Opinion ID: 330039
Heading Depth: 1
Heading Rank: 2

Heading: Truth-in-Lending

Text: 29 Having established the existence of federal jurisdiction, we turn now to the substantive Truth-in-Lending violations found below. The court found that these violations generally involved use of the wrong terms in defendant's standard form coupon contract or improper disclosure of certain facts. For convenience, we attach as appendices A and B the relevant portions of Grants' blank forms, and as appendix C a portion of a form actually used by one of the plaintiffs. 30
31 The district court found that Grants' coupon contracts used amount financed 12 instead of the term unpaid balance prescribed by Connecticut Regulations (Conn.Regs.) 13 § 36-395-7(c)(5), cf. 12 C.F.R. § 226.8(c)(5), 14 and held that this constituted a violation of the Act. See also Welmaker v. W. T. Grant Co., supra, 365 F.Supp. at 536-37. Grants first alleges that the unintentional violation defense of 15 U.S.C. § 1640(c), 15 cf. C.G.S.A. § 36-407(c), is available to it. The section provides: 32 A creditor may not be held liable in any action brought under this section for a violation of this part if the creditor shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. 33 Grants argues that in using the term amount financed it relied on a Board pamphlet entitled What you ought to know about Truth in Lending. 16 Therefore, Grants claims the benefit of section 1640(c) as a defense. See Welmaker v. W. T. Grant Co., supra, 365 F.Supp. at 540-45, where Grants prevailed on this very issue. But see Johnson v. Associates Finance, Inc., 369 F.Supp. 1121, 1123-24 (S.D.Ill.1974), and Scott v. Liberty Finance Co., 380 F.Supp. 475, 479 (D.Neb.1974), where other defendants' reliance on the same pamphlet was to no avail. The unintentional violation provision has been the subject of substantial litigation and two different analyses have emerged. Welmaker v. W. T. Grant Co., supra; Rolader v. Georgia Power Co., 4 CCH Consumer Credit Guide P 98,684 (N.D.Ga.1974); Thrift Funds of Baton Rouge, Inc. v. Jones, 274 So.2d 150, 161 (Sup.Ct.La.), cert. denied, 414 U.S. 820, 94 S.Ct. 115, 38 L.Ed.2d 53 (1973); Richardson v. Time Premium Co., CCH Consumer Credit Guide P 99,272 (1969-1973 Transfer Binder) (S.D.Fla.1971), have held that good faith efforts to comply with the legal requirements of the statute will excuse unintentional violations. Thus, Grants demands that it at least be granted a hearing on its good faith attempt to follow the law. 34 Plaintiffs dispute the bona fides of Grants' good faith efforts, noting that both the term amount financed and the term unpaid balance are required by Conn.Reg. § 36-395-7(c)(5), cf. 12 C.F.R. § 226.8(c)(5), and Conn.Reg. § 36-395-7(c)(7), cf. 12 C.F.R. § 226.8(c)(7). Plaintiffs also rely on another line of cases, all of which follow the reasoning of Ratner v. Chemical Bank New York Trust Co., supra, 329 F.Supp. at 281-82 & n. 17, in holding that the unintentional violation defense applies only to clerical errors of a sort that might occur in billing or in making mathematical calculations despite established procedures reasonably adapted to avoid any such error. See Haynes v. Logan Furniture Mart, Inc., 503 F.2d 1161, 1166-67 (7th Cir. 1974); Palmer v. Wilson, 502 F.2d 860, 861 (9th Cir. 1974); Johnson v. Associates Finance, Inc., supra, 369 F.Supp. at 1123-24; Scott v. Liberty Finance Co., supra, 380 F.Supp. at 480; Owens v. Modern Loan Co., CCH Consumer Credit Guide P 99,099 (1969-1973 Transfer Binder) (W.D.Ky.1972); Douglas v. Beneficial Finance Co., 334 F.Supp. 1166, 1178 (D.Alaska 1971), rev'd on other grounds, 469 F.2d 453 (9th Cir. 1972); Buford v. American Finance Co., 333 F.Supp. 1243, 1247-48 (N.D.Ga.1971). Finally, plaintiffs assert that good faith in the past is irrelevant since the order appealed from only enjoined Grants from entering into any coupon contracts in violation of the Truth-in-Lending law. 35 Defendant concedes that the unintentional violation defense does not apply to that portion of the district court's order providing for injunctive relief. 