Truth in Lending: 3.8.1 Overview
One TILA category that people on both sides of the loan desk sometimes find confusing is the prepaid finance charge.
One TILA category that people on both sides of the loan desk sometimes find confusing is the prepaid finance charge.
Prepaid finance charges are part of the total finance charge that must be disclosed. The term prepaid finance charge is an umbrella term for “any finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time.”496 Consequently, prepaid finance charges are simply a subset of the finance charges imposed by the creditor.
Regulation Z specifically ties disclosure of the prepaid finance charge to the itemization of the amount financed,510 but the prepaid finance charge is always calculated as a component of the finance charge, never as a component of the amount financed.
Regulation Z’s instructions for calculating the amount financed can make one yearn for the clarity of Alice in Wonderland. To calculate the amount financed, Regulation Z provides as follows:516
Step One:
determine the principal of loan, or, in a sale, the cash price less the down payment
Step Two:
The official interpretations define an application fee as a charge to recover the costs associated with processing applications for credit.542 According to the official interpretations, this fee could cover costs of services, such as credit reports, credit investigations, and appraisals, even though such costs would otherwise be included in the finance charge.543
Over-the-limit fees are a major source of revenue for many credit card issuers, and the Comptroller of the Currency has termed them “interest” under the National Bank Act, the law controlling national banks.555 Yet Regulation Z excludes over-the-limit charges from its definition of “finance charge” under the Truth in Lending Act.556
So-called “courtesy” overdraft services are a form of disguised high-cost credit offered by banks and credit unions.559 Separate from explicit overdraft lines of credit—through these overdraft services—financial institutions offer short-term credit with fees that amount to triple-digit rates. When the financial institution covers an overdraft, the bank repays itself by deducting the amount of the overdraft plus a hefty fee, often up to $35, by setting off the consumer’s next deposit.
Insurance written in connection with a consumer credit transaction587 clearly meets the prima facie definition of a finance charge.
The federal McCarran-Ferguson Act596 leaves the “business of insurance” to state regulation and bars substantive federal regulation of insurance. However, TILA’s disclosure requirements do not rise to the level of substantive regulation of either the sale of insurance or the cost of insurance under the McCarran-Ferguson Act and so are not barred.597
Some states do not consider debt cancellation or debt suspension coverage to be insurance. Regardless, under TILA they are considered credit insurance for finance charge purposes, unless stated otherwise.602
Credit insurance is a form of insurance offered in connection with a loan where the policy terms are specifically related to the loan, and the creditor or the credit account is the beneficiary.607 Creditors must include charges for credit life, credit accident, credit health, or credit loss-of-income insurance in the finance charge if the insurance is sold in connection with a credit transaction, unless the transaction meets several conditions described below.608 In theory, the insurance pay
Facially, credit insurance protects the consumer, whose estate would be relieved of the obligation to repay the debt in the event of her death, or who does not have to make payments during a covered disability or loss of employment. But in practice the far greater benefit goes to the creditor for several reasons.
Where credit insurance is legal,619 premiums and other costs for credit insurance may be excluded from the finance charge only if the following conditions are met:
Insurance premiums are included in the finance charge only when the policy is “written in connection with a credit transaction.”630 Implicit in the official interpretations is the suggestion that “in connection with” should be interpreted to encompass insurance purchased contemporaneously for use in that transaction.631 Fees for debt cancellation coverage are practically per se written in connection with the credit.632 In general, if a premiu
If credit insurance is required, the premiums must be included in the finance charge, regardless of whether the consumer purchases it from the creditor or from a third party.642 For example, if the creditor requires the debtor to purchase credit life insurance, the premium for the life insurance policy the consumer purchases (and assigns) must be included in the finance charge.643 If the creditor offers the insurance, but the consumer purchases the required insurance elsewhere, the amount in
The consumer must sign or initial an affirmative written request for the insurance after receiving the required disclosures of the voluntary nature of the insurance and the premium for the initial term in order for the premium to be excluded from the finance charge.652 The regulation’s model disclosure forms merely provide a space for the consumer’s signature after these statements: “I want credit life insurance”; “I want credit disability insurance”; and “I want credit life and disability insurance.”
The official interpretations provide that voluntariness is a factual issue,661 ascertainable only “by reference to all of the circumstances of a particular transaction. Inquiry into these circumstances is, of course, not foreclosed by the presence of a customer’s signature in an insurance authorization.”662 The Federal Trade Commission, in enforcement proceedings, has similarly looked upon voluntariness as a factual issue.663
A series of Fifth Circuit cases from the late 1970s, the most prominent of which is USLIFE Credit Corp. v.
Coercive or deceptive practices in the sale of credit insurance can also be challenged under various state law theories, including state deceptive acts and practices statutes,698 usury, and common law tort claims.699 Antitrust laws may offer some relief, though that can be an extremely complicated issue when it comes to insurance.700 Finally, relief may be available under the Equal Credit Opportunity Act.