Finance Charges & Expedited Fees

Question: We advertise that we process mortgage loan applications quickly. In quite a few cases, the flood hazard search needs to be expedited in order to give the customer adequate notice regarding insurance prior to closing. Our flood service provider charges a $10 fee for expedited service which we pass on to the customer. Is this fee a finance charge or is it exempt because the customer requested it?

Answer: This is a "maybe yes, maybe no" situation. Whether the surcharge is a finance charge depends on how the service is offered and requested. A fee for a third party service that is required is a finance charge. Recent revisions to Regulation Z leave no question about this.

However, if the service is at the request of the customer, it may not be a finance charge. In that situation, it would not be a requirement for getting credit, it would be an accommodation of a special customer request. The same analysis would apply when a customer requests closing by a certain date and that schedule can only be met by using couriers to move documents quickly.

Here's the problem. You advertise a service for rapid decisions and loan closing. Thus, while it may not be a requirement of obtaining credit, it does appear to be a charge that is a condition of getting a particular type of credit that you offer - a rapid decision loan. In this case, it looks like a finance charge. It is a third party fee passed on to the customer and you require the use of the third party for this particular type of credit.

In the current environment of attention to finance charges, especially third party charges, we believe that the safer course would be to treat this fee as a finance charge.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 2, 2/97