17 Defendant strongly objects to the district court's summary rejection of the defense, however, because of plaintiffs' pending motions for damages for past violations. We have carefully considered the question and have reviewed all of the arguments raised in the briefs as well as those discussed in the two lines of cases referred to above. We expressly adopt the reasoning of Judge Frankel in Ratner and the cases that follow that decision. We hold that the unintentional violation defense of section 1640(c) is only available for clerical errors which occur despite a system for correcting them. 36 In its first reply brief, defendant calls to our attention the recent addition of subsection (f) to 15 U.S.C. § 1640. See section 406 of Pub.L.No.93-495, 1 U.S.Code Cong. & Admin.News, 93d Cong., 2d Sess.1974, at p. 1745. Subsection (f) provides: 37 No provision of this section or section 112 (15 U.S.C. § 1611) imposing liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board, notwithstanding that after such act or omission has occurred, such rule, regulation, or interpretation is amended, rescinded, or determined by judicial or other authority to be invalid for any reason. 38 By virtue of section 408(e) of the same Act, id. at p. 1746, subsection (f) applies to this action even though it is now in the appellate process. Defendant argues that we should construe the subsection broadly to include Board staff letters or pamphlets as providing a basis for the good faith defense. But this position was anticipated and expressly repudiated by the drafters: 39 The Truth in Lending Act is highly technical and the Committee does not believe a creditor should be forced to choose between the Board's construction of the Act and the creditor's own assessment of how a court may interpret the Act. Accordingly, the Committee recommends an amendment to Truth in Lending requested by the Board which would relieve a creditor of any civil liability under Truth in Lending for any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board. In order to confer immunity from civil liability, the rule, regulation, or interpretation thereof must be approved by the Board itself and not merely by the staff of the Board. 18 40 Before the new good faith reliance provision was enacted, the Board noted: 41 One of the legitimate concerns of creditors who have attempted to comply in good faith with the requirements of Truth in Lending is that, although they have followed Regulation Z, a court may conclude that the Regulation is invalid and that different disclosures or procedures were mandated by the Truth in Lending Act itself. At present, the civil liability provisions of section 130 (15 U.S.C. § 1640) do not necessarily preclude a finding of liability where the creditor has followed regulatory requirements which subsequently are held invalid. In order to avoid this inequity, a good faith reliance provision is suggested for inclusion in the Act. 42 Board of Governors of the Federal Reserve System, Annual Report to Congress on Truth in Lending for the Year 1972, 14-15 (1973). Thus, it appears that the reference in subsection (f) to any rule, regulation, or interpretation thereof by the Board means those requirements of Truth in Lending that have become part of Regulation Z, 12 C.F.R. § 226. But see Scott v. Liberty Finance Co., supra, 380 F.Supp. at 480. Grants does not claim that any rule, regulation, or interpretation of the Board as so defined, upon which Grants has relied, has been held invalid. Therefore, its defense based upon purported reliance on staff letters and pamphlets is legally insufficient under the new subsection (f). We hold that Grants did not comply with the requirements of law in failing to use the term unpaid balance.
