Opinion ID: 1794502
Heading Depth: 1
Heading Rank: 10

Heading: Service Charges and Maintenance Fees

Text: Technically, we perhaps have responded to the two questions certified; however, question number one is sufficiently broad to cover all pertinent portions of Sec. 45-2007, T.C.A. We note appellant's assignment VII, which reads as follows: The Circuit Court erred in failing to hold that Section 45-2007(i), (p) and (q), in defining and regulating service charges and maintenance fees ... is constitutional. We elect to respond to this assignment because we think it fairly within the purview of question one; further, it is necessary that we treat with this insistence for the guidance of the trial judge on remand. This Court has addressed this matter in numerous reported cases, from which these rules emerge: 1. The Legislature may not authorize a lender to arbitrarily fix a monthly expense fee. Koen v. State, 162 Tenn. 573, 39 S.W.2d 283 (1931); Personal Fin. Co. v. Hammack, 163 Tenn. 641, 45 S.W.2d 528 (1932), nor to charge all borrowers the maximum fee, in addition to interest. Family Loan v. Hickerson, 168 Tenn. 36, 73 S.W.2d 694 (1934). 2. The lender and the borrower are free to agree upon a reasonable service charge within the statutory limit, Koen v. State, supra ; but this freedom of contract is limited by Article 11, Section 7 relating to conventional interest, Pugh v. Hermitage Loan Co., 167 Tenn. 389, 70 S.W.2d 22 (1934), and is further limited and governed by other principles set forth in this sequence. 3. Service charges must bear a reasonable relation to the expense and service of the lender. Pugh v. Hermitage Loan Co., supra . 4. When the service charge is within the statutory limits it is prima facie valid, and the burden is on the borrower to show by a preponderance of the evidence that the charge does not bear a reasonable relation to expenses and services. Family Loan Co. v. Hickerson, supra . When the borrower makes out a prima facie case, the burden shifts to the lender. Golightly v. Hermitage Loan Co., 171 Tenn. 70, 100 S.W.2d 654 (1937). The burden is on the borrower to show that the loan is usurious. Williams v. Personal Finance Co., 172 Tenn. 69, 109 S.W.2d 1166 (1937). 5. The service charge amounts to usury if exacted as additional compensation for the use of money in attempted evasion of the statutes against usury. Pugh v. Hermitage Loan Co., supra . 6. The service charge may not include overhead expenses such as rents, salaries and loan losses, Family Loan Co. v. Hickerson, supra , but this does not preclude charging for services directly related to the loan rendered by salaried employees. It only excludes indirect or extraneous expense. Williams v. Personal Finance Co., supra . As we said in Aztec Prop. v. Union Planters Nat. Bank, etc., 530 S.W.2d 756 (Tenn. 1975): Interest includes all compensation for the use of money. Any payment to the lender in addition to the rate of interest legally permissible, whether called by the name of bonus or commission or by any other name, is usurious. (Emphasis supplied). 530 S.W.2d at 757. We hold that any service charge in excess of the fair and reasonable worth of expense and service attributable directly to a loan must be treated as additional compensation to the lender and constitutes interest. Any such excess must be added to the stated, or resulting, amount of interest in order to determine the validity of the charge. The excess, of course, is conventional interest. Installment maintenance fees, as set forth in Sec. 45-2007(h) are to be governed by the same rules. We do not hold Sections 45-2007(i) or (p) to be unconstitutional. We do hold, that, in order to sustain the constitutionality of these sub-sections, they must be construed and interpreted as hereinabove set forth, and not as established, uniform, fixed, rigid or arbitrary charges, the provisions of subsection (q) to the contrary notwithstanding. See Family Loan Co. v. Hickerson, supra, 168 Tenn. at 42, 73 S.W.2d 694 and Pugh v. Hermitage Loan Co., supra . We do not test legislative enactments by our conception of morality or merit. Our sole duty is to insure that legislation complies with the mandates of our Constitution. Nor are we privileged to sit in judgment on the merits of constitutional provisions. We may only construe and abide them and mandate that they be respected. Modified, Affirmed and Remanded. COOPER, C.J., and FONES, BROCK and HARBISON, JJ., concur.