We closed a loan in CA a year ago and our upstream bank is making us buy it back because they think the settlement fee should be recorded as a Finance Charge. The fee was high because in CA, the fee is based on a % of the sale (which was very high).

I disagree with our upstream bank, we meet all the requirements for the fee not to be included in Fiance Charges. We do not care who they use, we do not require a charge and we retain 0. Any thoughts?

We do not care who they use, - You may not require a specific settlement agent, but you require the use of a settlement agent.

we do not require a charge and we retain 0. - But you required the settlement agent.

Any thoughts? - We treat all settlement fees shown on 1101 as finance charges.

We follow the same process and philosophy as Dan.

Thanks guys

What if the title insurance company requires the settlement to be done in their office and charges a fee?

See Dan's answer - where the closing happens has no bearing on whether it is a finance charge.

What I was trying to say was that we do not require the closing to be handled by the TI company. The TI company requires that they handle the closing.
I believe this would also happen if a FI was not involved and the buyers wanted an owner policy; the TI company would still do the closing and charge a fee.
I guess I was hoping that we weren't doing it wrong! Sounds like we are though!

IMO, if the title company separates out the fee for the real estate closing from the fee for the loan closing (I've seen this done), then it is only the fee for the loan closing that needs to be treated as a finance charge.

It is most likely State law. In Massachusetts, for example, only Attorneys can conduct Real Estate Closings.

I never thought about that. And I'm the one usually reminding everyone to check their state laws. Thanks.

Tillie-

Quote:

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The TI company requires that they handle the closing.

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Does State law require that all closing be at a title company. If not, then what it comes down to is that - "you" require someone else to do the closing for you, not actually the title company.

If the transaction was a purchase transaction, and the "settlement" fee is the same for an all cash purchase as it is for a purchase involving a loan, then you can probably exclude the fee under the "same as cash" exemption.

More than likely it wasn't the bank that required the settlement agent. It was the brokers, the seller and/or buyer that chose to have the settlement agent. In California, it is almost unheard of NOT to have a settlement agent involved in a purchase transaction. You are talking about way too much money changing hands, and there are too many frauds that can take place not to have the transaction go through a neutral third party settlement agent.

Real estate closings out in California are handled a bit differently than many other states, and Title Companies are pretty much the standard for clearing and settling title.

One way to review this is to take a look at the Real Estate Purchase contract that you should have in file. If the Title Company is named in that contract, (it usually is), then you can point this out to your upstream bank that the settlement was not required by you.

However, you will need to document if the fee would have been the same for an all cash transaction. Normally, the actual settlement fee is, but look for fees such as "loan tie-in fee", "Sub-escrow fee", and "wire fee". These are usually the add-on fees charged when a loan is involved.

Now - if your transaction was a REFINANCE, then the settlement fee IS a finance charge because you no longer have an equivilent "all cash" transaction, and in a refinance, you will pretty much dictate the use of a settlement agent. (Which, IMHO, is a waste of money if you have experience staff that knows how to order demands and review a Preliminary Title report.)

"More than likely it wasn't the bank that required the settlement agent."

How many banks are willing to perform this (closing a purchase loan) themselves and do the required IRS reporting and take on the other legal responsibilities? Not too many and although the bank may only be one of a number of parties that want a title company to close the loan, I would not want to use that argument to defend not treating the settlement as fee as finance charge.

If you have a Purchase Contract and/or opening Escrow Instructions that already lists the Title Company, I think you can make a good argument that the Title Company is not required by the bank.

The usual course of events in California is that the opening escrow instructions are executed prior to being presented by the lender.

It's one thing to require disclosures as a means to prevent abuse by lenders who would railroad borrowers by requiring certain services. It's quite another to require the disclosures because of some 5th degree of separation as to who might benefit by someone else performing the service.

If settlement agent charges should always be disclosed as a finance charge, then why does the regulation have this provision in 226.4?

(2) Special rule; closing agent charges. Fees charged by a third party that conducts the loan closing (such as a settlement agent, attorney, or escrow or title company) are finance charges only if the creditor:
(i) Requires the particular services for which the consumer is charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of the portion retained.

Why would the Commentary go on to state the following with respect to settlement agent charges?

4(a) Definition.
1. Charges in comparable cash transactions.
A. If an escrow agent is used in both cash and credit sales of real estate and the agent's charge is $100 in a cash transaction and $150 in a credit transaction, only $50 is a finance charge.

4(a)(2) Special rule; closing agent charges.

1. General. This rule applies to charges by a third party serving as the closing agent for the particular loan. An example of a closing agent charge included in the finance charge is a courier fee where the creditor requires the use of a courier.

2. Required closing agent. If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the imposition of the charge, or retains a portion of the charge. Fees charged by a third-party closing agent may be otherwise excluded from the finance charge under § 226.4. For example, a fee that would be paid in a comparable cash transaction may be excluded under § 226.4

(a). A charge for conducting or attending a closing is a finance charge and may be excluded only if the charge is included in and is incidental to a lump-sum closing fee excluded under § 226.4(c)(7).

Sometimes I think we all just run a little bit too scared of this rule and we roll over and play dead too easily.

Bonnie-
You are right about the contract. I spoke with the lender and found out that it was a part of the sales contract between the buyer & seller.
Thanks for your input. I'll run this by our auditors.