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Truth in Lending: 3.9.4.4.4 Timing and location of insurance disclosures

The rules on the timing and location of insurance disclosures for closed-end transactions must be followed in order to exclude the cost from the finance charge disclosure.702 The disclosure, like all other required disclosures, must be made prior to consummation in closed-end transactions.703 However, the disclosures, and, in the case of credit insurance, authorization required to exclude the insurance premiums from the finance charge may be made either together with or separately from the o

Truth in Lending: 3.9.4.4.5 Premium cost disclosures

The creditor must disclose the premium for the initial term of insurance coverage if the premium is to be excluded from the finance charge.709 For example, if the initial term of the credit property insurance policy is three years, the creditor must disclose the premium for the first three years, even if the term of the insurance may later be extended.710

Truth in Lending: 3.9.4.4.6 Term disclosures

If the term of the insurance is less than the term of the transaction, then the term of the insurance must also be disclosed.732 Practitioners should be especially alert for this issue on longer term loans, such as ten-year or fifteen-year loans. To fully insure those loans is quite expensive, so frequently credit insurance is written for only a part of the term.733 Property insurance, similarly, is usually written for a year at a time, and so the term disclosures are necessary.

Truth in Lending: 3.9.4.5.1.1 Generally

Like credit insurance, the premiums or other charges for property insurance written in connection with a consumer credit transaction must be included in the finance charge unless the creditor meets certain requirements. This applies to insurance against loss of or damage to property (sometimes called hazard insurance), or against liability arising out of the ownership or use of property.737 Property insurance—in the form of homeowner’s insurance—is almost universally required with mortgages.

Truth in Lending: 3.9.4.5.1.2 Choice of provider disclosure

If the creditor wishes to exclude the premiums from the finance charge, it must allow the consumer to choose the insurer and must disclose the availability of that choice to the consumer.751 Oral notice of the option is not sufficient; it must be written.752 This disclosure must be made regardless of whether the insurance is available from the creditor or not,753 and must be made even if it is not readily available from anyone but the credito

Truth in Lending: 3.9.4.5.3 Voluntary homeowners insurance, flood insurance, and wind insurance

Nearly all lenders require consumers to insure mortgaged dwellings against property damage. In some regions, that may mean obtaining separate coverage for flood or wind damage. This insurance is required as a condition of the extension of credit and, therefore, meets the definition of a finance charge. But the cost of this insurance is usually excluded from the finance charge because most creditors disclose that the insurance may be obtained from anyone the consumer chooses, subject to the creditor’s approval.780

Truth in Lending: 3.9.4.5.4 Force-placed insurance and other post-consummation insurance

Insurance coverage voluntarily added or requested by a consumer after consummating a closed-end transaction or after opening a home equity line of credit (HELOC) is not considered written in connection with the transaction.782 If it is financed, however, new disclosures may be required.783 For open-end credit not secured by a home, coverage sold after account opening will be considered written in connection with the transaction and subject to the finance charge rules.

Truth in Lending: 3.9.4.5.5.1 GAP insurance described

One add-on product for credit transactions (particularly car loans) is “GAP” insurance. The risk insured is the “gap” between the outstanding loan balance and the amount paid out by the property insurer after a covered loss occurs on the collateral. For example, if the car is totaled and the insurance values it at the time of loss at $3,000, and the debt balance is $5,000, the consumer may be liable for the $2,000 deficiency. GAP insurance covers that deficiency.

