Court Opinion

ID: 767765
Source: CourtListenerOpinion
Date Created: 2012-04-18 08:42:18+00
Date Added: 2024-06-11T17:55:30.593026
License: Public Domain

204 F.3d 748 (7th Cir. 2000)
Theresa L. Cannon WILLIAMS,  on behalf of herself and all others  similarly situated, and Lois Reed,    Plaintiffs-Appellants,v.CHARTWELL FINANCIAL SERVICES, Ltd.,    Defendant-Appellee.
Nos. 99-2258 & 99-2287
In the  United States Court of Appeals  For the Seventh Circuit
Argued November 2, 1999Decided February 8, 2000

Appeals from the United States District Court   for the Northern District of Illinois, Eastern Division.  Nos. 98 C 6966 & 98 C 6965--Suzanne B. Conlon, Judge. [Copyrighted Material Omitted]
Before Coffey, Flaum, and Kanne, Circuit Judges.
Flaum, Circuit Judge.

1
The plaintiffs, Theresa L.  Cannon Williams and Lois Reed, appeal the  district court's grant of summary judgment to  defendant Chartwell Financial Services, Ltd.  ("Chartwell"). The plaintiffs first argue that  the district court erred in determining that  Chartwell's practices of demanding cash security  for a loan and issuing an alternative payment  schedule did not violate the Truth in Lending Act  ("TILA"), 15 U.S.C. sec. 1601 et seq., as  interpreted by the Federal Reserve Board in  implementing Regulation Z ("Regulation Z"), 12  C.F.R. sec. 226. In addition, the plaintiffs  challenge the district court's entrance of a  protective order limiting the plaintiffs' use of  confidential documents and preventing the  plaintiffs from contacting Chartwell's customers  until class certification was granted. Lastly,  Williams appeals the district court's refusal to  certify a class in her matter. For the reasons  stated below, we reverse the decision of the  district court in regard to the cash collateral  issue, reverse and remand the district court's  decision as to the alternative payment schedule,  vacate the protective order entered by the court  and remand that issue for further consideration,  and remand the district court's decision as to  the class certification issue.

I.  Background
A.

2
The defendant, Chartwell Financial Services, is  a small consumer lending agency. Chartwell began  making loans in March of 1998, and during its  short time in operation made just over 100 loans.  Two of those loans, one to Theresa L. Cannon  Williams and one to Lois Reed, are at the center  of the dispute in these cases.

3
Williams and Reed both entered into loan  agreements with Chartwell. Williams signed her  loan agreement on May 16, 1998. Under the terms  of that agreement, Williams received $750. At the  same time Williams received the $750, she was  required to give Chartwell $250 in cash as  collateral for the loan. Reed entered into her  loan agreement with Chartwell on May 26, 1998.  Reed's agreement provided for a loan in the  amount of $700, with a required security deposit  of $200. The security deposits, or cash  collateral, were placed in Chartwell's operating  account and used by the company for business  expenses. If Williams and Reed paid off their  loan obligations, the money put up as collateral  was to be returned with 9% interest.

4
When Williams and Reed signed their loan  agreements with Chartwell, both were provided  with federally-mandated disclosure statements as  required by TILA, a federal statute that  regulates the content and presentation of such  disclosures. Congress enacted TILA to ensure that  consumers receive accurate information from  creditors in a precise and uniform manner that  allows them to compare the cost of credit. 15  U.S.C. sec. 1601; Anderson Bros. Ford v.  Valencia, 452 U.S. 205, 220 (1981). Implementing  Regulation Z mandates that "[t]he creditor shall  make the disclosures required by this subpart  clearly and conspicuously in writing, in a form  that the consumer may keep. The disclosures shall  be grouped together, shall be segregated from  everything else, and shall not contain any  information not directly related to the  [required] disclosures . . . ." 12 C.F.R. sec.  226.17(a)(1). The mandatory disclosures, which  must be grouped in the federal disclosure section  of a written loan agreement, include the finance  charge, the annual percentage rate, any security  interests taken, and the number and schedule of  payments. 12 C.F.R. sec. 226.18.

