I know some banks have done it the way your bank has done in the past and it has never been questioned. First consider, the closing fee should be included in the 1101 total. If a third party (other than the title company) performs the closing it should also be listed in line 1102 outside the column. Some banks utilize the lump sum finance charge exception (see commentary to Reg Z 1026.4(c)(7)) in order to exclude the closing/settlement fee from the FC. If the closing fee is itemized as a separate charge (e.g. on a bill or the HUD, etc.) then the lump sum exemption wouldn’t apply and it would be a FC – but if it is paid to a third party as stated above it is required to be listed on 1102 outside the column. I’m assuming you’re forcing/manually inputting the closing fee on line 1110? If that is the case, your forms platform probably isn’t recognizing what type of fee it is (closing/settlement) and that is why it is not requiring it to be a FC.
Take a look at the RESPA FAQs p. 53 and 54, numbers 13. https://portal.hud.gov/hudportal/documents/huddoc?id=resparulefaqs422010.pdf
13) Q: If the title agent conducts the settlement, should the charge for conducting the settlement be included in Line 1101 of the HUD-1, with the itemized charge listed outside the column on Line 1102?
A: Yes, the charge for conducting the settlement must be included in the total on Line 1101. If the charge is paid to a third party, the charge must be itemized outside of the columns on Line 1102.
(The consensus seems to be that HUD’s intention here is that a third party is separate from the title company.)
Here’s an ABA document that might also help. Look at page 62. https://www.aba.com/aba/documents/abaworks/ABAWorksonRESPA.pdf
