August 20, 1997 a) Fair Debt Collection Practices Act; b) Loan

CONSUMER PROTECTlON OIVIStON

HOOVER

BUILO1NG

THOMAS

MILLER

AnORNEI

GENERAL

DES

MOINES. IOWA 303,s

TELEPHONE: 3,

bZB3

-SvZ6

TELEFAX:

Sf=-202-6771

August 20, 1997

RE: ICCC Informal

Advisory

No.

a) Fair Debt Collection Practices Act;

b) Loan Documentation Fees

Dear

Thank you for your letter inquiring about H.F. 308, amending

the Iowa Debt Collection Practices Act

(IDCPA), and about loan

documentation fees. The questions will be addressed in that order.

H.F.

308

IOWA DEBT COLLECTION PRACTICES ACT

You ask about the applicability of H.F. 308 to notices of

overdrafts and to notices on consumer loans.

First, it is

import;ant to note that H.F.

308 does not enlarge

the category of transactions to which the notice requirement

applies, nor did it

impose any new requirement with regard to

written notices that did not exist prior to its effective date.

Thus if the notice requirement applies to overdraft advances or

loan accounts,

Iowa

Code

537.7103(4)(b) also applied to them

prior to the passage of H.F. 308.

The Iowa amendment was drafted to track a 1996 amendment to

the federal Fair Debt Collection Practices Act (FDCPA) which, in

fact, lessened notice requirements.' Prior to the 1996 amendment,

the federal notice was required to be on

all

communications,

Pub.

104-208

2305 (Sept. 30, 1996), amending the

federal Fair Debt Collection Practices Act, 15 U.S.C.

1692e(ll).

written and oral.' The intent and effect of the new amendment to

the federal act is to require the notice only with respect to the

initial communication. If the initial communication is oral, an

oral notice is required, and the first written communication also

requires the notice. But the warning is no longer required on

subsequent collection communications. The amendment also

statutorily eliminated the required notice on court pleadings.'

In drafting the Iowa amendment to track the federal

language, the sponsors added language providing that where the

initial communication is oral, an oral notice must be given, to be

followed by written notice only on the first written communication.

Prior to H.F.

308,

the Iowa notice requirement applied only to

written communications, but it was required on all written

communications, not just the initial one.

Content of the Notice: With respect to the content of the notice

in connection with oral communications, it may be useful for you to

know that the-FTC has said that, so long as the collector clearly

discloses he is seeking payment of a debt,

"he need not state that

all information will be used to collect a debt, since that should

be apparent to the consumer."'

However, the FTC Commentary to the

FDCPA does not have binding force,

and courts have disregarded it

when they felt it conflicted with the plain meaning of the

statute.= Hence the Commentary language may not provide a defense

to a private suit on the issue, and some courts have held that both

portions of the notice are required.'

nCommunication" under the FDCPA is defined as "the

conveying of information regarding a debt directly or indirectlyto

any person through any medium.

U.S.C.

1692a(2). That

definition includes oral, as well as written communication. See,

e.g. FTC Commentary

§§

803

(1)

-1, 807 (11) -1.

The federal act, of course, applies only to third party

collectors, while the IDCPA applies both to third party collectors

and to creditors collecting their own debts.

Given the breadth of the definition of

"communicationti in

the FDCPA, a dispute had arisen as to whether court documents were

covered communications. The Supreme Court held that they were in

Heintz

Jenkins,

131

L.Ed.2d

395 (1995).

FTC Commentary

807 (11)

-2.

See, e.g. Heintz v. Jenkins, supra

E.g. Seabrook v. Onondago Bureau of Medical Economics,

705

Supp.

81, 86

(E.D.

N.Y.

1989).

The IDCPA also provides that the notice is not required where

the disclosure would tend to embarrass the debtor. For example,

when leaving a message with third parties, such a notice would not

be appropriate, and well may violate other provisions of the

IDCPA.

Overdrafts

Whether a bank's attempt to recoup funds advanced to cover an

overdraft is subject to the notice requirement would appear to turn

on the question of whether the advance constitutes a

"debt" within

the meaning of Iowa Code

537.7102(3).

