B-176879, APR 2, 1975

B-176879: Apr 2, 1975

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EMPLOYEE WHO PURCHASED RESIDENCE INCIDENT TO TRANSFER IS NOT ENTITLED TO REIMBURSEMENT FOR LOAN SERVICE FEES AS SUCH FEES ARE CONSIDERED NON REIMBURSABLE FINANCE CHARGES UNDER PROVISIONS OF REGULATION Z WHICH IMPLEMENTS THE TRUTH IN LENDING ACT. HARPER CONTENDS THERE IS A CONTRADICTION BETWEEN CERTAIN PROVISIONS OF OFFICE OF MANAGEMENT AND BUDGET CIRCULAR NO. A-56 ON WHICH THE DISALLOWANCE WAS BASED AND THE INTERNAL REVENUE MANUAL. THE ALLEGED CONTRADICTION IS BASED ON. WHICH STATES THAT THE ONE PERCENT CHARGE ($247 CLAIMED) IS NOT A FINANCE CHARGE. WHICH HELD THAT A LOAN ORIGINATION FEE (KNOWN AS POINTS) TO OBTAIN A VA MORTGAGE IS A SERVICE CHARGE AND IS NOT INTEREST. WHICH HELD THAT THE ONE PERCENT CHARGE MADE BY THE BANK TO THE BORROWER WAS FOR SERVICES IN PLACING THE LOAN AND NOT INTEREST TO ADJUST THE INTEREST RATE.

B-176879, APR 2, 1975

EMPLOYEE WHO PURCHASED RESIDENCE INCIDENT TO TRANSFER IS NOT ENTITLED TO REIMBURSEMENT FOR LOAN SERVICE FEES AS SUCH FEES ARE CONSIDERED NON REIMBURSABLE FINANCE CHARGES UNDER PROVISIONS OF REGULATION Z WHICH IMPLEMENTS THE TRUTH IN LENDING ACT, 15 U.S.C. 1605, WHICH OFFICE OF MANAGEMENT AND BUDGET CIRCULAR NO. A-56 ESTABLISHES AS THE GUIDE TO REIMBURSEMENT FOR REAL ESTATE EXPENSES IN CONNECTION WITH EMPLOYEE TRANSFERS.

MR. LESLIE W. HARPER, JR. - REAL ESTATE EXPENSES - LOAN SERVICE FEES:

THIS ACTION CONCERNS A REQUEST FROM MR. LESLIE W. HARPER, JR., AN EMPLOYEE OF THE INTERNAL REVENUE SERVICE, FOR RECONSIDERATION OF A PORTION OF A SETTLEMENT ISSUED JANUARY 11, 1973, BY OUR TRANSPORTATION AND CLAIMS DIVISION. THE SETTLEMENT DISALLOWED REIMBURSEMENT OF A ONE PERCENT SERVICE CHARGE LEVIED BY HIS MORTGAGE COMPANY IN CONNECTION WITH A LOAN HE OBTAINED TO PURCHASE A NEW HOME INCIDENT TO A CHANGE OF OFFICIAL STATION FROM SACRAMENTO, CALIFORNIA, TO PHILADELPHIA, PENNSYLVANIA.

MR. HARPER CONTENDS THERE IS A CONTRADICTION BETWEEN CERTAIN PROVISIONS OF OFFICE OF MANAGEMENT AND BUDGET CIRCULAR NO. A-56 ON WHICH THE DISALLOWANCE WAS BASED AND THE INTERNAL REVENUE MANUAL. THE ALLEGED CONTRADICTION IS BASED ON; (1) A LETTER FROM ASSOCIATED EAST MORTGAGE CO., WHICH STATES THAT THE ONE PERCENT CHARGE ($247 CLAIMED) IS NOT A FINANCE CHARGE; (2) REVENUE RULING 67-297, 1967-2CB87, WHICH HELD THAT A LOAN ORIGINATION FEE (KNOWN AS POINTS) TO OBTAIN A VA MORTGAGE IS A SERVICE CHARGE AND IS NOT INTEREST; (3) THE CASE OF METROPOLITAN MORTGAGE FUND INC., 749 CCH 1974 STAND. FED. TAX REP. SEC. 7362, WHICH HELD THAT THE ONE PERCENT CHARGE MADE BY THE BANK TO THE BORROWER WAS FOR SERVICES IN PLACING THE LOAN AND NOT INTEREST TO ADJUST THE INTEREST RATE. THUS, MR. HARPER CONTENDS THE LOAN PLACEMENT FEE IS NOT AN INTEREST OR A SERVICE CHARGE OR A FINANCE CHARGE WITHIN THE DEFINITION OF INTERNAL REVENUE MANUAL SEC. 583(D)2, NOR IS IT SUBJECT TO THE TRUTH IN LENDING ACT, TITLE 1, PUBLIC LAW 90-321.

