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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.

Truth in Lending: 3.9.6.2.8 Fees for post-consummation services

Another example of the trend to unbundle and pass on business costs as separately priced charges is the increase in fees for post-consummation services, such as monitoring the tax lien status of secured property, or checking whether contractually required property insurance has been maintained.

Truth in Lending: 3.9.6.3.1 Overview

According to Regulation Z, certain closing costs are excluded from the finance charge if they are “bona fide and reasonable in amount.”936 Neither the Act nor the regulations give any guidance on the meaning of this phrase.937 When this occurs, Regulation Z instructs that words have the meanings given to them by state law or contract.938 Although courts sometimes use the terms “bona fide” and “reasonable” interchangeably, case law offers some

Truth in Lending: 3.9.6.3.2 Definition of bona fide

Courts have looked to state law, dictionaries and the common-sense, ordinary meaning of the words, using definitions for bona fide such as: made or done in good faith, without deception or fraud, authentic, genuine, real, and sincere.939 In practical terms, a “bona fide” fee should, at a minimum, be one that was genuinely incurred in the amount charged, for the work described.940 For example, a duplicate charge or a charge for an appraisal that never took place would not be bona fide.

Truth in Lending: 3.9.6.3.3 Definition of reasonable

Reasonableness, on the other hand, should be determined by comparison with rates in the marketplace.950 If the creditor’s charge greatly exceeds the prevailing prices of the industry, then there may be a hidden finance charge, particularly if the creditor retains any of the excess or receives a rebate from a particularly expensive third party.951 The reasonableness of some fees may be governed by state law.952 The policies of a state’s title

Truth in Lending: 3.9.6.3.4 Determining if a fee is bona fide and reasonable

Generally, the bona fide and reasonableness requirements suggest that practitioners should seek discovery as to amounts actually paid and an accounting of services performed, particularly if the fees are higher than usual in the area. A practitioner also should seek closing settlement instructions regarding whether a fee was required and how much of the fee the lender approved. Note that any excess fee may have been reimbursed to the borrower at or after closing. Whether or not the excess was returned to the borrower may bear upon whether the fee is a finance charge.

Truth in Lending: 3.9.6.3.5 Average cost pricing

Rulemaking under the Real Estate Settlement Procedures Act (RESPA) complicates the determination of what is a bona fide and reasonable fee. As of October 3, 2015, the rules changed for closed-end consumer credit transactions secured by real property covered by the integrated TILA-RESPA disclosure rules.959

Truth in Lending: 3.9.6.3.6 Investigating third-party fees

Fees to closing attorneys or other settlement agents should be carefully scrutinized in particular when the consumer is also separately billed for the excludable services.977 For example, when investigating a notary fee it would be helpful to ask the following questions:

Truth in Lending: 3.9.6.3.7 How much of the fee is part of the finance charge?

Another issue that can significantly impact liability is whether the entire fee that is not bona fide and reasonable should be disclosed in the finance charge, or only the difference between the amount that is bona fide and reasonable and the amount that was charged. Given the tolerances built into TILA via the 1995 amendments,980 correctly assessing the amount of the undisclosed finance charge can make the difference between liability and exoneration.

Truth in Lending: 3.9.6.4.1 The HUD Settlement Statement and Good Faith Estimate forms

In November 2008 the Department of Housing and Urban Development released amendments standardizing the good faith estimate form and changing the settlement statement.995 While the changes improve consistency and clarity, they omit or obscure some charges relevant to calculating the finance charge.996 Particularly difficult may be determining the allocation of broker compensation.997 The use of these forms is required in all “federally related

Truth in Lending: 3.9.7.1 Overview

Some charges imposed in connection with a security interest may be excluded from the finance charge under prescribed conditions in both real-estate-secured loans and non-real-estate loans. This exclusion covers taxes and fees that meet the following criteria:

Truth in Lending: 3.9.7.2 Taxes; Recording and Filing Fees Prescribed by Law

This provision encompasses taxes and fees for determining the existence of or for perfecting, releasing, or satisfying a security.1045 It does not capture fees to record an assignment of the mortgage, or any other filing fees that relate to a transaction between the creditor and a third party, such as an assignee.1046 In order to be excluded from the finance charge, the fee should be necessary for perfecting the security interest and actually required by law.

Truth in Lending: 3.9.7.3 Nonfiling Fees

Sometimes a creditor will find it easier or less expensive to pay an insurance premium in lieu of perfecting the security interest. A nonfiling insurance policy will pay the creditor if the collateral is lost to it because the security interest was not perfected.

Truth in Lending: 3.10.1 Overview

Creditors, third parties, and sellers may agree to pay some of the closing costs for the borrower. This is more common in consumer credit transactions secured by real estate than in other types of consumer credit. Seller credits occur only when the consumer is buying the real property and the seller agrees to cover some of the consumer’s closing costs.

Truth in Lending: 3.10.2.1 Lender Credits

The CFPB determined that a credit provided by the creditor can offset a specific fee if the legal obligation so provides in the TILA-RESPA context.1083 Note that the TILA disclosure itself does not constitute the “legal obligation.” Rather, the legal obligation includes the loan note and any other documents relevant under state law. When the legal obligation so provides, the creditor can apply the credit to a specific fee.

Truth in Lending: 3.10.2.2 Seller Credits

Like creditor offsets, seller credits will be treated as general or specific depending on the terms of the purchase and sale agreement and other relevant documents between the seller and borrower in the TILA-RESPA context.

Truth in Lending: 3.10.2.3 Third-Party Credits

This category of credits includes those from a real estate agent or real estate developer. Under the TILA-RESPA rules, the CFPB treats these in the same fashion as lender and seller credits. If the credit is paid to cover a specific fee owed by the borrower, the credit is listed in the “Paid by Others” column in the “Closing Cost Details” table on the closing disclosure.1088 The finance charge total can be reduced by the amount of any credit applied against a specific fee that constitutes a finance charge.

Truth in Lending: 3.10.3 Treatment of Credits in Other Loan Contexts

Credits rarely appear in the non-mortgage loan context. Nonetheless, the same principles should apply and consumers should look to the contract and other relevant documents between the consumer and the third party to assess whether a credit against a particular fee is permitted.