TILA Does Not Apply to Transfers of Texas Tax Liens

The Fifth Circuit Court of Appeals recently determined that transfers of Texas real property tax liens were not consumer credit transactions within the meaning of the Truth-in-Lending Act (“TILA).  Consequently, the repayment terms, for the property owners to the transferees of the tax liens, could not violate TILA or Regulation Z.

Billings v. Propel Fin. Svcs., L.L.C., involved the consolidated appeal of four district court rulings about tax lien transfers:  one ruling had dismissed a lawsuit where the plaintiff had asserted violations of TILA; and three rulings had denied motions to dismiss TILA claims, but these district courts certified the rulings for interlocutory appeal.  The Fifth Circuit affirmed the dismissal, but reversed the three denials of motions to dismiss, and entered judgment in those three lawsuits for the defendants.

The Fifth Circuit explained that transfers of tax liens are governed by Texas statutes.  Under the statutory scheme, the property owner can make an arrangement to pay the tax claim over time, by authorizing a third party to pay the amount due for the taxes to the appropriate taxing authority.  The tax lien is then transferred to a person who will accept payments over time from the property owner.  A tax loan with a promissory note was established for each transferred tax lien.  The statutes allow the transferee to collect interest and fees.

The Fifth Circuit also explained the property tax loans were not extensions of credit.  Rather, the tax lien transfers were “merely transfers of tax obligations from one entity to another, and thus did not create a new ‘debt’ that might be subject to TILA.”  Under the statutory scheme, the transferee of the tax lien became subrogated to the rights of the taxing authority.  The tax claim was not extinguished by the transferee’s payment.  Rather, the tax lien and corresponding tax claim was assigned to the transferee.  And even though the statutory scheme gives greater rights to transferees than the taxing authorities, nothing fundamentally changed, other than the entity to whom the tax obligation is owed.  No new debt had been created, and no consumer credit transaction had occurred, within the meaning of TILA.

Weiner Brodsky Kider regularly represents mortgage loan originators and servicers throughout the United States against asserted violations of TILA and other federal lending statutes.