43 The district court also found that the net finance charge in the add-on contract for the coupon plan 19 was not clearly, conspicuously and meaningfully disclosed within the requirements of Conn.Reg. §§ 36-395-5(a), 36-395-7(c)(8)(A), cf. 12 C.F.R. §§ 226.6(a), 226.8(c)(8)(i). This finding was in accord with Welmaker, supra, 365 F.Supp. at 535, where the same arrangement was found confusing. Grants argues that this is not so, and in any event that the issue was not a proper subject for summary judgment. In Welmaker, the finding of confusion was made after a trial. 44 We do not agree that an evidentiary hearing was necessary. The district court had before it the forms in question, as we do, and there was nothing to have a hearing about. Why the arrangement is confusing is apparent from an examination of the form in appendix B. To the right of item 7, Amount financed, is a large space where the dollar figure to be financed is placed. This figure equals the balance still due, less the unearned finance charge, 20 from the original contract, plus new insurance charges, if any, plus the new amount borrowed. Below item 7 is item 8, which contains two parts: (a) Finance charge and (b) Less rebate $______ equals. 8(a) is the actual finance charge on the total in space 7. 8(b) is the unearned finance charge from the earlier contract which the present add-on loan contract extends. Thus, directly below the dollar figure of the total amount financed, space 7, appears a figure in space 8 which is less than the true finance charge. An example from plaintiffs' brief illustrates the point well. Plaintiff Robertson's contract, a portion of which is attached as appendix C, discloses an amount financed of $796.41 (item 7) and a finance charge of $177.56 (item 8(a)) less rebate $77.21 equals $100.35. Instead of disclosing the finance charge of $177.56 prominently underneath the Amount financed of $796.41, and in the column where all the other numerical disclosures are made, Grants discloses the finance charge off to the left of that column, in a smaller space. In the space where the format of the contract leads one to expect disclosure of the finance charge, Grants instead discloses the unlabeled net finance charge of $100.35. Thus, the natural result of Grants' arrangement of the disclosed figures is to view the $100.35 net finance charge as the genuine finance charge since it is disclosed far more prominently than the actual finance charge of $177.56. This makes the finance charge appear to be less than it actually is and is certainly misleading. 21 We agree with the district court that Grants' disclosure in this respect is not clear, conspicuous and meaningful. 45
46 Grants argues that a question of fact exists as to the adequacy of disclosure of its non-rebated insurance premiums in the coupon add-on contracts. 22 The problem arises when a contract on which insurance has been purchased by the debtor is extended by an add-on of a new amount. When this occurs, the unearned finance charge on the old amount is rebated but the unearned insurance charges are not. The insurance carrier's contract with Grants seems to indicate that the insurance terminates upon the refinancing evidenced by the add-on contract, but Grants and the carrier both have submitted affidavits stating that the insurance on the previous balance continues in force for the new term of repayment. The court below recognized the possible difference of interpretation but held it did not matter. We agree. 23 If the insurance is terminated when the add-on contract is entered into, Connecticut law mandates that a refund be paid or credited. C.G.S.A. § 38-253. 24 Since this is concededly not done and the non-refunded amount is not disclosed, Grants would be in violation of Conn.Regs. § 36-395-7(c)(8)(A), cf. 12 C.F.R. § 226.8(c)(8)(i), for failure to disclose a charge imposed as an incident to or as a condition of the extension of credit. Conn.Regs. § 36-395-3(a), cf. 12 C.F.R. § 226.4(a). If, on the other hand, as Grants contends, it automatically extends the period of the old insurance on the original amount for the term of the new loan, this insurance purchase would be required by the creditor under Conn.Regs. § 36-393-3(a)(5), cf. 12 C.F.R. § 226.4(a)(5)(i). Even if it is a free-ride for the period the contract is extended, as defendant asserts, 25 the debtor is at least paying for the balance of the initial term of insurance with an unearned but non-rebated premium. This is not voluntarily done by the debtor and so must be disclosed. Conn.Regs. § 36-395-7(c)(8)(A), cf. 12 C.F.R. § 226.8(c)(8)(i). See Welmaker, supra, 365 F.Supp. at 537-39. Thus, whichever set of facts is correct, Grants has not made the required disclosure. 26