Truth in Lending: 3.9.4.5.5.2 TILA coverage of GAP insurance

Since 1996, Regulation Z has treated GAP insurance in the same fashion as credit life and disability insurance.804 That is, in the first instance, it is a finance charge,805 but it may be excluded provided it meets all the same criteria necessary to exclude those types of charges from the finance charge.806 As a result, the discussion at

Truth in Lending: 3.9.4.5.6 TILA coverage of debt cancellation and debt suspension agreements

In 2009, the rules for credit life and disability insurance were directly applied to debt cancellation and suspension agreements between the debtor and creditor as well.813 Only debt cancellation and suspension agreements that parallel life, disability, and loss of income insurance are covered: debt cancellation agreements that cancel liability remaining in excess of the value of collateral, or in case of death, disability, or loss of income are covered.814

Truth in Lending: 3.9.4.5.8 Credit insurance and the Dodd-Frank Act

The Dodd-Frank Act amends TILA by prohibiting creditors from financing most forms of credit insurance in connection with residential mortgage loans830 or home equity lines of credit that are secured by the consumer’s principal dwelling.831 Due to an unfortunate drafting error, the relevant section in is entitled “Single premium credit insurance prohibited[.]”832 But the prohibition is not limited to single-premium policies.

Truth in Lending: 3.9.5 Third-Party and Closing Agent Charges: 15 U.S.C. § 1605(a); Regulation Z § 1026.4(a)(1) and (2)

Neither TILA nor Regulation Z makes any reference to how fees for a lender’s closing agent’s own services are to be treated.841 (The 1995 statutory amendments address fees imposed by these closing agents, but, as is discussed below, there is—or should be—a distinction.) In order to analyze these fees, and the fees of other third parties, the practitioner must start by examining section 1026.4(a)(1) and (2). But the inquiry does not end there.

Truth in Lending: 3.9.6.1 General

The complexity of identifying finance charges is compounded by special exceptions for residential mortgage transactions and transactions secured by real property.

Truth in Lending: 3.9.6.2.1 Overview

There are four classes of closing costs that may be excluded from the finance charge in transactions secured by real property and residential mortgage transactions,859 but only when the fees are bona fide and reasonable.860 This is an exhaustive list, which, like all the exclusions, should be narrowly construed.861 Consequently, any other charges must be assessed under the general definition and examples.

Truth in Lending: 3.9.6.2.2 Real property, title-related fees

Fees for title examination,869 abstract of title, title insurance, property survey, or similar purposes may, if bona fide and reasonable, be excluded.870 Cases involving such fees hold that excessive cost would violate the bona fide and reasonable standard.871 When evaluating the question of whether title insurance should be excluded, who is covered by the policy is not relevant.872

Truth in Lending: 3.9.6.2.3 Document fees

TILA exempts877 “fees for preparation of loan-related documents” from the finance charge in credit secured by real property.878 Regulation Z elaborates, applying this exclusion to “fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents,” provided they are “bona fide and reasonable in amount.”879

Truth in Lending: 3.9.6.2.4 Closing agent/attorney fees

As discussed earlier, under the statute and Regulation Z, the fees charged by a third-party closing agent are finance charges only if the creditor requires the particular services for which the consumer is charged, requires the imposition of the charges, or retains a portion of the third-party charge—even if the consumer is allowed to choose the provider.

Truth in Lending: 3.9.6.2.5 Notary, appraisal, and credit report fees

TILA excludes appraisal fees, including pest or flood hazard inspections, credit report fees, and fees for notarizing documents from the finance charge.904 The appraisal must be conducted pre-closing in order to be excluded.905 As with other excluded fees, the charges must be bona fide and reasonable to qualify for the exclusion.906 Some fees, such as notary fees, are regulated by state law.

Truth in Lending: 3.9.6.2.6 Standard escrow costs

The statute explicitly excludes “escrows for future payments of taxes and insurance” from the finance charge.914 Regulation Z muddies that provision, in allowing “amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.”915 In other words, if an unescrowed charge is not a finance charge, the same charge is not a finance charge simply because it is escrowed.

Truth in Lending: 3.9.6.2.7 Impound accounts

Disputes about the treatment of escrow arise most frequently in the context of escrowed payments. “Escrow holdback” accounts should be distinguished from other escrow fees and should count toward the finance charge. An escrow holdback account contains a portion of the loan, is administered by the lender, and funds from it can be disbursed to cover unpaid or past-due amounts. One use of such an account could be to ensure payments are made at the outset of the mortgage, thereby avoiding an early default that would trigger the lender’s repurchase obligation to the assignee.