Fifth Circuit Holds the Transfer of a Tax Lien is not Subject to the Truth in Lending Act


The Fifth Circuit agreed with the defendants, holding that the tax lien transfer did not extinguish the original tax obligation, but rather, merely transferred the preexisting tax obligation to a new entity, which is not a “debt” under Texas law.  The Court’s reasoning hinged on the conclusion that, at the heart of the transaction, the transfer of a tax lien from the taxing authority directly to the lender is distinguishable from a situation in which a lender makes a loan to the property owner and the property owner in turn uses that money to pay off the tax lien.  In the former scenario, the Court reasoned, there is no independent line of consumer credit extended to the property owner that transforms the debt obligation.  Thus, the Court concluded, the property tax loans at issue in Billingswere not subject to TILA.

The Billings decision serves as a reminder that the relevant state law definition of “debt” may be of paramount importance in determining whether federal TILA protections apply to a consumer’s property tax loan.

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