47 The district court also found that Grants violated Conn.Regs. § 36-395-7(c)(8) (A), cf. 12 C.F.R. § 226.8(c)(8)(i), by not itemizing the component parts of the finance charge. Conn.Regs. § 36-395-3(a), cf. 12 C.F.R. § 226.4(a), defines finance charge to include all charges imposed as a condition of the extension of credit. In part II-C above we determined that, one way or the other, Grants did not disclose a charge related to unrebated insurance premiums in add-on contracts. Thus it is obvious that in failing to reveal this charge in such contracts Grants did not indicate all the elements of the finance charge. Indeed, in its brief Grants tacitly concedes this position by arguing only that if insurance premiums are not a part of the finance charge, that charge need not be further described. 48 The district court, however, went further and held that if Grants was correct in its assertion that the finance charge was comprised of but one element, a time-price differential, that element should be spelled out. Grants argues that for a single element finance charge it does not have to identify the component part further. For support it cites a letter from a Board staff attorney written approximately one year after this litigation was instituted, and a Federal Reserve Board Public Information Letter, No. 444, which states that the public should be able to rely upon staff letters even though not approved by the full Board. Even if we disagree with the interpretation expressed in the staff letter, Grants argues that the good faith defense discussed earlier should apply here. For the reasons we have discussed above, this defense is not available to a defendant who has relied on staff letters rather than a rule, regulation, or interpretation thereof by the Board and so is not available here. As to the weight to be given to the letter itself, plaintiffs call to our attention the short shrift a similar staff letter received in Ratner, supra, 329 F.Supp. at 278-79. 49 While we do not have to reach the issue whether a single element finance charge has to be itemized in the case of the add-on contracts, plaintiff Joyce Chapman apparently signed a new account contract in which the insurance purchase was optional within the meaning of Conn.Regs. §§ 36-395-3(a)(5) and (6), cf. 12 C.F.R. § 226.4(a)(5) and (6), and therefore was not part of the finance charge. Thus in her case the finance charge was truly comprised of a single element. But, the question arises, what was that single element? The term finance charge is used to cover a multitude of elements: under Conn.Regs. § 36-395-3(a), cf. 12 C.F.R. § 226.4(a), it can include interest or time-price differentials; service or transaction charges; loan fees, finders fees or points; credit report charges; and insurance charges. There is no way a consumer can tell if the finance charge includes any or all of these elements unless it is spelled out in the contract, and in a way that does not cause confusion. Thus, defendant violated the Truth-in-Lending law by failing to identify the single element finance charge as only a time-price differential. 27 See Johnson v. Associates Finance, Inc., supra, 369 F.Supp. at 1122; Meyers v. Clearview Dodge Sales, Inc., 384 F.Supp. 722, 726 (E.D.La.1974).
50 The district court found that Grants had violated Conn.Regs. § 36-395-7(b)(5), cf. 12 C.F.R. § 226.8(b)(5), by not identifying sufficiently the items upon which a security interest was claimed. The Grants contract in question states: 51 (C) that the seller shall retain title to and a purchase money security interest in such merchandise until all amounts due hereunder shall have been paid, and the right to possession in case of default . . . . 52 Grants claims that no security interest is retained in the coupon plan accounts and the only reason a security is even mentioned is because the same contract is used for big-ticket items where an interest is retained. 28 Grants claims that the existence of any retained security interest is an undetermined question of fact so that summary judgment should not have been granted. It is Grants' position that if no security interest is retained, no disclosure is necessary. See Scott v. Liberty Finance Co., supra, 380 F.Supp. at 479. Whether Grants actually retains a security interest is irrelevant. On its face, the contract provides for a security interest and for Grants to reveal later that there is none is hardly the type of disclosure Congress thought would permit consumers to compare the cost of credit among different creditors and to shop effectively for the best credit buy. S.Rep.No.392, supra, at 1. 29 III. Connecticut Usury Claims 53 By two statutes, C.G.S.A. §§ 37-4 30 and 36-243, 31 it is usurious to loan money at a rate of over 12 per cent per annum in Connecticut. The court below held 54 that the coupon plan is indeed usurious, the contract transaction a mere form for what is in substance a loan of the equivalent of money for an excessive return, . . . The customer purchases no goods by contract; he receives scrip to be used like cash to buy merchandise, and for that immediate credit agrees to pay back over an extended time period the principal amount represented by the face value of the coupons, together with a steep surcharge for the delay permitted in satisfying the account debt. 55 Grants argues that its coupon plan is not usurious and, in any event, cannot be so determined on a motion for summary judgment. 