Texas property taxes are secured by a superior tax lien on the property. Unlike other states, Texas law permits a homeowner to select and authorize a property tax lender to pay delinquent property taxes on the homeowner's behalf by signing a sworn authorization. After agreeing to terms with a property tax lender, the homeowner executes a promissory note in favor of the property tax lender to finance the delinquent taxes, collection costs, and penalties owed to the taxing authority and closing costs charged by the property tax lender at an interest rate that does not exceed the statutory maximum. The property tax lender then presents the authorization to the taxing authority and pays the delinquent amount. The taxing authority transfers the tax lien to the property tax lender who is subrogated to the rights of the taxing authority.
There has been uncertainty as to whether these Texas property tax transactions are required to comply with the federal Truth in Lending Act ("TILA"). If TILA applies, the transactions would be high cost mortgage transactions that must comply with ability-to-repay and counseling requirements. On their face, the transactions appear to be credit transactions subject to TILA because a homeowner voluntarily enters into a contractual relationship with a property tax lender. The state regulator, the Texas Office of Consumer Credit Commissioner, has taken the position that TILA does apply and advised some property tax lenders to comply with TILA after examinations, but did not take formal enforcement action. On the other hand, property tax lenders have taken the position that TILA does not apply. Several homeowners filed suit against their property tax lenders in an attempt to settle the issue. This led the Fifth Circuit Court of Appeals to issue a decision on April 29, 2016, concluding that TILA does not apply to these transactions. This is how the Fifth Circuit came to that conclusion.
David and Tressa Billings entered into a Texas property tax loan with Propel Financial Services, LLC to pay their delinquent property taxes. The Billings subsequently sued Propel Financial Services for failing to comply with the Truth in Lending Act and its implementing regulations, Regulation Z. The Billings alleged the property tax transaction was third-party financing of the tax obligation which is credit per the staff commentary to Regulation Z. Propel Financial Services moved to dismiss the complaint by alleging that tax lien transfers are not subject to TILA because they are not "consumer credit transactions" as defined by the Act. Propel Financial Services relied on a prior Fifth Circuit case, In re Kizze-Jordan, 626 F.3d 239 (5th Cir. 2010), to argue that the tax lien transfer was only a transfer of the tax obligation which was not credit under TILA. In In re Kizze-Jordan, the Fifth Circuit held that the underlying tax lien was not extinguished by a tax lien transfer so the property tax lender's tax lien was a tax claim for purposes of bankruptcy law. Because the staff commentary to Regulation Z also states that tax liens and tax assessments are not credit for purposes of the regulation, a tax lien transfer is not subject to TILA. The trial court granted the dismissal after relying on the In re Kizze-Jordan case to hold that a tax lien transfer is not credit subject to TILA.
The Billings appealed. The case was consolidated with three other cases filed by homeowners against their property tax lenders. The trial courts denied dismissal in those cases after concluding that TILA applies to the transactions. The property tax lenders renewed the Propel argument on appeal. The Consumer Financial Protection Bureau filed an amicus brief in support of the homeowners, arguing that the transactions were credit transactions to which TILA applied. The CFPB argued that the transactions were credit transactions in the form of third party financing of tax liens, an argument that the Billings trial court ignored. The CFPB also argued that the tax obligation was extinguished because Texas statutes expressly state that the tax loan transaction pays off the taxes so the existing tax obligation no longer exists.
The Fifth Circuit Court of Appeals affirmed the Billings decision and reversed the other trial court decisions after concluding that the transactions are not credit subject to TILA. The appeals court relied on its holding in In re Kizze-Jordan to conclude that a tax lien transfer does not extinguish the existing tax obligation. Thus, a tax lien transfer is a preexisting tax obligation and not a new credit transaction.
Texas property tax lenders are now assured that they do not have to comply with ability-to-repay and counseling requirements of TILA with respect to the transactions. However, this position could change. Texas property tax lenders may be required to comply with TILA in the future if the Texas legislature amends state law or the CFPB amends Regulation Z, which implements TILA. In addition, property tax lenders should ensure that they are dealing fairly with homeowners because the CFPB could use its UDAAP authority to examine a property tax lender for unfair, deceptive, and abusive acts and practices in connection with these consumer transactions.
Billings v. Propel Financial Services, LLC, 2016 U.S. App. LEXIS 7843, 2016 WL 1729421 (April 29, 2016).