I’m sorry to bring this back, but I am still a little confused on this issue.
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Supplement I, 226.4: Finance Charge (01/01/99)

4(b)(10) Debt cancellation fees.

1. Definition. Debt cancellation coverage provides for payment or satisfaction of all or part of a debt when a specified event occurs. The term includes guaranteed automobile protection or "GAP" agreements, which pay or satisfy the remaining debt after property insurance benefits are exhausted.

4(d) Insurance and debt cancellation coverage.

1. General. Section 226.4(d) permits insurance premiums and charges and debt-cancellation charges to be excluded from the finance charge. The required disclosures must be made in writing. The rules on location of insurance and debt-cancellation disclosures for closed-end transactions are in §226.17(a). For purposes of §226.4(d), all references to insurance also include debt cancellation coverage unless the context indicates otherwise.

4(d)(3) Voluntary debt cancellation fees.

1. General. Fees charged for the specialized form of debt cancellation agreement known as guaranteed automobile protection ("GAP") agreements must be disclosed according to §226.4(d)(3) rather than according to §226.4(d)(2) for property insurance.

2. Disclosures. Creditors can comply with §226.4(d)(3) by providing a disclosure that refers to debt cancellation coverage whether or not the coverage is considered insurance. Creditors may use the model credit insurance disclosures only if the debt cancellation coverage constitutes insurance under state law.
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I talked with the IN DFI yesterday afternoon, and according to them, as long as the GAP program has been approved by the State’s Insurance Commission, GAP charges can be excluded from the FC. The person I spoke with referenced 226.4(d)(3) and the appropriate IN Code.

I also explained that the charge will be X, we will keep X and the insurance company will get X. He said the entire charge would be excludable.

Your thoughts on this would be appreciated. (I do have a call in to the FDIC, but my rep is out until next Wednesday.)

As long as coverage is not required, disclosures are made and the consumer authorizes - it is not a f.c.

I concur. Whether or not you are keeping part of the premium is not a determining factor under Reg Z disclosure requirements. If you disclose GAP coverage appropriately, the total premium amount assessed is excludable. Whether you are allowed under law to charge the premium that you are assessing to the customer and keeping part of it would be governed by your state's insurance regulations.

In a previous thread the portion that the bank kept was thought (myself included) to be a FC. But, after talking with our DFI, they are saying the entire charge can be excluded. This is what I am really trying to get a clarification or consensus on, is the portion we keep a FC?

I can see where the State would allow it not to be included in calculating the APR for State usury, but I'm still not reasonably sure if it would be under Reg Z. It does say "Section 226.4(d) permits insurance premiums and charges and debt-cancellation charges to be excluded from the finance charge." So, at this point I have the tendency to agree with my DFI.

Randy, I was working on my reply to ahou, got interrupted and didn't see your reply before responding.

Anyway, you and ahou are confirming my DFI's statement and my change of thought. Thank you both for responding.