5
The federal disclosure section of the loan  agreement signed by Williams listed a finance  charge of $900, and an annual percentage interest  rate ("APR") of 345.98%. The total amount to be  repaid over the course of the loan agreement was  $1650. The federally-mandated TILA disclosure  section of Williams's loan agreement stated that  this amount was to be paid in five monthly  installments of $350. In the case of Reed's loan,  the finance charge disclosed was $950, and the  APR was 427%. The total amount of Reed's  obligation was also $1650, again to be paid in  monthly installments of $350.

6
At the same time Williams and Reed signed their  loan agreements with Chartwell containing the  required TILA disclosures, they were each  provided with an alternative payment schedule.  This document outlined a payment schedule by  which Williams and Reed would pay off their loans  in ten bi-weekly installments, rather than the  five monthly installments disclosed in their loan  agreements. Because the loans were simple  interest loans, and would not be fully amortized  if the bi-weekly schedule was adhered to, the  alternative payment schedule also provided for an  additional interest payment. The additional  interest payment amounted to $117 in the case of  Williams, and $261 in the case of Reed. Both  Williams and Reed were asked to initial this  alternative payment schedule.

7
Neither Williams nor Reed repaid her loan in  accordance with either the monthly or bi-weekly  schedules provided by Chartwell. Williams made  only one payment to Chartwell, totaling $100.  Reed has made payments on her loan agreement  totaling $550. Chartwell's efforts to collect the  outstanding debts owed it by Williams and Reed  were suspended when both debtors filed suit in  federal district court.

B.

8
On October 30, 1998, Williams filed a five-  count complaint against Chartwell in federal  district court that she styled a "class action."  The complaint alleged various violations of TILA,  as well as several claims under Illinois law. On  the same day that Williams filed her complaint,  Reed also filed a one-count complaint against  Chartwell. That complaint alleged the same TILA  violations as those alleged by Williams.  Williams's complaint was eventually reassigned as  related to Reed's complaint, and the two cases  have been treated as consolidated by both the  parties and the district court.

9
On February 12, 1999, Williams filed a motion  for class certification, as well as a memorandum  in support of that motion. This motion for class  certification was based on the allegations that  all of Chartwell's customers were subject to the  cash collateral requirement and were provided an  alternative payment schedule that differed from  the one disclosed pursuant to TILA. Consequently,  Williams proposed that classes be certified as to  both issues. Chartwell opposed class  certification. On March 10, 1999, the district  court denied class certification on the ground  that Williams had failed to show numerosity.  Specifically, the court noted that Williams had  not demonstrated that Chartwell required cash  collateral and excessive interest from all its  customers.

10
The district court granted Williams's motion to  reconsider its decision regarding class  certification. Williams then presented additional  evidence that the cash collateral requirement and  alternative payment schedule were common to all  of Chartwell's customers. On March 22, 1999, the  district court issued an opinion finding that  Williams satisfied all the prerequisites for  class certification. Nevertheless, the district  court stated that it was not convinced that a  class action would be superior to other methods  of adjudication. The court then denied Williams's  request for class certification, arguing that  certification of the classes proposed by Williams  would be unmanageable. This finding was based on  the district court's doubts about the feasibility  of sending out two sets of class notices, as well  as its concern over possible confusion as to opt-  out rights.

11
At about the same time the district court  denied Williams's motion for class certification,  it also entered a protective order requested by  Chartwell. The protective order prohibited the  plaintiffs from using any documents marked as  confidential until class certification was  granted for any purpose other than prosecuting  the suit. In addition, the protective order  prevented the plaintiffs from contacting other  members of the putative class. After this  protective order was in place, and Chartwell was  assured that the plaintiffs would not be able to  contact any of its present or former customers,  Chartwell turned copies of its loan files over to  the plaintiffs.

12
On May 13, 1999, the district court granted  summary judgment to Chartwell with respect to  Williams's and Reed's TILA claims, and dismissed  their motions for summary judgment as moot. The  district court also dismissed the plaintiffs'  remaining state law claims without prejudice.  Williams and Reed now appeal the district court's  grant of summary judgment to Chartwell, alleging  various errors in regard to the TILA issues, the  entrance of the protective order, and the denial  of class certification.

