A Fee by Any Other Name....

A particularly key compliance component of our project definition process for new clients is the analysis of the properties associated with any fees paid by a consumer as part of a prospective credit transaction.

Unlike mortgage lending where some fees have common labels and are universally understood, e.g. appraisal fees, title examination fees, property survey fees etc., fees associated with personal loans, small loans, and retail sales aren't always transparent based solely on the fee name.

Our focus is two-fold; 1) determine if the fee is part of the finance charge for Truth in Lending disclosure purposes, and 2) determine if the fee is included in any regulated "charge" amount for specific state maximum charge evaluation.

The heart and soul of the Federal Truth in Lending Act is really the dollar finance charge, aka "cost of credit". When Truth in Lending first came into being the basic rule of thumb was that "every fee is part of the finance charge, with a few exceptions".  That has evolved over the last 42 years to a process of "some fees are, some fees aren't" based on certain criteria.

State maximum rate statutes generally declare that any statutorily authorized fees either "are" or "are not" included in the maximum amount the particular statute regulates.

What is often confusing is that while an authorized "processing fee" in a specific state may not be included in the state's maximum charge amount, that same fee is most certainly included in the TILA cost of credit.  To exacerbate the mental congestion that often accompanies trying to clearly digest and segregate two separate sets of rules is that the label used for both state and federal purpose may be identical; "finance charge".

So, for our purposes of making sure both state and federal calculations are accurate and compliant, we do need to know the name/label of a particular fee but we're much more interested in whether it is a TILA finance charge and part of the state maximum charge calculation.  Stating "we charge a service fee" is merely a starting point in the decision making process of how to accurately portray that fee in a "live" credit transaction.

The key is to remember that fees must be evaluated on two separate levels; 1) whether they are included/excluded for state maximum charge evaluation, and 2) whether they are included/excluded for the purpose of determining the Truth in Lending Act finance charge dollar cost of credit. These represent two separate processes to attain two separate compliance goals.