QUESTION
I am the compliance officer of a regional mortgage banker. As an
attorney, I am familiar with several regulatory guidelines involving the Truth
in Lending Act with respect to allowing certain charges to be excluded from the
“finance charge” if itemized and disclosed to the consumer. Is there a test for
excluding fees from the finance charge?
ANSWER
The Truth-in-Lending Act (TILA) and Regulation Z, its implementing
regulation, allow the following charges to be excluded from the “finance
charge” if itemized and disclosed to the consumer:
(1) taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest;(2) the premium for insurance in lieu of perfecting a security interest (i.e., “non-filing insurance”) to the extent the premium does not exceed the fees described in item (1) that otherwise would be payable; and,
(3) any tax levied on security instruments or on documents evidencing indebtedness if the payment of the taxes is a requirement for recording the instrument securing the evidence of indebtedness.
Let’s call it the “three-prong test.”
Condensed to a brief outline, the three prongs are:
(1) paid to a public official,
(2) perfecting a security interest, and
(3) prescribed by law.
To drill down a bit, a creditor may aggregate the fees described
in items (1) and (2) for disclosure purposes, rather than itemizing them
according to the specific fees and taxes imposed. With respect to excluding a
fee from the finance charge, Regulation Z makes clear that sums must be
actually paid to public officials to be excluded under item (1), such as charges or other fees for filing or recording
security agreements, mortgages, continuation statements, termination
statements, and similar documents. Other examples include intangible property
or other taxes. [§ 1026.4, Comment 4(e)-1]
Now to applying the three-prong test!
A federal bankruptcy court in Alabama considered whether an
electronic filing fee required by state law for filing a Uniform Commercial
Code (UCC) statement fell within item (1), even though the fee was paid to the
state and then passed along by the state to a third-party electronic service
provider. The case I have in mind is Hall v. Republic Finance, LLC. [Hall v.
Republic Finance, LLC, N.D. AL, Feb. 5, 2019]
Hall borrowed $3,533.54 from Republic Finance. The itemization of amount financed section
of her note reflected that the amount financed included a charge of $24.75 for
“Amounts Paid to Public Officials” for filing and termination fees, where $15.00
of the fee was attributed to “File” and $9.75 to “Access.”
Hall sued Republic Finance, claiming it had violated TILA by
including the entire $24.75 in the amount financed section as “amounts paid to
public officials” when only $15.00 was the fee charged by the state for
perfecting the lien, while $9.75 was accepted by the state for payment to a non-government,
third-party, electronic filing service provider. In effect, she argued that
Republic Finance violated TILA by excluding the $9.75 from the finance charge. The
court dismissed the action.
However, under the Alabama Code (“Code”), a fee of $15.00 was
charged to record a financing statement filed electronically. Another provision
of the Code authorized the Secretary of State to adopt rules necessary to
implement the state’s version of the UCC. Those rules allow UCC records to be
filed electronically for the $15.00 fee plus “an access fee of $9.75 per
transaction in addition to any applicable contract provider convenience fee.”
This is where it gets interesting. Nobody actually questioned the exclusion
of the $15.00 fee from the finance charge because it clearly satisfied the three
requirements for exclusion. According to the court, the $9.75 access fee also met the three-prong test, to wit, the
tax is (1) paid to a public official; (2) for perfecting a security interest; and
(3) prescribed by law. By the way, even if the lender did not have to file the
UCC Statement by electronic means, Hall had offered nothing to indicate that
electronic filing was impermissible or unreasonable and that the lender could
not exclude from the finance charge a portion of the fee paid to a government
entity merely because of what the governmental entity subsequently did with the
fee.
Now, please follow me on the result: if the state had required UCC
statements to be filed electronically, there would be no question that the
$9.75 portion of the fee ultimately paid to a third-party provider would be
properly excluded from the finance charge because the state required the fee to
be paid to the state in order for a security interest to be perfected. The
analysis was no different just because a traditional, non-electronic filing was
perhaps a cheaper option that did not ultimately involve a third-party provider
of services to the government.
So, the fee had to be paid if a UCC statement were filed by
electronic means, and TILA provided that fees paid to public officials for
perfecting a lien could be excluded from the finance charge so long as the fees
were itemized and disclosed and prescribed by law.
One final observation. The
court mentioned that its research had not uncovered a case directly on point.
The court noted that Republic Finance did not pad its fees for its own benefit
or keep the $9.75 fee. The State of Alabama required payment of the fee if the
UCC Statement was transmitted for filing by electronic means. It seems to me
inevitably that, at a time when electronic filings are more pervasive than
ever, other courts will face this issue – if they haven’t already done so.
Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group
