Banking and Finance Law Daily Tax payment agreement is subject to TILA and EFTA
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Tuesday, February 12, 2019

Tax payment agreement is subject to TILA and EFTA

By Nicole D. Prysby, J.D.

A consumer’s tax payment agreement with a third party to finance payment of local property taxes is a consumer credit transaction subject to the Truth in Lending Act and the Electronic Funds Transfer Act, and the consumer has standing to bring claims under those statutes.

A tax payment agreement (TPA) between a consumer and a third party for financing of the consumer’s residential property tax is subject to the Truth in Lending Act and the Electronic Funds Transfer Act, held the Fourth Circuit Court of Appeals. Under the TPA (as authorized by state law), the third party agrees to pay taxes owed to a locality on behalf of a taxpayer and the taxpayer agrees to repay the third party in installments, with fees and interest. The court held that the TPA is a credit transaction because it provides for third-party financing of a tax obligation. It is a consumer transaction because, as financing of a real property tax debt, it is a voluntary transaction that the consumer entered into for personal or household purposes. The court also held that the consumer had standing to bring the claims, based on his assertion that the contract required him to repay the third party by electronic funds transfer, with no opt-out provision (Curtis v. Propel Property Tax Funding, LLC, Feb. 6, 2019, Duncan, A.).

Background. Propel Property Tax Funding, LLC and Propel Financial Services, LLC (collectively Propel) entered into a TPA with a consumer pursuant to Virginia law, which allows taxpayers to enter into agreements with third parties to finance payment of local taxes. Under those agreements, the third party agrees to pay taxes owed to a locality on behalf of a taxpayer and the taxpayer agrees to repay the third party in installments, with fees and interest. The terms of the agreement, including repayment periods, interest rates, and other fees, are prescribed by statute. The consumer entered into a TPA to finance payment of his residential property taxes. The TPA required him to pay an origination fee equal to ten percent of his tax obligation (the maximum origination fee allowed under the statute). The TPA also set his interest rate at 10.95 percent (below the statutory maximum of sixteen percent) and requires repayment in monthly installments for ninety-six months (the maximum period allowed by the statute).

The consumer brought a class action against Propel, alleging violations of the Truth in Lending Act (TILA) and the Electronic Funds Transfer Act (EFTA). For example, he alleged that many of the terms of the TPA included incorrect amounts, that Propel did not include an itemized list of closing costs in the documents, and that the TPA was missing certain financial disclosures. He also alleged that, as a condition of the TPA, he was required to agree to repay Propel by preauthorized electronic fund transfers (EFTs) and that the required authorization form does not contain a space that would allow him to indicate that he declined to do so.

Propel moved to dismiss the claims under TILA and EFTA, contending that the TPA is not a consumer credit transaction governed by those statutes. The district court held that the consumer has standing to proceed on his claims against Propel and that TPAs are consumer credit transactions for purposes of TILA and EFTA. Propel appealed.

Consumer has standing to bring claims. Propel argued that the consumer does not have standing to bring a claim under EFTA because he did not adequately allege that Propel required him to agree to EFTs or that he made or attempted to cancel any EFT payments. The court rejected that argument, finding that the district court correctly held that the consumer has standing to bring claims under EFTA because the harm that he alleges is a substantive statutory violation that subjects him to the very risks that EFTA was designed to protect against. His injury is particularized because it stems from his own TPA with Propel, which allegedly required him to consent to EFT authorization when he entered into the agreement and allegedly waived his right to cancel preauthorized EFTs. He alleged a sufficiently concrete injury to establish standing, because under the EFTA, a consumer has the substantive right to enter into a credit agreement without being required to agree to preauthorized EFTs. The court rejected Propel’s argument that the injury was only hypothetical because the consumer has not yet made an EFT payment or attempted to retract his EFT authorization.

TPA is a consumer credit transaction subject to TILA and EFTA. Propel argued that the TPA, as authorized by Virginia law, is not subject to TILA and EFTA. But the appellate court disagreed, finding that the TPA is a credit transaction because it provides for third-party financing of a tax obligation and a consumer transaction because, as financing of a real property tax debt, it is a voluntary transaction that the consumer entered into for personal or household purposes. TILA defines credit under 15 U.S.C. § 1602(f) as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment." That definition generally excludes tax assessments, but under the Staff Commentary to TILA’s implementing regulations, third-party financing of such an obligation is considered to be credit. This transaction is deferred payment of property taxes and creates third-party obligations between the consumer and Propel. Specifically, the TPA requires the consumer to pay Propel interest and fees. The fact that Propel paid the locality directly instead of loaning the money directly to the consumer does not affect whether the transaction falls under TILA’s definition of credit. The tax obligation is not transferred to Propel and the TPA does not lose its character as a credit transaction just because a third party—the locality—retains a lien related to the underlying obligation.

The TPA is also a consumer transaction under TILA and EFTA. Given that the transaction related to the consumer’s residential home, it was primarily for personal, family, or household purposes. Propel argued that the TPA is not a consumer transaction because the imposition of the underlying obligation (property taxes) is motivated by the public welfare rather than by personal, family, or household purposes. But the court rejected that argument. Although for some purposes such as bankruptcy, property tax is not a debt incurred by a consumer, the debt in this case is not the tax that the consumer owes to the locality. Instead, it is one level removed—his obligation to Propel, a third party, to repay Propel’s financing of his tax obligation.

Concurring and dissenting opinion. Judge Keenan concurred in part and dissented in part. She agreed that the consumer has standing to bring the claims, but she would have held that the TPA does not qualify as a credit transaction under TILA because state law, rather than a creditor, grants to the consumer the right to defer payment of a local tax assessment by entering into a tax-payment plan with a third-party payor. The preexisting obligation of the taxpayer is not severed by the third-party payor’s payment, and the third-party payor does not grant any right to the taxpayer that is not conferred already by statute. The locality’s oversight of the taxpayer’s compliance with the TPA continues throughout the repayment process. The locality does not remove the lien or transfer it to the third-party payor, who lacks recourse against a defaulting taxpayer with respect to the underlying tax obligation if the third-party payor obtains reimbursement from the locality as permitted by statute. Thus, the link between the taxpayer and the preexisting tax assessment is not severed by a TPA as the majority contends, but remains in effect throughout the course of the TPA’s operation. The TPA did not create a new debt that would be subject to TILA, but instead granted Propel the authority to implement a payment plan with the consumer for his existing tax obligation, which is not subject to TILA.

The case number is No. 17-2114.

Attorneys: Thomas Dean Domonoske (Consumer Litigation Associates, PC) for Garry Curtis. Charles Kalman Seyfarth (O'Hagan Meyer PLLC) for Propel Property Tax Funding, LLC and Propel Financial Services, LLC.

Companies: Propel Property Tax Funding, LLC; Propel Financial Services, LLC

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