II.  Analysis

13
We review the district court's grant of summary  judgment to Chartwell de novo. See Johnson v.  Zema Sys. Corp., 170 F.3d 734, 742 (7th Cir.  1999). In order to overcome summary judgment, the  plaintiffs must show specific facts sufficient to  raise a genuine issue for trial. Fed.R. Civ.P.  56(c); see Shermer v. Illinois Dep't of Transp.,  171 F.3d 475, 477 (7th Cir. 1999) (citing Celotex  Corp. v. Catrett, 477 U.S. 317 (1986)). In  determining whether a genuine issue of material  fact exists, we must construe all facts in the  light most favorable to the non-moving party and  draw all reasonable inferences in favor of that  party. See Senner v. Northcentral Technical C.,  113 F.3d 750, 754 (7th Cir. 1997). "A genuine  issue for trial exists only when a reasonable  jury could find for the party opposing the motion  based on the record as a whole." Roger v. Yellow  Freight Sys., Inc., 21 F.3d 146, 149 (7th Cir.  1994).

A.
1.  The Cash Collateral Requirement

14
The plaintiffs first challenge Chartwell's  practice of requiring its customers to provide cash as collateral for a loan. The plaintiffs  argue that the only effect of the cash collateral  requirement was to reduce the amounts of the  loans. According to the plaintiffs, a $750 loan  with a $250 cash security deposit, or a $700 loan  with a $200 cash security deposit, is in reality  only a $500 loan. Because Chartwell calculated  the disclosed APRs according to the stated  amounts of the loans, without taking into account  the reduction the plaintiffs contend was effected  by the cash security, the plaintiffs argue that  the APRs disclosed by Chartwell were inaccurate.

15
The plaintiffs argue that in the case of  Williams the actual APR, based on a $500 loan,  was 619.5%. This interest rate is much higher  than the rate disclosed. Similarly, the  plaintiffs claim that the actual APR on Reed's  loan, calculated according to a $500 loan, was  641%. This too is significantly greater than the  rate disclosed. All TILA disclosures must be  accurate, and to the extent Chartwell understated  the interest rates applicable to the plaintiffs'  loans it has violated that statute. See Gibson v.  Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 285  (7th Cir. 1997). Therefore, the first question  before this Court is whether the interest rates  disclosed by Chartwell were in fact accurate. In  order to answer that question, we must determine  whether the plaintiffs' characterization of the  cash security requirement and its effect on the  amounts of the loans is correct.

16
The district court rejected the plaintiffs'  characterization of the loans, and therefore  their allegations of TILA violations. Initially,  the district court stated that cash should not be  treated differently from any other form of  security. In support of that proposition the  district court correctly noted that if Williams  or Reed had put up her car as security for her  loan, the value of the car would not have been  subtracted from the stated amount of the loan for  purposes of the interest rate disclosure.  According to the district court, cash is just  another form of collateral whose value, like that  of a car, should not be subtracted from the  amounts of the loans. Under this reasoning, the  actual amounts of the Williams and Reed loans  were $750 and $700 respectively, and the  disclosed APRs were accurate.

17
Having found that Chartwell accurately disclosed  the relevant APRs if the cash collateral was  treated the same as any other form of collateral,  the district court then proceeded to consider the  effect of a specific TILA provision that treats  "deposits" differently from other forms of  collateral. The TILA provision governing deposits  provides that "[i]f the creditor requires the  consumer to maintain a deposit as a condition of  the specific transaction [the creditor shall  include] a statement that the [APR] does not  reflect the effect of the required deposit." 12  C.F.R. sec. 226.18(r). In effect, TILA requires  that the potential impact of a required security  deposit on the APR be disclosed. However, the  regulations exempt deposits earning interest at  a rate of more than 5% per year from this  disclosure requirement. 12 C.F.R. sec.  226.18(r)(4), n.45. The district court cited this  exemption and determined that, even if the cash  collateral in these cases was considered a  deposit, Chartwell's policy of returning the cash  security with 9% interest exempted Chartwell from  the disclosure requirements TILA generally places  on such deposits.

