Check State Law Before Charging Fees

We need to get another dog. Spot slept through the entire morning in a warm spot where the sunlight slants through the window and hits the rug, and missed an opportunity to bite the mailman, so once again I had to answer a letter. Here's the incoming correspondence, which was from a lawyer who represents dealers:
 
Hi Tom,

I have just discovered that several of our dealer clients are charging “credit bureau inquiry fees” to their non-cash customers. I understand that the fees range from approximately $15 to $30. In discussing this issue with a local consumer attorney, he told me that such fees are considered a “finance charge” under the federal Truth in Lending Act and that when charged in auto purchase transactions they inevitably violate TILA because the charge is not accounted for in the TILA disclosure section of the retail installment contract. According to the attorney, the TILA disclosures end up being inaccurate. He told me TILA does allow a small discrepancy, but that the credit bureau inquiry fees charged are usually large enough to make this “safe harbor” provision inapplicable.

I am sure this is an issue you have dealt with before and was hoping you could provide me with some insight on the topic. In the event you might have written an article on the subject, I would certainly like to read it.

Thanks for your help!

Here's my reply:

Well, I haven’t written an article on that precise point, but, as it happens, the answer is fairly straightforward. That doesn’t happen often with a federal regulation that is as technical as Regulation Z, which is the Federal Reserve Board Regulation that implements TILA.

"Finance Charge" is defined in Reg. Z, sec. 226.4(a). The definition is a long one - I won't bore you with it.

Section 226.4(b) gives examples of fees and charges that are finance charges for purposes of Reg. Z, and subsection (4) expressly mentions "credit report fees." So your local consumer lawyer is correct. 
 
When checking the Regulation, though, I noticed something that might interest you. Section 226.4(c) lists fees and charges that are excluded from the finance charge. One of these is "application fees charged to all applicants, whether or not credit is extended." So it looks like the dealers could charge an application fee without including it in the finance charge for federal disclosure purposes.
 
Before your dealers rush out and start charging application fees, remember that TILA is only a disclosure statute. It tells you how you must disclose a particular fee or charge, but does not tell you whether it is legal to charge a particular fee or charge. That’s a matter of state law.

State law might prohibit a credit report fee, an application fee or both, so you'll need to check your state retail installment sales law and any other applicable law to make sure the charge is permitted under state law.
 
If anyone is threatening a lawsuit, keep in mind that TILA (at present) doesn't apply when the amount financed exceeds $25,000. Dodd Frank increased that to $50,000, but the increase doesn't take effect until July 21, 2011.
 
Hope this helps.
 
Tom

Yep. Gotta get another dog. All this working for a living is tiring.

Vol. 8, Issue 4