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The Iowa Supreme Court handed down a significant decision with regard to the fees a lender may charge in connection with loans made subject to the Iowa Consumer Credit Code.

Thomas and Susan Luttenegger and Jerome Carpenter sued Conseco Financial Servicing Corp. in a putative class action, alleging that Conseco collected certain loan origination fees that it was not permitted by Iowa law to charge. The plaintiffs alleged that Conseco collected a loan origination fee, a loan processing fee and a courier fee in connection with consumer loans in violation of Iowa's Uniform Consumer Credit Code. The plaintiffs also alleged that Conseco collected a loan discount fee, a loan processing fee, a closing fee and title fees in connection with home acquisition loans in violation of Iowa Code § 535.8. The plaintiffs later dropped the Iowa Code §535.8 claims, except the claim that Conseco was prohibited from collecting a closing fee under that provision without an agreement in writing, and that the HUD-1 signed at closing was not such a written agreement.

Conseco filed motions for partial summary judgment as to each category of loans, but the trial court denied both motions, finding that the fees were not permissible. Conseco filed applications for interlocutory appeals on the denials of each motion for partial summary judgment, which the Iowa Supreme Court initially denied. The high court reconsidered after oral arguments and granted the applications.

Conseco argued on appeal that fees not expressly authorized by Iowa Code §537.2501 of the Iowa Consumer Credit Code are not prohibited, but are permissible as part of the finance charge, subject to the finance charge cap in Iowa. Conseco disagreed with the trial court's ruling that fees not expressly authorized by the Iowa Consumer Credit Code are not permitted. Conseco also argued that the HUD-1 signed at the home acquisition loan closing constituted a written agreement between the borrower and the lender, such that the closing fee to which the borrower agreed, which was disclosed in the HUD-1, was permissible under Iowa Code §535.8.

The Supreme Court of Iowa agreed with Conseco on both issues. The court reviewed the legislative history and intent of the Uniform Consumer Credit Code to determine that loan charges do not need to be specifically enumerationerated in the statute to be permissible, but that loan charges should be considered finance charges unless the statute specifically excludes them from the finance charge. The court recognized that the definition of "finance charge" under the Iowa Consumer Credit Code was "the sum of all charges payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit, including any of the [four] following types of charges which are applicable…."

While the trial court found ambiguity in the use of the term "including" in the definition of "finance charge," the Supreme Court of Iowa read the definition of "finance charge" to provide nonexclusive examples of the kinds of charges that should be accounted for in the calculation of the finance charge. The high court also noted that the Iowa legislature had used language in Iowa Code §535.8 that specifically prohibited loan fees other than those enumerationerated in Iowa Code §535. 8(2)(b): "Collection of any cost other than as expressly permitted by this lettered paragraph is prohibited." The court found the absence of a similar provision in the Iowa Consumer Credit Code to mean that the Iowa legislature did not intend to prohibit nonenumerationerated fees in credit extended subject to the Iowa Consumer Credit Code.

Conseco included the allegedly illegal charges in its calculation and disclosure of the annual percentage rate, and the combined annual percentage rate was still below the 21% finance charge cap in the Iowa Consumer Credit Code. Accordingly, the court ruled that the trial court erred when it denied partial summary judgment on the issue of the fees charged in connection with consumer loans.

The high court also ruled that the trial court erred when it denied partial summary judgment on the issue of the permissibility of the closing charge in connection with home acquisition loans. Iowa Code §535.8(2)(a) requires an agreement in writing before a lender may charge a commitment charge or a closing charge or both. Conseco argued that the HUD-1 was an agreement in writing, and that the closing charge it collected was therefore permissible.

The court agreed, noting that Iowa Code § 535.8 did not require the agreement to be signed. The court found it important only that the HUD-1 was in writing, that it was proof of the parties' intention as to certain agreed-upon charges in the transaction, and that the HUD-1 was signed by the party agreeing to pay the charges. Accordingly, the high court held as a matter of law that the HUD-1 constituted a written agreement for purposes of Iowa Code §535.8(2)(a), and that the closing charge imposed by Conseco in connection with the home acquisition loan was therefore permissible.

For more information, look for Luttenegger v. Conseco Financial Servicing Corp., 2003 WL 22669067 (Iowa November 13, 2003).

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