Skip to main content

Search

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.

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