Judge's Ruling Continues CU Members' Lawsuit Over TILA Dispute

A federal judge’s ruling did not dismiss a lawsuit brought by two members of the Marriott Employees Federal Credit Union for alleged violations of the Truth in Lending Act because the credit union’s security interest disclosure for loans was not clear.

However, U.S. District Judge Wendy Beetlestone in Philadelphia last month dismissed the members’ $1 million claim for actual damages against the Bethesda, Md.-based credit union for allegedly violating TILA.

The $186 million MEFCU filed a motion to dismiss the TILA lawsuit brought last year by two longtime members Katherine N. Payne and Arthur Coates, both of Philadelphia, who are employees of the Marriott Hotel chain.

Over the course of their membership, they received MEFCU’s $500 mini-loans with an 18% interest rate.

Payne and Coates argued that because the credit union did not include a $35 application fee, the loan’s interest rate was actually 46%. And because MEFCU failed to include the fee as a finance charge, the credit union violated TILA.

TILA regulations allow financial institutions to assess an application fee, but only as long as the fee is charged to all applicants regardless of whether their loans are approved or rejected. The application fee also can be used to pay for the costs of credit reports, credit investigations and appraisals.

According to Payne and Coates, however, the $35 application fee was only assessed to loan applications that were approved and that MEFCU did not conduct any credit checks or investigations.

They argued because the application fee was not charged to all loan applicants and that it was not used to pay for credit processing, it was not an application fee. That means the fee should have been included in the finance charge and APR calculations for the mini-loans. Because the credit union failed to do so, however, it violated TILA, Payne and Coates argued in court documents.

The judge agreed.

“These allegations give rise to the reasonable inference that the $35 fee was not charged to all applicants and that it was not related to costs associated with processing applications,” Judge Beetlestone wrote in her ruling. “Therefore, MEFCU’s argument must be rejected.”

MEFCU argued that the lawsuit failed to allege any facts from which the federal judge “could conclude that any applicant was not charged an application fee by MEFCU.”

Additionally, TILA regulations require “clear and conspicuous” disclosure of any security interest taken by the creditor.

Although MEFCU contended that its loan applications and loan agreement and consumer disclosure statements show that it adequately disclosed the credit union’s security interest against members’ share accounts or wages, the judge disagreed.

“At least at this stage of the proceedings, it is entirely unclear from the documents provided to Plaintiff (Payne and Coates) what security interest MEFCU would obtain by making the loans,” Judge Beetlestone wrote. “This is not a clear disclosure as required by Regulation Z, and therefore MEFCU’s motion to dismiss on this point will be denied.”

Nevertheless, the judge granted the credit union’s motion to dismiss the $1 million in actual damages claim.

The judge ruled Payne and Coates did not show detrimental reliance, which is a legal standard that they would have foregone the credit union’s loan had they received and reviewed an accurate disclosure or that the members relied on the credit union’s disclosures to their detriment.

The lawsuit was referred to a settlement conference to facilitate an agreement.