We believe that a separately itemized fee for conducting a loan closing should be included in the finance charge calculation if it is a required service, even though your institution permits borrowers to select the service provider. Regulation Z and the accompanying Official Interpretations include fees charged for a conducting or attending a closing in the finance charge calculation, unless they are part of a lump-sum fee for excludable service fees (such as title insurance charges).

The Official Interpretations address the argument that fees for conducting or attending a closing are charged in comparable cash transactions. Although that may be the case, if there is a difference between the closing fee charged in a credit transaction and a cash transaction, the difference between the fees must be included in the finance charge calculation (in most cases, closing fees are higher for credit transactions, which tend to be more complex than cash transactions). In other words, if you document the title company’s ordinary closing fee for cash transactions and compare it to closing fee for credit transactions, you may reduce the amount included in the finance charge to the difference between the two.

Regulation Z does permit you to entirely exclude a closing fee that is part of and incidental to a lump sum for excludable services, such as a lump sum fee for title insurance. However, in your case, the closing fee has been itemized separately, so there is no lump sum fee. Because the closing fee is not included in a lump sum fee, it should not be excluded from the finance charge. (Notably, some title companies do insist on itemizing their charges, due to the HUD guidance under RESPA requiring a separate itemization of title charges.)

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.4(a)(2) (“Fees charged by a third party that conducts the loan closing (such as a settlement agent, attorney, or escrow or title company) 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.”)

• Official Interpretations, 12 CFR 1026, Paragraph 4(a)(2), Comment 2 (“If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the imposition of the charge, or retains a portion of the charge. Fees charged by a third-party closing agent may be otherwise excluded from the finance charge under § 1026.4. For example, a fee that would be paid in a comparable cash transaction may be excluded under § 1026.4(a). 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 § 1026.4(c)(7).”)

• Official Interpretations, 12 CFR 1026, Paragraph 4(a), Comment 1(iii) (“If the charge in a credit transaction exceeds the charge imposed in a comparable cash transaction, only the difference is a finance charge. For example: (A) If an escrow agent is used in both cash and credit sales of real estate and the agent’s charge is $100 in a cash transaction and $150 in a credit transaction, only $50 is a finance charge.”)

• HUD Responses to Questions from the Massachusetts Bankers Association (July 12, 2000) (“Question 1. Is it required to indicate anywhere on the HUD-1 the actual dollar amount of the commission earned by the settlement agent (closing attorney) for issuing a title insurance policy? Answer: Yes. The Instructions specifically state that the HUD-1 must ‘itemize all charges imposed upon the borrower and the seller by the lender and all sales commissions, whether to be paid at settlement or outside of settlement.’”)