bank and included in the calculation of the finance charge presented to
the Pechinskis before they entered into the loan agreement; and second,
that even if the assignment fee is not part of the finance charge, it is
a prepayment penalty that should have been disclosed by the bank pursuant
a) The Assignment Fee is Not Part of the Finance Charge of the Mortgage
Among the disclosures required by TILA are the three elements of a
credit transaction: the amount financed, the finance charge, and the
annual percentage rate. See 15 U.S.C. § 1638. TILA and Regulation Z
define the finance charge as "the sum of all charges, payable directly or
indirectly by the person to whom the credit is extended, and imposed
directly or indirectly by the creditor as an incident to the extension of
credit." 15 U.S.C. § 1605(a); see also 12 C.F.R. § 226.4(a)
(the finance charge includes charges imposed "as an incident to or a
condition of the extension of credit."). Examples of charges included in
the finance charge are: interest on the loan, service or carrying
charges, loan fees, finder's fees, fees for an investigation or credit
report, or other charges for any guarantee or insurance that protects the
creditor against the obligor's default or other credit loss. See
15 U.S.C. § 1605(a).
To determine whether a charge is a part of the finance charge, a court
must determine whether the charge is incident to, or a condition of, the
extension of credit. See Stutman v. Chemical Bank, No. 94 Civ. 5013, 1996
WL 539845, at *3 (S.D.N.Y. Sept. 24, 1996) (citing Veale v. Citibank,
85 F.2d 577, 579 (11th Cir. 1996); Berryhill v. Rich Plan of Pensacola,
578 F.2d 1092, 1099 (5th Cir. 1978) ("The important question is whether
the seller refuses to extend credit until the customer agrees to another
The .875% assignment fee in this action is not part of the finance
charge as defined by TILA and Regulation Z. The .875% fee was not imposed
incident to, or as a condition of, the extension of plaintiffs' loan.
Instead, the fee was imposed more than four years after defendant issued
the loan and there is no evidence that defendant would not have provided
the loan without a guarantee that plaintiffs would pay this fee. See
Stutman, 1996 WL 539845, at *3 ($275 document transfer fee assessed in
connection with a mortgage prepayment is not part of the finance charge
pursuant to TILA where fee was imposed three years after the defendant
loaned the money and there is no allegation that the defendant would not
have granted the loan without a guarantee that the fee would be paid).
Moreover, the assignment fee was imposed because of plaintiffs'
specific request that Astoria Federal assign the mortgage to another
lending institution. "Therefore, the [fee] was incident not to the
extension of the loan, but rather to the extinguishment of the debt."
Id. (citing Adamson v. Alliance Mortg. Co., 861 F.2d 63, 65-66 (4th Cir.
1988), overruled on other grounds, Busby v. Crown Supply, Inc.,
896 F.2d 833, 841 (4th Cir. 1990) (fees for the release of a deed at the
termination of a loan were not part of the finance charge because they
were not incident to the extension of credit but instead were "incident
to the formal extinguishment of the Lender's liens after the debts had
Because the .875% assignment fee was not imposed incident to the
extension of credit and because it was not a condition of the loan, it is
not a finance charge within the meaning of TILA and Regulation Z.
b) The Assignment Fee is Not a Prepayment Penalty
In addition to the finance charge, TILA requires the disclosure of
aspects of a credit transaction, including certain terms of
prepayment. See 12 C.F.R. § 1638; 12 C.F.R. § 226.18 (1996). TILA
requires that the lending institution provide the consumer with:
A statement indicating whether or not the consumer
is entitled to a rebate of any finance charge upon
refinancing or prepayment in full pursuant to
acceleration or otherwise, if the obligation
involves a precomputed finance charge [and] [a]
statement indicating whether or not a penalty will
be imposed in those same circumstances if the
obligation involves a finance charge computed from
time to time by application of a rate to the unpaid
15 U.S.C. § 1638(a)(11). Regulation Z elaborates on the disclosure
required in the event of prepayment as follows:
(k) Prepayment. (1) When an obligation includes a
finance charge computed from time to time by
application of a rate to the unpaid principal
balance, a statement [must be issued] indicating
whether or not a penalty may be imposed if the
obligation is prepaid in full.
(2) When an obligation includes a finance charge
other than the finance charge described in paragraph
(k)(1) of this section, a statement [must be issued]
indicating whether or not the consumer is entitled
to a rebate of any finance charge or if the
obligation is prepaid in full.
12 C.F.R. § 226.18(k).