Fifth Circuit Rejects TILA Claims for Loans Obtained in Exchange for Tax Lien Transfers

The United States Court of Appeals for the Fifth Circuit recently held that money lent in exchange for the transfer of tax liens does not constitute an extension of credit covered by the Truth in Lending Act (“TILA”).  See Billings v. Propel Fin. Servs., L.L.C., 2016 WL 1729421 (5th Cir. Apr. 29, 2016).  Under Texas law, property taxes are secured by tax liens that automatically attach to the property.  Tex. Tax Code Ann. § 32.01.  If a property owner fails to pay the taxes, the owner may authorize someone else to pay and the lien transfers to the payor.  Tex. Tax Code Ann. § 32.06.  The payor and the property owner must then record any repayment contract in the county deed records.  Tex. Tax Code Ann. § 32.065. 

In four separate actions, plaintiffs alleged that the terms of their tax loans with these payors violated TILA.  All defendants moved to dismiss, arguing that tax lien transfers are not “consumer credit transactions” covered by TILA because a tax lien is not a “debt” under the Regulation Z.  12 CFR 1026.  The plaintiffs countered that, although TILA might not apply to the tax lien itself, it would apply to the new contract between the payor and the property owner.  One district court agreed with the defendants and dismissed the action, but the other three denied the motions.  On appeal, the Fifth Circuit held that TILA did not apply to tax lien transfers and that all actions should be dismissed.  In doing so, it found that the existing tax liens were simply transferred from one entity to another and were not extinguished, and therefore that there was no “debt” under TILA because the underlying obligation remained a tax lien exempt from the statute.  This decision follows a Third Circuit opinion that held that tax liens transferred to property tax lenders are not covered under TILA, but added that loans made directly to borrowers who then use the money to pay taxes would be covered.  See Pollice v. Nat’l Tax Funding, L.P., 225 F.3d 379 (3d Cir. 2000).

For a copy of the decision, please contact Michael O’Donnell at