Members Sue Maryland Credit Union for Alleged TILA Violations

The $188 million Marriott Employees Federal Credit Union asked a federal judge to throw out a civil lawsuit brought by two members. They claimed the Bethesda, Md.-based credit union violated the Truth in Lending Act by failing to disclose the true cost of mini-loans for which members were allegedly charged an interest rate of 46%.

MEFCU argued in documents filed in U.S. District Court in Philadelphia earlier this month that the lawsuit failed to prove TILA violations.

The lawsuit’s plaintiffs are Katherine Payne and Arthur Coates both of Philadelphia who are Marriott hotel employees. Since the hotel chain controls the amount of hours employees work, they use MEFCU’s $500 mini-loan to make ends meet whenever their employer reduces their work hours, according to the lawsuit.

Payne’s and Coates’ MEFCU’s mini-loan credit agreements disclosed an 18% APR based on a finance charge of $29.23 for the six-month loan. However, Payne and Coates were also required to pay a $35 application fee after their loans were approved.

The TILA allows an application fee to be excluded from the finance charge as long as the fee is used to recover the costs associated with processing credit applications such as credit reports, credit investigations and appraisals. However, Payne and Coates in their lawsuit say that the mini-loan is promoted by the credit union as being available to all Marriott employees who join MEFCU without running any credit check or obtaining credit reports, performing any credit investigation or obtaining any appraisals.

Because MEFCU excluded the $35 application fee from the finance charge, contrary to TILA regulations, the APR disclosure to Payne and Coates was understated and that the actual APR was 46%, not the 18% APR disclosed by the credit union, which allegedly violated TILA.

Moreover, for Marriott employees to qualify for the loan, a $250 cash security deposit is required, which is collected through $10 weekly deductions from the employees’ wages. Although these funds are held in an MEFCU share savings account, they are frozen and inaccessible to employees during the loan repayment period.

Payne and Coates contend the mini-loans pose no risk for MEFCU but do create burdens for low-income members who need the loans compared to other loans for higher-income member borrowers.

In its motion to dismiss the case, however, MEFCU argued that Payne’s and Coates’ claim that MEFCU application fee is not a bona fide application fee and should have been disclosed as a finance charge fails because TILA regulations say that application fees are not to be considered as finance charges.

In addition, MEFCU pointed out that in a previous case involving a mortgage company, a court ruled application fees are excluded as finance charges under TILA so long as they are charged to all applicants.

Payne and Coates are demanding a jury trial and are seeking a money judgement for statutory damages equal to $1 million or one percent of MEFCU’s net worth.