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Truth in Lending: 3.9.2 Application Fees

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

Truth in Lending: 3.9.3.1 General

Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default,549 or a similar occurrence550 may be excluded from the finance charge.551 These fees are distinguished from finance charges because finance charges are actual and unavoidable.552

Truth in Lending: 3.9.3.2 Over-the-Limit Fees

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

Truth in Lending: 3.9.3.3 “Courtesy” Overdraft Services Fees

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.

Truth in Lending: 3.9.4.2.1 McCarran-Ferguson Act

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

Truth in Lending: 3.9.4.3.1 General description

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

Truth in Lending: 3.9.4.4.1 Overview

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:

Truth in Lending: 3.9.4.4.2 Insurance “written in connection with a credit transaction”

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

Truth in Lending: 3.9.4.4.3.1 Generally

State law usually prohibits compulsory credit life and disability insurance in consumer credit transactions under any circumstances.640 But even when state law allows a creditor to require credit insurance, a creditor cannot require the insurance and exclude the premium from the finance charge.641

Truth in Lending: 3.9.4.4.3.2 Voluntariness disclosure

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

Truth in Lending: 3.9.4.4.3.3 Affirmative written request for insurance

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.”

Truth in Lending: 3.9.4.4.3.4 Voluntariness is a factual issue

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

Truth in Lending: 3.9.4.4.3.6 Proof of coercion

The mere fact that a borrower did not read the insurance authorization form, stating that the purchase is voluntary, before signing it is unlikely to trigger a finding that the insurance was compulsory,677 nor is having seen it but failing to signify that it was not wanted.678

Truth in Lending: 3.9.4.4.3.7 Other claims to challenge coercive insurance

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.

Truth in Lending: 3.9.4.4.4 Timing and location of insurance disclosures

The rules on the timing and location of insurance disclosures for closed-end transactions must be followed in order to exclude the cost from the finance charge disclosure.702 The disclosure, like all other required disclosures, must be made prior to consummation in closed-end transactions.703 However, the disclosures, and, in the case of credit insurance, authorization required to exclude the insurance premiums from the finance charge may be made either together with or separately from the o

Truth in Lending: 3.9.4.4.5 Premium cost disclosures

The creditor must disclose the premium for the initial term of insurance coverage if the premium is to be excluded from the finance charge.709 For example, if the initial term of the credit property insurance policy is three years, the creditor must disclose the premium for the first three years, even if the term of the insurance may later be extended.710

Truth in Lending: 3.9.4.4.6 Term disclosures

If the term of the insurance is less than the term of the transaction, then the term of the insurance must also be disclosed.732 Practitioners should be especially alert for this issue on longer term loans, such as ten-year or fifteen-year loans. To fully insure those loans is quite expensive, so frequently credit insurance is written for only a part of the term.733 Property insurance, similarly, is usually written for a year at a time, and so the term disclosures are necessary.

Truth in Lending: 3.9.4.5.1.1 Generally

Like credit insurance, the premiums or other charges for property insurance written in connection with a consumer credit transaction must be included in the finance charge unless the creditor meets certain requirements. This applies to insurance against loss of or damage to property (sometimes called hazard insurance), or against liability arising out of the ownership or use of property.737 Property insurance—in the form of homeowner’s insurance—is almost universally required with mortgages.

Truth in Lending: 3.9.4.5.1.2 Choice of provider disclosure

If the creditor wishes to exclude the premiums from the finance charge, it must allow the consumer to choose the insurer and must disclose the availability of that choice to the consumer.751 Oral notice of the option is not sufficient; it must be written.752 This disclosure must be made regardless of whether the insurance is available from the creditor or not,753 and must be made even if it is not readily available from anyone but the credito