Would a subordination fee be considered a finance charge for Reg Z?

Can you give us an example of when a subordination fee would apply to a consumer loan? All the ones I've ever dealt with have been commercial loans - therefore Reg Z didn't apply.

How about you want to refinance your first but you have an existing HELOC you want to keep? Subordination would be required in order for the refinanced loan to remain a 1st lien, unless the loan was refinanced with the same creditor. In that case, you could make the refinanced loan subject to the original deed of trust through modification.

To answer the original question, I believe the subordination fee is a finance charge. It relates to the credit obtained - you dont need it in a cash transaction. I would include it under 226.4(b)(3), as similar to loan points, assumption fees, etc.

Here's a similar discussion.

This is a fee in relation to the loan transaction, I do not feel it would qualify as exemption. Would you make the loan if the fee is not paid? (And just because it's a third party fee does not auotmatically exempt it from the finance charges.)

I agree that the third party nature of the fee has no bearing in this case. The real question is, is this thing a document preparation fee under 226.4(c)(7)(ii)? So far I have a couple of opinions on the "it's a finance charge" side; and mortgage management has a consultant saying "not a finance charge".

I've sent the question to our regulator for a ruling - I'll let you know how it comes out.

Depends on whether you believe the fee is collected for the preparation of the document, or for the service of obtaining the junior lender's agreement to subordinate their inerest to the new lien.

If the answer is the first, then I agree with the consultant your mortgage department hired, that the fee relates to document preparation and is therefore exempt under 226.4(c)(7)(ii).

If the fee relates to the service of getting the juior leinholder to subordinate their interest to the new lien, then I agree with Dan - the fee clearly meets the definiton of a finance charge. This fee would not exist in a cash transaction - it is solely related to the extension of credit.

From a risk management perspective, I don't think I would want to try to surivive a potential challeng to the accuracy of my disclosures based on the arguments listed above. I think that, because part of the work of preparing the agreement is getting the other institution to sign it, you should consider it a finance charge.

However, if there are existing loans where the subordination fee was not considered a finance charge, I don't think I would be in a hurry to reimburse, either. There is enough gray there that I would be willing to let my existing portfolio remain alone.

Excellent analysis! I have a colleague at one of the banks who charges the subordination fee. I've left a message asking (in part) "why, specifically, are you charging us $100?" This should provide some documentation to support whichever position we take with this.

I agree a very good analysis, but also one I will have to take an exception to.

How does the fee for preparing the subordination agreement figure into the doc prep fee for the loan the FI is doing (it's not a required closing document to obligate the borrower)? The subordination agreement is not necessary for the FI to perfect thier lien. It's required to prefect thier lien position. They could do this loan as a junior lien so the subordination fee would not be required in the transaction. So, IMO it is a fee related to the loan transaction and is a finance charge. (I just don't see an exemption for this fee, but again I want to stress this is my opinion and interpretation.)

I hold the same opinion on a partial release fee, unless the release fee was charged in a similar cash transaction. (Which BTW I just had one the other day.)

Dan, I agree that the fee is related to the credit transaction. The only way to get around calling it a finance charge is by fitting it into one of the exceptions in 226.4(c)(7).

If you think about it, fees like credit report, doc prep, title work, appraisal fees, etc. in a mortgage transaction are related to the credit transaction, too. They aren't finance charges only because Reg Z says they aren't.

Bart's mortgage lenders are trying to shoehorn the fee into the exception for document preparation. If the fee is truly just for the preparation of the agreement, I think you can make the argument, and it may be accurate, but it isn't worth the trouble.

Bartman,

I asked our local FDIC office this exact question - Is a subordination fee a finance charge? Their answer was a very short, yes, it is a finance charge and I was wrong in thinking it was a doc prep fee.

I haven't had a compliance exam since that interpretation, but am hoping everything will be "coming up Milhouse" now that we're on track. (Odd Simpson's quote for those who don't watch the show).

Good Luck!

kmg

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but it isn't worth the trouble.

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Agreed.

Most subordination fees I've seen (in my area anyway) run from $125 up. It's hard for me to justify those fees as reasonble for preparing what in most cases is a one page document.

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They suggest that the fee is really a doc prep fee.

We pass the full charge to the borrower and do not retain any portion. Is this just a third-party doc prep fee?

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Doc prep fee? We subordinate HELOCs all of the time. As the 2nd mortgagee, we choose to prepare the doc ourselves (our attorney suggested this). We also do a full D/I ratio analysis, new credit report. etc. to determine if we're going to agree.

How would this be handled since, if we decide to start charging this fee, the 1st would be "passing through" a fee?

Thank you.

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I asked our local FDIC office this exact question - Is a subordination fee a finance charge? Their answer was a very short, yes, it is a finance charge and I was wrong in thinking it was a doc prep fee.

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Glad you chimed in (more support for me).

Also your regional FDIC office would be the same as mine.

CowboyFan, If I understand you correctly you will be charging a fee to subordiate an existing loan. In this case it is a subsequent event and would not be a finance charge for you. It would be a FC (IMO) for the FI doing the other loan if they pass the cost to the borrower.

Also, when we do a subordination, we don't charge the customer, we charge the FI requesting the subordination.

Okay, so maybe the subordination fee is or is not a finance charge. I agree with the conservatives on that one. What about the fee to RECORD the subordination? I think not, but some of the large lenders are saying otherwise......