As DocMagic, Inc.'s Compliance Department has received a number of inquiries in the past week regarding whether or not an application fee constitutes a finance charge, we thought it appropriate to provide an explanation on this topic.

As indicated in our Finance Charges matrix, the default in the DocMagic system designates an application fee as a finance charge.  Therefore, the amount of the application fee would be included in the APR calculation.  However, there is a footnote to our default in the matrix indicating that an application fee would not be considered a finance charge if it is charged to all applicants.

Section 226.4(c)(1) of Reg. Z provides in relevant part:

(c) Charges excluded from the finance charge. The following charges are not finance charges:

(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.

A further explanation of this provision can be found in the Official Commentary to Section 226.4(c)(1), which provides:

Paragraph 4(c)(1).

Application fees. An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals. The creditor is free to impose the fee in only certain of its loan programs, such as mortgage loans, However, if the fee is to be excluded from the finance charge under §226.4(c)(1), it must be charged to all applicants, not just to applicants who are approved or who actually receive credit.

Based on the above commentary, if the application fee would be charged to all applicants, whether or not their application for a loan is denied, the DocMagic user should override the default for application fees in DocMagic by unchecking the APR box.  If you have any questions regarding the contents of this article, please contact DocMagic's Compliance Department.