Skip to main content

Search

Truth in Lending: 3.6.3.4.3 Remedies

For TILA purposes, a major issue is whether the violation triggers actual damages or statutory damages.197 If the cost of any particular back-end product is related to the extension of credit, or if the charge should have been included in the finance charge but was placed in the amount financed, then the violation can lead to statutory damages. If, on the other hand, the claim relates to a misdisclosure in the itemization of the amount financed,198 only actual damages are available.

Truth in Lending: 3.6.4.1 Introduction

The statute uses only the phrase “incident to,”200 while Regulation Z uses the disjunctive “incident to or a condition of” the extension of credit.201 In theory, these are two separate phrases, with each to be given meaning.202 “Incident to” suggests any fee that the borrower pays in connection with the credit extension, whether required by the creditor or not.

Truth in Lending: 3.6.4.3 Condition of the Extension of Credit

In determining whether a charge is “a condition of the extension of credit,” one question is whether the credit would have been granted if the borrower did not agree to pay it.213 For example, where a bank required car loan customers to pay for a bank-approved attorney’s services in preparing chattel mortgage papers, the fees were “incident to or a condition of the extension of credit” and were a finance charge.214 Similarly, where a creditor required a borrower to pay off a third party’s de

Truth in Lending: 3.6.4.4 The Role of Voluntariness

Two circuit court decisions have used the presumed voluntariness of a fee to exclude it from the finance charge. In Veale v. Citibank, F.S.B.,225 the Eleventh Circuit held that a Federal Express fee was not a finance charge because the service appeared to be voluntary. There was no evidence that the creditor required the borrower’s express mail delivery of pay-off checks.

Truth in Lending: 3.6.4.5 Example of Fees Imposed “Incident to” the Extension of Credit

A fee for preparing a TILA disclosure statement is a classic example of a charge “incident” to an extension of credit and is always a finance charge.235 Both the amounts charged a pawnbroker’s customer to exercise a repurchase option and the monthly service fees to extend the repurchase period were incident to what the court found was a loan from the pawnbroker, not a sale by the customer.236 A storage fee paid at the outset of a pawnbroker arrangement may be a condition of the extension of

Truth in Lending: 3.6.4.6 Prepayment Charges

Prepayment penalties are charged by a creditor when the borrower pays off the loan early. Prepayment penalties are clearly charges that are incurred incident to an extension of credit. But they are not finance charges on the underlying loan. If the prepayment penalties are paid as part of a refinancing, they may be included in the finance charge in the refinancing.

Truth in Lending: 3.6.5.1 General

TILA and Regulation Z provide that any charge of a type payable in a comparable cash transaction is not considered a finance charge.252 This statement can be viewed as mere surplusage because any charge that is payable in both cash and credit transactions is not imposed “as an incident to or a condition of the extension of credit.”253 The official interpretations compare cash and credit transactions, noting that charges imposed uniformly in cash and credit transactions are not finance charge

Truth in Lending: 3.6.5.3.1 Car sales

The official interpretations give several examples of credit transaction charges that would not be imposed in cash transactions and therefore are considered finance charges: loan disbursement fees, inspection fees in staged disbursement loans, TILA disclosure statement preparation fees, and required maintenance or service contract fees imposed only in credit transactions.265

Truth in Lending: 3.6.5.3.3 Overdraft loans

Overdraft loan programs imposed on customers’ deposit accounts—whereby overdrawn transactions are systematically paid—are transactions with no cash equivalent, similar to a non-purchase money loan. With overdraft loans, the consumer is receiving cash, not goods or services. Thus, fees imposed for overdraft loans should be a finance charge.

Truth in Lending: 3.6.5.3.4 Bail bond premium loans

Another example arises in the context of bail bond premium loans.293 If the creditor (the bail bond company or surety or both) imposes a fee when financing a bail bond premium, that fee is a finance charge unless it is imposed in a comparable cash transaction. In this scenario, a comparable cash transaction occurs when the premium plus the fee is paid in full at the time it is imposed. For example, the bail bond company may impose an administrative fee in all bail bond transactions regardless of whether the premium is financed.

Truth in Lending: 3.7.2.1 The Basic Interest Cost

Ordinarily, interest will be the largest component, and sometimes the only component, of the finance charge.303 This is consistent with the notion that interest is the basic cost of credit. The “interest” component of the finance charge disclosure includes “prepaid” or “per diem” interest. This is the amount of interest that accrues from the date of the contract to the date on which the interest begins to accrue for purposes of the first scheduled payment.

Truth in Lending: 3.7.2.3.1 General

One logical outgrowth of the characterization of basic interest as a finance charge arises in the context of credit transactions that refinance earlier ones prior to their scheduled maturities.323 If, in calculating the balance of the prior transaction to be paid off, the creditor fails to rebate any unearned charges, the portion of the pay-off representing the unearned charges is part of the finance charge in the new loan.324 Thus it is necessary for the practitioner to scrutinize carefully

Truth in Lending: 3.7.2.3.3 Federal rebate law prescribes method of calculating unearned interest in long-term transactions

The Housing and Community Development Act of 1992342 requires a rebate of unearned interest upon prepayment in full of any consumer credit transaction.343 More importantly, that Act further prohibits the use of the Rule of 78s to calculate rebates in long-term consumer credit transactions. Codified in TILA section 1615, this is a significant protection for consumers because the Rule of 78s is an anachronistic formula that skews refund calculations in favor of creditors.

Truth in Lending: 3.7.3.1 General

All “service, transaction, activity, and carrying charges” are finance charges under TILA.351 The FRB reiterated this position with respect to credit cards in the official interpretations effective 2010.

Truth in Lending: 3.7.3.3 Membership or Participation Fees

Many creditors will charge consumers a fee to participate in their credit plans. A classic example is the annual or semi-annual membership fee paid by credit cardholders to card issuers. Despite the fact that this fee is clearly incident to or a condition of the extension of credit and could logically fall within the scope of section 1026.4(b)(2), Regulation Z specifically excludes a participation fee from the finance charge via section 1026.4(c)(4).362

Truth in Lending: 3.7.3.4 Courier and Express Delivery Fees

Despite the warning of one of the first treatises on Truth in Lending that “the listing of charges that are excludable from the finance charge in real estate and residential mortgage transactions is an exhaustive list and not merely a list of examples,” and that a “courier expense” charge would therefore be a finance charge,369 many creditors have imposed charges for courier fees or express delivery fees and included them in the amount financed.

Truth in Lending: 3.7.4.1 Generally

Although brokers may be involved in many types of loans, this section focuses on mortgage brokers. Because payments to mortgage brokers are subject to special rules under TILA, practitioners will want to investigate carefully the role of every party in a home mortgage transaction to determine whether they should be treated as a mortgage broker.379 Charges imposed by other types of loan brokers are subject to the same finance charge rules as other third parties.380

Truth in Lending: 3.7.4.2 General Rule

The treatment of mortgage broker fees under TILA has evolved from a complex, fact-based analysis to a nearly bright-line rule.384 Since 1995,385 all borrower-paid fees charged by mortgage brokers are considered finance charges.386 This is the case irrespective of whether the fees are paid directly to the broker or via the lender, whether paid in cash or financed, or whether the creditor requires the use of a broker or retains any of the fees.

Truth in Lending: 3.7.4.3 Hidden Broker Fees

Sometimes broker fees are disguised as other types of payments.397 The plain text of the statute requires the inclusion of all fees paid to a mortgage broker, whether individually, in a corporate capacity, or even paid to multiple mortgage brokers. Common sense dictates that padded broker fees or broker fees fraudulently labeled as something else are also finance charges.