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In our area [Cook County], title companies charge a “Tax & Indemnity” fee when the company holds funds for property taxes that are due within 60 days of a mortgage loan closing, generally in situations where the tax bills for the upcoming installment have not yet been issued. Should we include this fee in the finance charge calculation? – IBA Compliance Connection

IBA Compliance Connection

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In our area [Cook County], title companies charge a “Tax & Indemnity” fee when the company holds funds for property taxes that are due within 60 days of a mortgage loan closing, generally in situations where the tax bills for the upcoming installment have not yet been issued. Should we include this fee in the finance charge calculation?

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No, we believe this Tax & Indemnity fee should be excluded from the finance charge calculation, since it is a title insurance-related fee that is part the title insurance process.

Regulation Z exempts fees for “title examination, abstract of title, title insurance, property survey, and similar purposes” from the finance charge calculation. Title companies charge the Tax & Indemnity fee that you described for the service of holding funds to pay property taxes that will become due within 60 days of the mortgage loan closing. This is a service that the title insurance company likely would insist on as a condition of providing title insurance (which would be jeopardized if those taxes remained unpaid). Because this fee is so closely related to title insurance, we believe that it should be treated as a title insurance fee, or at least as a fee for “similar purposes,” and consequently it should be excluded from the finance charge calculation.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.4(c)(7)(i) (“The following charges are not finance charges: . . . (7) The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount: (i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes. . . .”)