Finance Charge - is there a pecking order?

Posted By: Geoz

Finance Charge - is there a pecking order? - 11/28/06 12:20 AM

Is a real estate "settlement" fee a prepaid finance charge? This is a fee charged by the title company and typically split between the buyer and seller for a RE purchase transaction. It is charged for both cash sales and credit transactions. Based on 226.4(a)and the Commentary to this section (4)(a) 1. "Charges in comparable cash transactions" I do not consider this fee a PPFC. I should add, this is NOT the Loan Closing Fee charged by the title company - that's a separate fee which we do disclose as a finance charge.

However, we just had an external residential mortgage loan audit and the consultant believes the RE Settlement Fee is a finance charge because the bank requires a settlement agent for the loan.

What is the official pecking order in Reg Z for this? Is it not covered because the fee is also charged for cash transactions? Or, is it covered because a case could be made the bank requires the borrower to use the services of a settlement agent (separate from the loan closing services)?
Posted By: Dan Persfull

Re: Finance Charge - is there a pecking order? - 11/28/06 02:39 AM

Look to the Commentary for 226.4(a)(2)(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. ........

If the charge is also charged in a similar cash transaction you may exclude it only if you do not require the use of the closing agent or if it is otherwise excluded under 226.4(c)(7).
Posted By: Geoz

Re: Finance Charge - is there a pecking order? - 11/28/06 04:02 PM

Thank, Dan - however, that section of the Commentary 4(a)(2)1. also states "...this rule applies to charges by a third party serving as the closing agent for the particular loan." The RE Settlement Fee is charged to buyer and seller for settlement of the real estate sale, not for settlement of the loan. When acting as a closing agent for the loan a separate fee is charged to the borrower, "Loan Closing Fee" and disclosed as a PPFC. Does this make a difference to your understanding?

According to Reg. Z, 226.4(a) the defintion of a FC "...does not include any charge of a type payable in a comparable cash transaction." This appears to be the primary litmus test for a FC. If a fee is not a FC for 4(a) why do we need to consider the fee under 226.4(a)(2)(ii)?
Posted By: Dan Persfull

Re: Finance Charge - is there a pecking order? - 11/28/06 04:18 PM

Quote:
The RE Settlement Fee is charged to buyer and seller for settlement of the real estate sale, not for settlement of the loan.


Yes that would change my opinion.
Posted By: Geoz

Re: Finance Charge - is there a pecking order? - 11/28/06 04:42 PM

Thanks, Dan. I've dealt with Reg. Z for years but this one threw me a curve. I appreciate your help.