We believe that a closing protection letter fee charged by a title insurance company should not be considered a finance charge under the Truth in Lending Act (TILA), based on two separate exemptions.

First, Regulation Z specifically exempts certain real-estate related fees from the scope of finance charges, including fees for title insurance “and similar purposes.” A closing protection letter protects the integrity of the lender's title. Consequently, a closing protection letter fee could be considered a title insurance-related fee, or at the very least, a fee for purposes similar to a title insurance fee. At least a few federal courts in Pennsylvania have reached this conclusion — although we are not aware of any Illinois courts that have considered the issue.

Perhaps more importantly, Regulation Z also exempts charges payable in comparable cash transactions from the finance charge calculation. When a when the title agency acts as escrow agent for a residential real estate transaction, the Illinois Title Insurance Act requires closing protection letters be issued to cover all parties to the transaction (sellers, buyers, borrowers and lenders) against negligence or fraud by the escrow agent. Consequently, even in a cash transaction, the buyers and sellers still must receive a closing protection letter. Because closing protection letters are required in comparable cash transactions, there is a strong argument that closing protection letter fees are exempt from finance charge calculations under Regulation Z.

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.

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.4(c)(7)  (“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…”)

• Title Insurance Act, 215 ILCS 155/3(13) (“ ‘Insured closing letter’ or ‘closing protection letter’ means an indemnification or undertaking to a party to a real property transaction, from a principal such as a title insurance company, setting forth in writing the extent of the principal's responsibility for intentional misconduct or errors in closing the real property transaction on the part of a settlement agent, such as a title insurance agent or other settlement service provider, and includes protection afforded pursuant to subsections (f), (g), and (h) of Section 16 and Section 16.1 of this Act even if such protection is afforded by contract.”)

• In re Lowenstein, 459 B.R. 227, 236 (Bankr. E.D. Pa. 2011) (“The $35.00 charge for the closing services letter was imposed in the Transaction to protect the integrity of the lender's title. Considering its purpose and function, I conclude that it was either a charge for title insurance—or, at a minimum, a charge imposed for a ‘similar purpose.’”)

• Stump v. WMC Mortg. Corp., CIV.A. 02-326, 2005 WL 645238, at *3 (E.D. Pa. Mar. 16, 2005) (“Finally, the $35 ‘closing services letter’ fee paid to Lawyers Title Insurance Corporation, which was itemized on the Disclosure Statement as a Settlement Charge, was properly excluded from the finance charge calculation. 15 U.S.C. § 1605(e)(1) permits exclusion from the finance charge of ‘fees or premiums for title examination, title insurance, or similar purposes.’ Defendants have called this Court’s attention to section 7.5 of the Manual of the Title Insurance Rating Bureau of Pennsylvania (‘Rating Manual’), which establishes that a title insurance company may charge $35 to issue a closing services letter to a creditor. Plaintiffs, in opposing the instant motions, have presented no evidence suggesting that the closing services letter fee was anything but a bona fide and reasonable charge.”)

• Regulation Z, 12 CFR 1026.4(a) (“The finance charge . . . does not include any charge of a type payable in a comparable cash transaction.”)

• Illinois Title Insurance Act, 215 ILCS 155/16.1(a) (“…a title insurance company or title insurance agent is not authorized to act as an escrow agent … in a residential real property transaction unless as part of the same transaction a commitment, binder, or title insurance policy and closing protection letters protecting the buyer's or borrower's, lender's, and seller's interests have been issued by the title insurance company on whose behalf the commitment, binder, or title insurance policy has been issued.”) (emphasis added)

• BankersOnline.com, Forum Discussion Post, Closing Protection Letter – Finance Charge? (November 16, 2009) (“Since the CPL indemnifies the lender for failures of the title company's agent in executing the lender's instructions for the closing of the loan, it would be a finance charge, as I do not believe it falls in any category found in 226.4(c).”)

• DocMagic’s website, FAQ, Are Closing Protection Letter fees classified as prepaid finance charges? (“At first glance, one may think that as a title insurance company issues closing protection letters, a fee for such letter may be considered a “[F]ee[s] for title examination, abstract of title, title insurance, property survey, and similar purposes” under Reg. Z Section 226.4(c)(7)(i).  But, it is not.  A closing protection letter has nothing to do with title examination, title insurance, etc.”)