We believe that a closing protection letter fee charged by a title insurance company should not be considered to be a prepaid finance charge for purposes of the Truth in Lending Act (TILA). Regulation Z specifically exempts certain real-estate related fees from the scope of finance charges, including an exemption for fees for title insurance “and similar purposes.” 12 CFR 1026.4(c)(7)(i). A closing protection letter fee paid to a title insurance company arguably should be considered a title insurance-related fee, or at the very least, arguably it should be considered a fee for purposes similar to a title insurance fee.  We know of at least one relatively recent federal court decision that concurs with this view.

Perhaps more importantly, these fees also are required by Illinois law to be charged in comparable cash transactions. See the Title Insurance Act, 215 ILCS 155/16.1(a), which strengthens the argument that closing protection letter fees are not finance charges, and 12 CFR 1026.4(a) (“The finance charge . . . does not include any charge of a type payable in a comparable cash transaction.”).

Having said that, we are aware that there is some disagreement on this point. For example, a post on Bankers Online suggests that a closing protection letter fee would be considered a finance charge.  Also, DocMagic’s website FAQ states that it considers a closing protection letter fee to be a finance charge. If your document vendor categorizes such charges as finance charges, we recommend that you take this issue up with them.