For construction loans, a borrower has to purchase "builder's risk insurance" which protects the property while the home is being constructed. The borrower pays this but the premium is typically just included in the construction contract and the policy is in the builder's name.

Would this be a finance charge for Reg Z. I know that hazard insurance is exempted if the borrower is allowed to pick the provider. But this isn't true with Builder's Risk. The bank requires it, but it's the builder's policy, chosen by the builder.

Finance Charge or not?

IMHO - the leading question is. . . Who does the insurance protect?
Customer - Not PPFC
Bank - Yes PPFC

a borrower has to purchase "builder's risk insurance" which protects the property

Typically, a bank requires the builder to carry such insurance, no different than requiring a borrower to have fire insurance on a completed structure. Who pays for the insurance is between the builder and the customer.

So Randy, do you agree that it's a PPFC? The borrower indirectly pays the premium....it's typically included in the contract between the builder and customer.

And for SouthernBanker....good point. I would assume it protects the borrower because the borrower does not have to have any other hazard insurance, the borrower has taken a loan out for the construction project and so "owns" the project.

No, I do not. The bank sets the conditions on accepting the builder on the borrower's loan. One of those conditions is that the builder has builder's risk insurance. The builder can get the insurance from whoever the builder wants too as long as the policy is acceptable to the bank. Whether the builder charges the borrower directly or indirectly for the cost is not material. It is no different than conditioning that the builder used is certified, licensed, bonded, or any other type of similar condition.