In 226.4(a)1 it discusses charges in comparable cash transactions. Is there a comparable cash transaction to a home mortgage refinance? If there is not then finance charges that are excluded based on the comparable cash transaction exclusion would not apply to refinancings. I hope this does not sound like a wierd question, but someone brought this idea to my attention and I am stummped. I have always thought that refi's and purchases were comparable to a cash purchase.

In a purchase money transaction, the customer could be buying for cash. Since the customer now owns the property fully (subject to the lien, of course), it's a stretch to imagine any kind of charge that could exit the FC under the comparable cash exclusion.

What kind of charge do you have?

The specific charge is an escrow fee, the situation is that the escrow fee is accepted as not a finance charge on our purchase loans due to fitting the exclusion for comparable cash transactions. But now the opinion is that the escrow fee is a finance charge for refinancings only because there is no comparable cash transaction to a refinancing. Does this sound right? With the commentary in 226.4 using words such as "comparable" and "similar", I just don't have a high comfort level at this point separating purchases from refi's based on this type of vague language.

Give us your definition of "escrow fee" and we can decide whether it's a FC.

It is a fee listed on the Hud 1 line 1101, and covers the servicing of the escrow account by a third party.

To get any traction, your "comparable cash transaction" argument needs a comparable service that is consumed by mortgage-free homeowners.

Since in a cash transaction there would not be an escrow - I would find it hard to justify excluding this from the finance charge.

I have always gone by this policy:
On a Purchase transaction, the part of the Escrow fee that would be charged to the buyer in a cash sale is excluded from the Finance Charge.

On a Refinance transaction, if you require the borrower to go through Escrow, then the entire fee is a Finance Charge.

So then there should be no difference in the treatment of the escrow fee based on if the loan is a purchase or refinance. I am in California if that makes any difference.

Markj - That is NOT what I said if you were responding to my post. I am also in California. In California, even an all cash sale will go through Escrow - a sign of how much we don't trust one another.

That is why on a PURCHASE transaction, that part of the Escrow fee that would be charged on an all cash transaction is NOT included in the Finance Charge.

Some Escrow companies charge what they call a "Loan Tie-In Fee" which is their fee for having to deal with us lenders. Any Loan Tie-In Fee WOULD be a Finance Charge. Also, if the Escrow charges a lower fee on an all-cash sale vs. a sale with a loan, then the difference WOULD be a Finance Charge.

However, there is no comparable cash transaction on a REFINANCE, therefore if you require the borrower to go through Escrow, the entire Escrow fee IS a Finance Charge.

Quite frankly, I've always been mystified at the requirement for escrow on a refi. There is nothing that the Escrow does that could not be handled in the Payoff Department of a Title Company.

Bonnie, actually I was writing my response before I saw your post. THANK YOU for this response, now this is understandable! Now for the 64 thousand dollar question, do you know where is it in CA law that requires escrows? I have run numerous searches in CA code with no luck so far.

Mark - the answer to your question is - there is NO legal requirement that I know of. In fact, it is entirely possible to conduct a sale of real property without using an Escrow or a Title Company. The parties can draw up the Grant Deed and sign it in front of a Notary Public, then go down to the County Recorder's Office and hand it to the Recorder as the buyer gives the seller his/her check or cash.

However, would YOU want to trust anyone to that extent regardless if you were the buyer or the seller?

There is less risk on the seller's side, but you do want to know that the funds are good (or that the cash is not counterfeit!)

On the buyer's side, how much confidence can you have that the property is being sold by the bonafide owner, that there are no outstanding liens on the property or other issues that could damage the title?

There are more issues for both sides, but I think you can probably see the perils.

Escrow and Title offer deep pocket$ for people to feel comfortable that the transaction will be handled properly.