A covered debt is one which is a "consumer credit

transaction,

or would be if it were payable in installments, or a

finance charge was imposed. Thus, if an overdraft transaction

meets four of the five prongs of the definition of a

"consumer

loan, it would be subject to the IDCPA. Before it can be a

"consumer

loan," however, it must first constitute a "loan," as

defined under the ICCC.

The ICCC defines a

"loan" as any one of five types of debts or

forbearance, of which the first would appear to apply to an

overdraft situation.'

(1) The creation of a debt by the lender's9

payment of or agreement to pay money to the debtor or to

a third person for the account of the debtor

....

A bank's advance of funds to cover an overdraft would seem to meet

this statutory definition of

"loan," as the bank created a debtxo

by paying money to a third person for the debtor's account.

"Loans" which are "consumer loansv subject to the IDCPA are

those which

See Iowa Code

537.7103(3).

Iowa Code

537.1301 (25) (a)

A "lender" is a person who makes a loan. Iowa Code

537.1301 (23)

To avoid circularity, "debt" as used in this definition

must be taken in its ordinary meaning. The Commentary to the

definition of loan in the Uniform Consumer Credit Code describes

this definition as continuing "the traditional concept of a loan as

an advance of money.

. .

Comment

1-301 (25) (1974 UCCC)

(1) are extended by a person regularly engaged in the business

of making loans;

(2) are made to a natural person;

(3) are primarily for a personal, family, or household

purpose; and

(5) do not exceed $25,000

Iowa Code

537.1301(14) (a). (The fourth prong

that the loan be

subject to a finance charge or payable in installments

is not

required.

)

Since banks regularly engage in the business of making loans,

that element would typically be met, and the other three elements

depend on the facts in a given case. Where those three variable

factors are present, it would appear as though an overdraft advance

would fall within the scope of the IDCPA. In those cases, the

bank's initial notices of the overdraft should include the required

notice, in accordance with Iowa Code

537.7103(4) (b), as amended

H.F.

308.

IT.

Automated Notices on Consumer Loans

Your letter also asks

1. Does the notice requirement apply to initial, automated

late payment notices on consumer loans?

2. If so, would there be a problem if it were included on

all notices, rather than just the initial ones?

As indicated by the prior discussion, a transaction which

meets all but the fourth element of the definition of a consumer

loan under Iowa Code

537.1301(14) (a) is subject to the IDCPA,

including the notice requirement.''

It would not present a problem to put the notice on

communications subsequent to the initial ones, a practice which was

in fact required under the provision prior to the amendment.

The

amendment was intended to ease compliance standards for debt

collectors, not to increase consumer protection standards. If

collectors find greater administrative ease in continuing to

include it on all communications with the debtor, neither the

letter nor the spirit of the law would be violated.

Presumably these transactions clearly meet one or more of

the definitions of

"loan" in Iowa Code

537.1301 (25) (a)

LOAN

DOCUMENTATION

FEES

Your letter indicates that many banks are imposing loan

documentation fees on all consumer loans, including non-real estate

loans. They treat the charge as a prepaid finance charge,.

including it in the calculation of the APR, and providing a pro

rata refund of the fee at prepayment.

As your letter acknowledges, loan documentation fees are not

an authorized additional charge under Iowa Code

537.2501.

Any fees imposed directly or indirectly by the bank, payable

directly or indirectly by the consumer, incident to or a condition

of the extension of credit are a finance charge. Iowa Code

537.1301(19) (a). A loan documentation fee is a finance charge.

Our office would take no position on whether a bank, for its

own internal accounting purposes, designates $15 of its finance

charge as a "loan document fee," so long as its doing so does not

lead to a violation of the Code. The following provisions of the

Code are the most likely to be implicated by the practice of

designating a documentation fee.

It must be included in the calculation of the finance charge

and the

APR for disclosure purposes, which you indicate is the

case.

It must be included in the calculation of the actual rate and

finan~ce charge for purposes of the contract terms and the

applicable usury ceiling.

