Reg Z - Inspection Fees in the Finance Charges

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Question:

Reg Z states that on residential construction loans inspection fees must be included in the finance charges. We do include inspection fees for a reasonable number such as say five inspections. However, corporate compliance recently informed me that we may charge for inspections beyond the reasonable number and that any subsequent inspections that may be needed once the original five (or whatever the reasonable number is) will be included in the loan agreement as a condition of that agreement and that makes it permissible. The defense is that it is unknown at the time of closing whether additional inspections will be needed. The TIL should show the inspection fee as an estimate for this reason. I don't think we should charge the customer for these subsequent inspections and simply including a statement that there may be additional charges in the terms of the agreement does not relieve us from including all inspection fees in the finance charge. I also think the estimate is for a variance in inspection fees for whatever reason and not for additional inspections. Could you please help clarify this issue?

Answer:

Answer by Randy Carey: 226.17(c) Basis of disclosures and use of estimates.

(1) The disclosures shall reflect the terms of the legal obligation between the parties.

(2)(i) If any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer, and shall state clearly that the disclosure is an estimate.

Since the exact number of inspections may vary, you may provide a reasonable estimate. The fact that a specific project may involve additional inspection fees and that inspection fees are covered in the contract will allow you to charge for them and not impact your initial disclosures.

Answer:

Answer by Richard Insley: Reg Z does not force you to live with finance charges that are estimated at closing. If it did, the same standard would apply to interest and you would be stuck with a non-accrual loan whenever a construction project runs over.

First published on BankersOnline.com 4/27/09