56 The elements of usury have been described as: 57 (1) agreement to lend money or its equivalent or to forbear to require repayment for a period of time; (2) the borrower's obligation to repay absolutely and not contingently; (3) the exaction of a greater compensation for making the loan or agreeing to forbear than is allowed by the applicable State Constitution or usury statute and (4) an intention to violate the usury statute. 58 Hershman, Usury and the Tight Mortgage Market, 22 Bus.Law. 333, 336 (1967). These elements have been cited as representing Connecticut law in Kafes, Usury and its Progeny: A Survey of Rate Regulation in Connecticut, 43 Conn.Bar.J. 220, 232 (1969). We are hard pressed to discover what facts in addition to those already stipulated need to be developed. 32 Items (2), (3), and (4) cannot be seriously disputed here. The borrower is required to repay the loan, and Grants has charged over 19 per cent interest on the contracts of the three named plaintiffs. 33 The requisite intent to violate the statute is similarly present. All that is necessary is that the defendant intend to charge more than the legal limit here 12 per cent and that cannot be challenged here. See Community Credit Union v. Connors, 105 A.2d 772, 775 (Conn.Sup.Ct.1954); Manchester Realty Co. v. Kanehl, 36 A.2d 114, 116-17 (Conn.Sup.Ct.1944). Grants argues that intent presents a classic question of fact. See Community Credit Union v. Connors, supra. This is normally true but in this case, where there is no dispute as to the intended interest rate, there is nothing for the trier of fact to decide. See Manchester Realty Co. v. Kanehl, supra. 59 The only substantial issue is whether the coupons are money or its equivalent within the contemplation of C.G.S.A. §§ 37-4, 36-243. Grants points out that coupons can only be used at its own stores and will be replaced if lost or stolen. On the other hand, Grants itself advertises: Use them like cash in any department of the W. T. Grant Company or member stores. 34 In addition, for coupon contracts entered into after January 1, 1971, once a single coupon is spent the total coupon amount becomes due for scheduled repayment. 35 If the coupons were treated as credit for merchandise purchases, instead of as money, the repayment obligation would accrue in stages as the goods were purchased rather than all at once. 60 In other states, similar Grants' coupons have been declared to be money in the usury context. See Rathbun v. W. T. Grant Co., 219 N.W.2d 641, 649 (Minn.Sup.Ct.1974); W. T. Grant Co. v. Walsh, 241 A.2d 46, 48 (N.J.Dist.Ct.1968). See also State v. W. T. Grant Co., CCH Consumer Credit Guide PP 99,135, 99,146 (Wisc.Cir.Ct.1972) (1969-1973 Transfer Binder). Grants argues that the statutes in the first two cases, Minn.Stat. § 334.01 and N.J.Stat. § 31:1-1, are not limited solely to money as are C.G.S.A. §§ 37-4, 36-243. Thus, those decisions are not apposite in determining whether Grants' coupons are money or its equivalent for the narrower Connecticut statutes. We agree that the Minnesota and New Jersey statutes are broader than the Connecticut statutes. Nonetheless, in both Rathbun And Walsh the coupons were found to be the equivalent of money, not the equivalent of something else also covered by the statutes. And there is no reason why in this context the Connecticut statute should be limited in a way the New Jersey or Minnesota statutes are not. The Connecticut Supreme Court of Errors has stated in reference to the state's usury laws it would be difficult to conceive of a more inclusive statute. Contino v. Turello, 101 Conn. 555, 126 A. 725, 727 (1924). Connecticut's usury statutes were enacted for the benefit of those debtor groups needing special protection. In re Feldman, 259 F.Supp. 218, 221 (D.Conn.1966); State v. Griffith, 83 Conn. 1, 74 A. 1068, 1069, aff'd, 218 U.S. 563, 31 S.Ct. 132, 54 L.Ed. 1151 (1910). It is thus in keeping with the intent of the Connecticut drafters to construe the statute to protect those low-income people most likely to become enmeshed in Grants' coupon credit plan. 61 Grants also claims C.G.S.A. § 36-243 only applies to organizations in the business of making small (under $1,800) loans. According to Grants, the record is absolutely barren of any facts to support a conclusion that defendant did 'engage in the business of making loans of money or credit.'  36 The argument disappears once it is determined that the coupons are money or its equivalent, since, according to the stipulated facts, Grants made such loans in the ordinary course of its business. 37 62 Grants also parades some horribles before us: If we hold the coupon credit plan usurious, then all the Grants big ticket credit transactions, which use the same blank forms, and the retail installment sales of most automobiles, which use similar forms, would be invalid as well. This is nonsense. A refrigerator or an automobile is not the equivalent of money, as the district court found the coupons were.