Your letter indicates that the fee is treated as a

"pre-paid

finance charge," subject to a pro-rata rebate at prepayment. You

ask what our office's position is on this practice, and whether it

is acceptable on either a pre-computed or simple interest loan.

While it is immaterial whether the creditor chooses to

disclose it as a prepaid finance charge pursuant to Truth in

Lending Regulation

226.18 (c) (1) (iv)

,I2

the fee cannot be

deemed to be

"earned at consummation" for purposes of the ICCC,

even if payment is deferred. This has both front-end and back-end

implications for the creditor's computational practices.

That provision authorizes listing the prepaid finance

charge in the itemization of the amount financed, though the figure

cannot be included in the calculation

the amount financed. Cf.

Reg.

226.18(b) (3).

Initial Com~utational Issues: Because a loan documentation fee is

a finance charge, and not an

atauthorized additional charge" under

Iowa Code

537.2501, it cannot be capitalized when determining the

amount of interest which will be payable under the contract.

Iowa Code

537.2401 provides for determining the maximum

finance charge to be calculated

Iton the unpaid balance of the

amount financed. Iowa Code

537.1301

(4)

defines, in relevant

part, the amount financed to be:

(b) In the case of a loan, the net amount paid to,

receivable by, or paid or payable for the account of the

debtor

...p lus additional charges if permitted under

paragraph

llcl' of this subsection.

permitted under section 537.2501, to the extent that

payment is deferred, that the charge is not otherwise

included, [sic] in the amount permitted respectively in

paragraph

"a" or "b", and that the charge is authorized

by and disclosed to the consumer as required by law.

The Comment to this definition in the Uniform Consumer Credit Code

elaborates on this definition:

The term

"amount financed" means the amount of credit

extended to he consumer and includes not only the net

price in sales and the net amount advanced in loans but

also other amounts such as official fees, insurance

charges, and other additional charges (Section 2.501) to

the extent that payment is deferred.

advance payment

of finance charge

...

is deducted from the 'net amount

paid" under paragraph

(b)

of this subsection.

.The term

a kev definition.. .for

determines the amount

which the finance charqe is imposed. (Emphasis added.)

Consequently, no interest can be charged on any portion of the

finance charge which the creditor designates as a loan

documentation fee,

even if payment is deferred. This would be the

case irrespective of whether the transaction is interest-bearing or

precomputed.

Rebate

Issues: Your letter poses two questions concerning the

rebate

policies with respect to a loan documentation fee.

Use of a pro rata refund at prepayment:

Iowa Code

537.2510(1) provides that, upon prepayment or

acceleration,13 a rebate must be given to the consumer of "an

amount not less4' than the amount provided in subsection

Subsection

in turn, describes the actuarial method.

Since use of the pro rata formula does not result in a smaller

refund to the consumer than would an actuarial calculation, it

is an acceptable formula under the ICCC.

Rebates in interest bearing and precomputed transactions

This was the subject of an earlier Informal Advisory

71,

Doland to Graf), a copy of which is attached. Obviously a fully

precomputed transaction is subject to the rebate requirement under

section

537.2501.

The question addressed in Informal Advisory No.

is whether

a simple interest transaction "with a flat

'documentation' fee,

treated and disclosed as a prepaid finance charge would be subject

to rebate under Iowa Code section

537.2510."

As that letter indicates, the document fee is subject to

rebate in an

otherwise simple interest transaction, as well as in

a fully precomputed transaction. It further notes that failure to

do so may constitute a prohibited prepayment penalty, in violation

of Iowa Code

537.2509.

Please note that this is neither a ruling of the Iowa Consumer

Credit Code Administrator, nor an opinion of the Attorney General.

If you have any questions, please do not hesitate to call.

Sincerely,

~itiileen

Keest

Assistant Attorney General

Deputy Administrator, Iowa

Consumer Credit Code

Iowa Code

537.2510

(6)

requires that rebates be given upon

acceleration as if payment had been made on the date maturity is

accelerated.