Sometimes it seems that you need a law degree to operate a consumer finance company or a retail installment seller. Well, you do need either in-house counsel or out-house counsel—I guess that should be “outside” counsel!
The federal Truth-In-Lending Act (“TILA”) generally tells us what charges must be considered Finance Charges and which ones are not; and also provides guidance as to how a particular charge may sometimes be considered a Finance Charge, but other times not. It really is confusing. I want to take a moment to outline some of the more common fees associated with consumer finance transactions, and discuss whether or not they are Finance Charges under TILA. State law also plays a role in the analysis. I primarily deal with Alabama state law—although the principles can be applied to each state's law.
The classic definition of Finance Charge is: the dollar amount that a consumer pays directly or indirectly and is imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. A good rule of thumb to keep in mind is that a fee or charge that is of a type payable in a comparable cash transaction is not a Finance Charge. With that general introduction, play my “Finance Charge Challenge!”
Is it a Finance Charge? “Yes” or “No.”
1. Voluntary credit insurance fees?
2. Required credit insurance that does not insure collateral?
3. Credit property insurance insuring collateral?
4. Voluntary debt cancellation or debt suspension fees?
5. Filing fees paid to public officials to perfect a security interest in collateral?
6. Non-filing insurance in lieu of filing a perfection document?
7. Charges for a voluntary service policy or auto club membership?
9. Real estate closing costs?
10. Notary fees?
11. An application fee?
12. A late payment fee?
13. Alabama interest surcharge, account handling fee and account maintenance fee?
And, now, here are the answers:
1. They are not Finance Charge, even if a portion of the premium is returned to the creditor as commission.
4. No, not Finance Charge.
5. No sir.
a. In Alabama, the designated agent's $1.50 fee for recording the lien on a vehicle is also not a
Finance Charge, but a convenience charge such as a Federal Express delivery charge for expedited delivery
b. An Efficiency Fee and the Electronic Access Fee paid to the AL Secretary of State's Office for on-line
filings appears not to be a Finance Charge either.
6. No ma'am.
a. But charging both a non-filing insurance premium and perfecting by filing probably makes the non-filing
insurance charge a Finance Charge.
7. These are not Finance Charge.
a. But, charges for a required maintenance or service contract imposed only in a credit
8. These can go either way.
a. A tax imposed solely on a creditor but passed along to the consumer is a
b. But one imposed on the consumer or on the creditor and consumer jointly
9. Most are not Finance Charges.
a. But, buyer's “points” are.
10. Again, this can go either way.
a. If a notary acknowledgment is required for a document, a fee in connection with the same
is not a Finance Charge.
b. However, if no acknowledgment is required, then imposing a charge for acknowledging the
document would be.
11. If charged to all applicants whether or not credit is extended such a fee is not a Finance Charge.
12. No siree, a late charge is not a Finance Charge.
13. This one was a gimme—of course all of these are Finance Charges!
How did you do on my challenge? Please remember that with all of this said, your state still may not permit all of these types of charges.
Practice Pointer: Before a fee is imposed, whether as a Finance Charge or not, make certain that applicable state law will permit the same.