We are having trust documents reviewed by the bank's counsel when we recieve mortgage applications from the consumer's trust. Is the legal fee in this situation a prepaid finance charge? Which line would this fee be shown on the HUD?

Thanks.

Based on a review of Reg Z, it indicates that:

Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or service sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition.

So if you are separately imposing the attorney fees on the customer, it would be considered a finance charge.

The instructions for the HUD-1 indicate:

Line 1107 is used to disclose the attorney's fees for the transaction. The instructions are discussed in the general directions for Lines 1100-1113. This line should include any charges by an attorney to represent a buyer, seller or lender in the real estate transaction.

Assuming we would charge the customer for this, would the fee for this service be deducted as a prepaid finance charge when figuring the APR? Also, if added to the usual attorney's fees on the HUD as one figure, would these fees have to be split as this new fee isn't exempt from the finance charge (226.4(C)7 )?

Trusts almost always have a spendthrift clause that prohibits the trust from paying the debts of the beneficiary. I would have bank counsel draft a standard trust certificate to be signed by the grantor that amends the trust to allow it to pay the loan, and certifies other information needed for the credit decision. This would eliminate the need to have bank counsel review trust agreements, and place the burden on the borrower to seek counsel to determine the impact of amending the trust in this manner.

Of course another consideration that escaped me the first time through this post is, depending on what type of trust this may be, the loan to the trust may very likely not be subject to Reg Z.