December 2010, Auto Dealer Today - WebXclusive
Know Your State’s Position
Over the past several years, clients have asked Hudson Cook to respond to a similar question: “Can I charge ABC or XYZ servicing fee?” Often, that question involves some form of expedited payment fee.
An expedited payment fee is a charge imposed after contract origination for taking a payment in a manner other than the manner typically accepted by the creditor. Generally, expedited payment fees are assessed by a creditor or a third party at the request of the consumer in order for the consumer to make a payment via a specialized method when other “free” payment methods are available. Online, in-person or telephone payments usually come to mind when thinking about when an expedited payment fee might apply.
The creditor or third party receives the expedited payment fee to cover its costs for taking a payment via a specialized method. The additional costs go to payment of staff to take the specialized payments and to systems for the development and maintenance of processes to take the specialized payments. Typically, creditors do not require consumers to use an expedited payment method, but assess a fee for providing an optional service.
The fee rarely appears in the contract, but consumers agree to pay the fee before they are charged by the creditor. Typically, the fees are not added to the credit balance on which finance charges accrue. In addition, expedited payments may help consumers avoid more costly late charges and additional finance charges on daily interest contracts, and thus can provide substantial benefits to consumers.
Whether a creditor can charge a servicing fee, such as an expedited payment fee, depends on the state. Some states expressly allow creditors to impose servicing fees. Other lenient states allow a creditor to impose any fee agreed to by the parties. In those states, expedited payment fees are permitted so long as the consumer agrees to pay the fee before the fee is imposed by the creditor. Other states allow servicing fees if the servicing fee is treated as a finance charge. In those states, a creditor may impose an expedited payment fee so long as imposition of the fee does not cause the rate to exceed a state usury cap. Finally, other states, such as Texas, permit only expressly stated fees.
Over the years, we cautioned creditors in Texas to avoid charging expedited payment fees. We told them that the Texas Credit Commissioner could treat these fees as incident to the extension of credit, and not expressly authorized by law. We’ve argued that the expedited payment fees should be excluded from the law governing extensions of credit since an expedited payment fee is: (1) imposed after credit origination; (2) assessed to pay for an optional payment benefit to the consumer at the request of the consumer; (3) paid to a creditor or a third party for additional services contracted for by a consumer separate and apart from the buyer’s contractual relationship with the holder of the debt; and (4) not added to the outstanding balance on which finance charges accrue. Although we thought the arguments were strong, because the fees were not expressly authorized, we warned there was a substantial risk that the regulator would consider the expedited payment fee as an unauthorized fee (at least where the creditor retained the fee).
Recently, we received a letter from the Texas Credit Commissioner confirming the conservative approach. The letter treated an expedited payment fee as a collection fee retained by the creditor. Because the statute delineating collection fees did not specifically allow an expedited payment fee, the Texas Credit Commissioner considered the fee an unauthorized fee. The Credit Commissioner noted that the Legislature’s failure to adopt legislation proposed in 2007, which would expressly allow an expedited payment fee, constituted the Legislature’s election to keep the expedited payment fee “unauthorized.”
Although the letter confirmed that expedited payment fees paid to the holder of a credit obligation (or an agent of the holder) were not permitted, the Credit Commissioner allowed expedited payment fees paid to unrelated third parties, such as Western Union.
So in Texas, the issue is settled. Creditor-retained expedited payment fees are not permitted. This is true at least for motor vehicle installment sale contracts under Chapter 348 of the Texas Finance Code, and likely true for Chapter 342 loans.
With the onset of new technology, creditors find many ways to ensure payments are made on time. While expedited payments may cost consumers a few dollars, making the payment in an expedited manner may save the consumers more than it costs. Taking expedited payments costs creditors too, and creditors want to transfer the costs to their customers.
Charging an expedited payment fee without knowing your state’s law can be risky. Before offering that expedited payment program and assessing a fee, consider your state’s applicable law. And, if you’re a Texas dealer or sales finance company, don’t charge the fee.