For closed-end mortgage transactions, we use a company to verify a borrower’s employment using their work phone number. The company charges a fee for this verification service, which we pass on to the borrower. We have been listing this fee in “Section B” of the Loan Estimate (LE) and Closing Disclosure (CD), since the borrower cannot shop for these services. Would this fee be considered a prepaid finance charge or is it just a finance charge?

First, we agree that an employment verification fee would be considered a finance charge, since it would not be charged in a comparable cash transaction and does not fall into any of the categories that are exempted from the definition of finance charge. Whether it is a prepaid finance charge depends on how it is paid. If the fee is “paid separately in cash or by check before or at consummation of a transaction or withheld from the proceeds of the credit at any time,” then it is a prepaid finance charge.

Additionally, we agree that this charge should be included in the “Services You Cannot Shop For” and “Services Borrower Did Not Shop For” sections of the LE and CD, respectively, since you do not allow borrowers to select a company to verify their employment.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.4(a) (“The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”)

Regulation Z, 12 CFR 1026.4(a)(i) (“Charges by third parties. The finance charge includes fees and amounts charged by someone other than the creditor, unless otherwise excluded under this section, if the creditor: (i) Requires the use of a third party as a condition of or an incident to the extension of credit, even if the consumer can choose the third party; or . . .”)

Regulation Z, 12 CFR 1026.4(c) (“Charges excluded from the finance charge. The following charges are not finance charges: . . .”)

Regulation Z, 12 CFR 1026.2(a)(23) (“Prepaid finance charge means any finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time.”)

Regulation Z, Official Interpretations, Paragraph 2(a)(23), Comment 2 (“Examples.

i. Common examples of prepaid finance charges include: A. Buyer's points. B. Service fees. C. Loan fees. D. Finder's fees. E. Loan-guarantee insurance. F. Credit-investigation fees.

ii. However, in order for these or any other finance charges to be considered prepaid, they must be either paid separately in cash or check or withheld from the proceeds. Prepaid finance charges include any portion of the finance charge paid prior to or at closing or settlement.”)

Regulation Z, 12 CFR 1026.37(f)(2), Loan Estimate (“Under the subheading ‘Services You Cannot Shop For,’ an itemization of each amount, and a subtotal of all such amounts, the consumer will pay for settlement services for which the consumer cannot shop in accordance with § 1026.19(e)(1)(vi)(A) and that are provided by persons other than the creditor or mortgage broker.”)
Regulation Z, 12 CFR 1026.38(f)(2), Closing Disclosure (“Under the subheading ‘Services Borrower Did Not Shop For’ and in the applicable columns as described in paragraph (f) of this section, an itemization of the services and corresponding costs for each of the settlement services required by the creditor for which the consumer did not shop in accordance with § 1026.19(e)(1)(vi)(A) and that are provided by persons other than the creditor or mortgage broker, the name of the person ultimately receiving the payment for each such amount, and the total of all such itemized amounts that are designated borrower-paid at or before closing.”)