The Truth in Lending Act and Regulation Z

The Truth in Lending Act and Regulation Z - HOEPA and Section 32

Question: In reference to the most recent Residential Real Estate Q & A's, wouldn't the "closing fee/settlement fee" for conducting or attending the closing, imposed by the closing agent always be included in both the finance charge and the "total points and fees"? Commentary 226.4(a)(2) "A charge for conducting or attending a closing is a finance charge and may be excluded only if the charge is included in and is incidental to a lump-sum fee excluded under section 226.4(c)(7)."

Answer: You’re right with respect to a fee imposed by the closing agent for conducting or attending the closing (unless excluded under the lump-sum fee exception). With respect to other charges that the closing agent might impose, these are finance charges only if the creditor:

(i) Requires the particular services for which the consumer is charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of the portion retained.

Regulation Z, Section 4(a)(2)

You correctly point out that Section 4(a)(2) governs whether fees paid to a closing agent are finance charges. We had assumed that since the original question asked about Section 4(c)(7) charges, the answer depended on whether the charges fit within that provision.

Whether these fees should be included in the “points and fees” under the high-cost mortgage rule (Section 32) of Regulation Z is, of course, governed by Section 32 and, it turns out, depends on whether the charge is a finance charge. Section 32 says:

…points and fees means:

(i) All items required to be disclosed under Sec. 226.4(a) and 226.4(b) [finance charges], except interest or the time-price differential;

(ii) All compensation paid to mortgage brokers;

(iii) All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and

(iv) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.

So if the charge is a finance charge as defined above, it would fit within the “All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential” category in the points and fees definition. (posted 12/10/04)

Question: “All items listed in Reg Z 226.4(c )(7) are considered in the calculation of total points and fees unless (a) the charge is reasonable, (b) the creditor receives no direct or indirect compensation, and (c) the charge is not paid to an affiliate of the creditor.” If a Mortgage broker is affiliated with the closing agent, even if the closing agent’s fees are reasonable and low, they still must be included in the finance charge. Is this correct how I am reading the above?

Answer: The provision you quoted is from the definition of “total points and fees” under the high-cost mortgage rule (sometimes called the HOEPA rule) of Regulation Z. That rule imposes certain requirements if either an interest rate threshold or a total points and fees threshold is met. “Total points and fees” is defined as including a number of items, one of which is “All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor.” The items listed in Sec. 226.4(c)(7) are charges commonly imposed in real estate transactions (e.g., title exams, abstracts, document prep fees, etc.) and that are excluded from the finance charge if the transaction is secured by real property or the loan is a residential mortgage transaction and the fees are bona fide and reasonable in amount. These charges are included in the calculation of total points and fees unless the conditions stated in the definition of “total points and fees” are met.

Your question is whether these fees must be included in the finance charge. That issue is decided under Sec. 226.4(c)(7), which says that they are not in the finance charge as long as the transaction is secured by real property or is a residential mortgage transaction, and the fees are bona fide and reasonable in amount (regardless of who is affiliated with whom). If you intended to ask whether the fees are included in the total points and fees calculation, that issue is decided under the high-cost mortgage rule. It seems to us that the fees would not be in the calculation if they are Sec. 226.4(c)(7) fees, are reasonable, etc., just because they are paid to an affiliate of the mortgage broker. They would be included in the calculation if they were paid to an affiliate of the creditor. (posted 12/3/04)

Question: Do second homes fall under section 32?

Answer: Section 32 of Regulation Z deals with “high-cost” mortgages and imposes extra requirements of the interest rate or fees associated with a mortgage loan exceed certain thresholds.

Section 32 applies only if the loan is secured by the consumer’s principal dwelling, so a loan secured by a second home would not be covered. (posted 11/5/04)

Question: Which fees are included in the limit that cannot exceed $488 without being a HOEPA loan?

Answer: Unfortunately, the answer to this question is complex. Here it is:

Regulation Z, Section 32, says the high-cost mortgage rules (sometimes referred to as HOEPA, or the Home Owner’s Equity Protection Act) apply if “total points and fees payable by the consumer at or before loan closing” exceed that amount. Points and fees are defined as:

All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential;
All compensation paid to mortgage brokers;
All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and
Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.

Numbers (i) and (iii) require a little more explanation.

Items required to be disclosed under Sec. 226.4(a) and 226.4(b) include virtually every form of finance charge you can think of, but, of course, interest and time-price differential do not count toward the total.

Items listed in Sec. 226.4(c)(7) are items that are excluded from the finance charge if the transaction is secured by real property or the loan is a residential mortgage transaction. These fees include the following:

Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.
Notary and credit report fees.
Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest infestation or flood hazard determinations.
Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge. (posted 10/15/04)

Question: Under Reg. Z HOEPA (Section 32), is the non-borrowing spouse required to sign the Final Supplemental TIL provided at signing?

Answer: In general, disclosures required by Regulation Z only need to be given to the borrowing consumer. (One exception to that is the notice of right to rescind, which must be given to any consumer, whether liable on the loan or not, whose ownership interest in the property is subject to the security interest.) The disclosures under Section 32 do not need to be given to a non-borrowing spouse, so there would be no need to have that person to sign the disclosure acknowledging receipt of it.