Skip-Payment Fees

Courts disagree on whether these fees are part of the finance charge.

MOST COMPLIance officers will tell you the Truth in Lending Act and the Federal Reserve Board's Regulation Z aren't easy to understand, especially the section on finance charges. As recent court rulings in Household Credit Services and MRNA v. Pfennig demonstrate, there's still room for interpretation of Truth in Lending requirements.

A credit card issuer allowed Ms. Pfennig to exceed her $2,000 credit card limit but charged her a $29 overlimit fee every month her balance remained over the limit. Pfennig sued the creditor for violating Truth in Lending by not including the overlimit fee in the finance charge calculation. The district court dismissed her lawsuit on the grounds that Reg Z specifically excludes overlimit fees as finance charges.

But the Sixth U.S. Circuit Court of Appeals in Cincinnati reversed the decision, ruling the overlimit fees were imposed "incident to an extension of credit," therefore constituting finance charges under Truth in Lending even though Reg Z specifically excludes overlimit fees as finance charges. In April 2004, the U.S. Supreme Court reversed the appellate court decision.

Even though the term "overlimit fee" specifically is excluded as a finance charge under Reg Z, these three courts couldn't completely agree on whether it was a finance charge. What if, instead, Pfennig had incurred a skip-payment fee as part of a program allowing members to skip loan payments during the holidays? Reg Z's section on finance charges doesn't mention skip-payment fees. Would the skip-payment fee be considered part of the finance charge or treated as part of "other charges," similar to an overlimit fee?

Truth in Lending, Reg Z, and the commentary to Reg Z don't explicitly address whether skip-payment fees are included within the definition of "finance charge." Skip-payment fees traditionally have been considered finance charges that must be included in the calculation of the annual percentage rate (APR) on periodic statements for open-end loans. Data processing software must be able to calculate the impact of the fee on the APR, as well as the possible effect on the credit union's usury limitation. Although there's nothing officially in writing, Fed attorneys repeatedly have expressed their opinion that skip-payment fees are finance charges and should be included in the calculation of the APR on open-end loans.

Congress defined finance charge in Truth in Lending, and the Fed enhanced the definition in Reg Z so the term is defined broadly to read "... any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." Reg Z lists a number of charges included in Truth in Lending but makes it clear the charges are only examples, not an exhaustive list. In addition, Reg Z also contains a list of charges specifically excluded from the definition of finance charge.

Unfortunately, the term "skip payment" doesn't appear in either list. This suggests that skip-payment fees should be considered finance charges because the list of finance charges isn't exhaustive. The Fed likely would list skip-payment fees as an exception if it considered them other charges.

The key point of interpretation is whether a skip-payment fee is "incident" to the extension of credit. Once again, neither Truth in Lending nor Reg Z defines what "incident to the extension of credit" actually means. Does it mean that only those charges or fees that are assessed when the loan is created or when credit is extended constitute finance charges? Or does it mean that charges or fees assessed anytime during the life of the loan are finance charges?

Reg Z lists service charges, transaction fees, activity fees, and carrying charges as examples of finance charges. These charges usually can be assessed anytime during the life of the loan. Therefore, the fact that a skip-payment fee can be assessed anytime doesn't automatically exclude it as a finance charge.

The Credit Union National Association currently doesn't see anything in the Pfennig ruling to cause credit unions to change their treatment of skip-payment fees as part of the finance charge. However, if a credit union considers treating skip-payment fees as other charges, it should rely only on the advice of legal counsel with expertise in consumer protection laws.

MICHAEL MCLAIN is senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185 or at mmclain@cuna.com.

Copyright Credit Union National Association, Inc. Sep 2004
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