First Acadiana Bank v. Federal Deposit Insurance Corp.
833 F.2d 548 (1988)
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Rule of Law:
Under the Truth-in-Lending Act, a charge imposed on a borrower for a third-party service is part of the 'finance charge' if the creditor requires the service as a condition of extending credit, regardless of whether the creditor retains the fee.
Facts:
- Since October 1, 1982, First Acadiana Bank's policy for car loans required each borrower to use a bank-approved attorney to prepare a chattel mortgage on the vehicle.
- The attorney, not the bank, determined the amount of the legal fee, which ranged from $55 to $151 per loan.
- For approximately two-thirds of these car-loan customers, First Acadiana Bank included the attorney's fee in the total amount financed.
- The Bank disclosed this fee separately under the 'amount financed' category on disclosure forms but did not include it in the 'finance charge' calculation.
- Excluding this fee from the finance charge resulted in a lower stated Annual Percentage Rate (APR), which would have been between 0.5 to 10 percentage points higher had the fee been included.
Procedural Posture:
- The Federal Deposit Insurance Corporation (FDIC) notified First Acadiana Bank it was in violation of the Truth-in-Lending Act.
- After the Bank refused to alter its policy, the FDIC Board of Review issued a Notice of Charges and of Hearing.
- An administrative law judge entered an initial decision against the Bank.
- The FDIC's Board of Directors adopted the administrative law judge's decision and issued a final order requiring the Bank to cease its practice and reimburse affected customers.
- First Acadiana Bank, as petitioner, sought review of the FDIC's final administrative order in the United States Court of Appeals for the Fifth Circuit.
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Issue:
Does a mandatory fee for a bank-approved attorney to prepare a chattel mortgage, which is a condition for the extension of credit, constitute a 'finance charge' under the Truth-in-Lending Act, even if the fee is set and retained by the attorney?
Opinions:
Majority - Judge Higginbotham
Yes. A mandatory fee for an attorney required as a condition of receiving a loan is a 'finance charge' under the Truth-in-Lending Act. The statute defines a finance charge as any charge imposed directly or indirectly by the creditor as an incident to the extension of credit. Because the Bank would not extend credit without the borrower paying the attorney's fee, the fee was 'incident to the extension of credit.' It is irrelevant that the fee was set and retained by a third party, as the Bank received a substantial benefit—a perfected security interest. This interpretation aligns with the Act's listed examples of finance charges, such as finder's fees or credit report fees, which are often paid to third parties. Separate disclosure under 'amount financed' does not cure the violation, as accurate disclosure of the finance charge and APR is essential to the Act's purpose of promoting the informed use of credit.
Concurring - Judge Williams
Yes. While the attorney's fees in this case were finance charges, the majority's reasoning is overly broad. The critical fact is that the Bank recommended two specific attorneys closely associated with it and automatically collected their fees, making the service akin to an 'in-house' action. A fee paid to a wholly independent attorney chosen and paid directly by the borrower should not be considered a finance charge imposed by the bank. The majority's broad rule could improperly classify any reasonable, third-party cost a borrower incurs to qualify for a loan as part of the bank's finance charge, which extends the statute beyond its intended limits.
Analysis:
This decision significantly clarifies the scope of the term 'finance charge' under the Truth-in-Lending Act, establishing that mandatory third-party fees are included if they are a condition of receiving credit. It reinforces a substance-over-form approach, focusing on the total cost imposed on the borrower rather than the technicality of who receives the payment. The ruling places a heavy burden on lenders to account for all required costs in their APR calculations, increasing transparency for consumers. The concurrence, however, highlights a potential point of future litigation: the distinction between fees for lender-required services performed by closely-associated third parties versus those performed by providers independently chosen by the borrower.
