fees that are finance charges would have to go into the APR calculation. Unfortunately it doesn’t matter who pays them."

My response:
1. What does the contract say about it?
2. Have you read the OSC to Section 226.17(c)(1), Comment #2?

Are you saying if there is a legal agreement for the lender to pay the borrower's closing costs, then any fees that would be finance charges if the borrower paid them are not finance charges?

If, prior to settlement, the lender relieves the borrower of a contractual responsibility, then (for Reg. Z purposes) it's just like it was never there. Your state law is the basis for determining whether "another agreement between the parties legally modifies the note or contract." Consult with bank counsel to determine if the bank's agreement to pay closing costs rises to the level of a contractual amendment.