RSK.IQ Question of the Week 3/17/14

RESPA GFE and Pre-Paid Finance Charges Questions

Bank lending personal attended a webinar that has them questioning a few things related to the GFE and finance/prepaid finance charges:

1) If a PMI premium is not due prior to or at closing, is PMI still a pre-paid finance charge when an escrow account is set up?

2) With regards the bank attorney fee, they had been including it in Block 4 of the GFE as the bank attorney reviews the title and attends the closings.  Should it be included in Block 1 as part of the Bank’s origination charge or Block 3, as a service the bank selects?  Is there a maximum dollar limitation for these services?

3) As for flood determinations, the flood company the bank uses charges a flat fee for flood determinations which also includes life-of-loan coverage. Should the bank be flagging the total fee as a finance charge even if it is paid by the lender?

4) If the bank charges a separate appraisal fee, should that be included in Block 1 – Our Origination charge?  How do we disclose the charge for the appraisal in Block 3?

In answer to your questions:

Under Regulation Z, if the prepaid mortgage insurance premium (“PMI”) is not collected at closing, it is still a finance charge which is calculated into the cost of the loan, just as interest is. It is simply not a prepaid finance charge. Any charge that is required as a cost of the credit, but not charged in a comparable cash transaction or is otherwise exempt by the regulation, is a finance charge. What makes it a prepaid finance charge and thus affecting the amount financed is whether the charge is paid at or before closing. 12 CFR 1026.2(23), 4(a)(1); Official Interpretations, section 4(a)(1)-1.

RESPA defines the term “title services” to include any service involved in the preparation and issuance of a title insurance policy, such as title examination and evaluation and the cost of conducting the settlement. The attorney’s fee for reviewing the title and attending the closing would be properly included in the charge for title services listed in Block 4. 12 CFR 3500.2; HUD RESPA FAQs, GFE – Block 4, Questions 4, 5, & 6. No maximum fee is listed for such a service by RESPA or Regulation Z.

Under Regulation Z, the fee for the initial flood search is excluded as a finance charge, but fees for continuing services, such as the life-of-loan search, are considered finance charges regardless of when they are performed. If the bank is uncertain as to how the flood search fee is divided between the initial search and the continuing services, it may treat the entire cost as a finance charge. Official Interpretations, section 4(c)(7)-3. Similarly, the bank would report the entire cost of the flood determination as the cost it was picking up.

The appraisal fee should be included in the origination charge in Block 1 if it is prepared in-house. If it is obtained from a service provider selected by the bank, it goes into Block 3. The bank identifies the provider and the estimated cost of the appraisal. The disclosure of this charge is subject to a 10 percent tolerance for error, meaning that the cost disclosed at settlement can exceed the estimated cost disclosed in the GFE by 10 percent without a penalty being assessed. Regulation X, Appendix C, Block 3; HUD RESPA FAQs, GFE – Block 3, Question 2.


This entry was posted on Friday, March 14th, 2014 at 8:32 pm.

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