IT SHOULD BE NOTED THAT MR. HARPER'S ENTITLEMENT TO REIMBURSEMENT FOR REAL ESTATE EXPENSES IS GOVERNED BY SECTION 4.2D OF OFFICE OF MANAGEMENT AND BUDGET CIRCULAR NO. A-56, REVISED AUGUST 17, 1971, WHICH WAS IN EFFECT AT THE TIME HIS TRANSACTION TOOK PLACE, AND NOT THE INTERNAL REVENUE MANUAL, NOR IS IT RELEVANT THAT THE FEES IN QUESTION ARE NOT DEDUCTIBLE FOR INCOME TAX PURPOSES AS INTEREST CHARGES. NEVERTHELESS, WE MUST POINT OUT THAT WE FIND NO INCONSISTENCY IN EITHER OF THE INTERNAL REVENUE RULINGS CITED BY THE CLAIMANT. IN BOTH INSTANCES, IRS CHARACTERIZED THE ONE PERCENT CHARGE MADE BY THE BANK TO THE BORROWER AS "A SERVICE CHARGE" FOR "SERVICES IN PLACING THE LOAN." WE DO NOT DISAGREE THAT THE FEE IN QUESTION WAS A SERVICE CHARGE FOR THIS PURPOSE. HOWEVER, SERVICE CHARGES IMPOSED IN CONNECTION WITH THE OBTAINING OF CREDIT ARE SPECIFICALLY LISTED AS FINANCE CHARGES UNDER THE TRUTH IN LENDING ACT, 15 U.S.C. 1605, AND REGULATION Z, ITS IMPLEMENTING REGULATION, FOUND AT 12 C.F.R. PART 226.4. THE AFOREMENTIONED SUBSECTION 4.2D OF OMB CIRCULAR NO. A-56 PRECLUDES REIMBURSEMENT OF ANY FEE, COST, CHARGE OR EXPENSE WHICH IS DETERMINED TO BE PART OF A FINANCE CHARGE UNDER THE TRUTH IN LENDING ACT, AND ITS REGULATION Z.

THE FOLLOWING GUIDELINES FOR DETERMINING WHETHER A PARTICULAR CHARGE IS AN EXCLUDABLE EXPENSE OR IS A PART OF THE FINANCE CHARGE ARE PROVIDED BY REGULATION Z ISSUED PURSUANT TO SECTION 106 OF THE TRUTH IN LENDING ACT:

"SEC. 226.4 DETERMINATION OF FINANCE CHARGE.

"(A) GENERAL RULE. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, THE AMOUNT OF THE FINANCE CHARGE IN CONNECTION WITH ANY TRANSACTION SHALL BE DETERMINED AS THE SUM OF ALL CHARGES, PAYABLE DIRECTLY OR INDIRECTLY BY THE CUSTOMER, AND IMPOSED DIRECTLY OR INDIRECTLY BY THE CREDITOR AS AN INCIDENT TO OR AS A CONDITION OF THE EXTENSION OF CREDIT, WHETHER PAID OR PAYABLE BY THE CUSTOMER, THE SELLER, OR ANY OTHER PERSON ON BEHALF OF THE CUSTOMER TO THE CREDITOR OR TO A THIRD PARTY, INCLUDING ANY OF THE FOLLOWING TYPES OF CHARGES:

"(1) INTEREST, TIME PRICE DIFFERENTIAL, AND ANY AMOUNT PAYABLE UNDER A DISCOUNT OR OTHER SYSTEM OF ADDITIONAL CHARGES.

"(2) SERVICE, TRANSACTION, ACTIVITY, OR CARRYING CHARGE.

"(3) LOAN FEE, POINTS, FINDER'S FEE, OR SIMILAR CHARGE.

"(4) FEE FOR AN APPRAISAL, INVESTIGATION, OR CREDIT REPORT."

CERTAIN CHARGES, SUCH AS FEES FOR PREPARATION OF DEEDS, OR APPRAISAL FEES ARE EXEMPT FROM THIS SECTION, BUT THE FEE IN QUESTION IS NOT IN THIS CATEGORY.

SEE ALSO COMPTROLLER GENERAL DECISIONS B-179659, OCTOBER 10, 1973, AND B- 180981, OCTOBER 1, 1974, COPIES ENCLOSED.

FOR THE ABOVE REASONS, OUR SETTLEMENT DISALLOWANCE OF JANUARY 11, 1973, IS SUSTAINED.