18
The plaintiffs challenge both the collateral and  deposit prongs of the district court's holding as  to the cash collateral issue, and we first  consider the court's assertion that cash should  be treated the same as any other form of  collateral. Although the district court focused  on a comparison between cash and other forms of  security in resolving this issue, we do not  believe that this is the correct analytical  framework. Such an approach elevates form over  substance, and fails to account for this Court's  consistent assertion that courts are to focus on  the economic substance of the transaction in  determining whether TILA has been violated. See Smith v. Cash Store Management, Inc., 195 F.3d  325, 329 (7th Cir. 1999); Adams v. Plaza Finance  Co., Inc., 168 F.3d 932, 936 (7th Cir. 1999). The  proper question in these cases is not whether in  form cash should be treated the same as other  kinds of security. Rather, our analysis must look  to whether in substance the cash security  required by Chartwell functioned as a security  interest at all. See Cash Store, 195 F.3d at 329;  Plaza Finance, 168 F.3d at 936.

19
According to Regulation Z, a security interest  is "an interest in property that secures  performance of a consumer credit obligation and  that is recognized by state or federal law." 12  C.F.R. sec. 226.2(a)(25). Illinois commercial  law, in turn, defines a security interest as "an  interest in personal property . . . which secures  payment or performance of an obligation." 810  ILCS 5/9-105(1)(c). As this Court has previously  noted, the creation of a security interest gives  a creditor an interest in property such that  "upon default, [the creditor may] take or sell .  . . the property--or collateral--to satisfy the  obligation for which the security interest is  given." Cash Store, 168 F.3d at 329. In these  cases, the cash collateral did not function as a  security interest in this way. The cash  collateral demanded by Chartwell did not serve to  reduce the creditor's risk by providing it with  an interest in property it could take or sell  upon default. Rather, Chartwell used the cash  security as a means to reduce the amounts of  money it initially put at risk. Put another way,  the real effect of the cash collateral required  by Chartwell was not to make the loans more  secure, but to reduce the amounts of the loans.

20
Because the cash security demanded by Chartwell  served only to reduce the effective amounts of  the loans made to the plaintiffs, we proceed with  the understanding that those loans were in  substance $500 loans. As such, Chartwell was  under an obligation to calculate the interest  with reference to that amount. Chartwell did not  calculate the interest rates according to the  $500 loans it made, however, but instead  calculated the applicable interest rates  according to the amounts of the loans recited in  the loan agreements. The result of Chartwell's  use of erroneous loan amounts was a significant  understatement of the APRs applicable to the  plaintiffs' loans. These understatements are  inaccuracies for which Chartwell is liable under  TILA unless some other provision of TILA exempts  it from liability.

21
The only potential exemption from liability  applicable to Chartwell is contained in the TILA  provisions addressing deposits. Although  classification of the cash security as a deposit  would generally bring with it disclosure  obligations, TILA specifically exempts deposits  that earn more than 5% interest. The  applicability of this deposit exemption to the  facts of these cases is particularly important in  light of our determination that Chartwell failed  to accurately disclose the APRs applicable to the  plaintiffs' loans. Because TILA specifically  exempts deposits earning more than 5% interest  from its disclosure requirements, a finding that  the cash collateral constitutes a deposit, when  coupled with the fact that the deposits in these  cases were to be returned with 9% interest, would  effectively provide Chartwell with a safe harbor  from TILA liability. As such, we must look at the  economic substance of the transaction to see if  the classification of the cash collateral as a  deposit provides a basis for relieving Chartwell  from liability under the statute. See Cash Store,  195 F.3d at 329; Plaza Finance, 168 F.3d at 936.

22
After a review of the relevant statutory  provisions governing deposits, we cannot conclude  that the cash collateral required by Chartwell  was the kind of deposit contemplated by 12 C.F.R.  sec. 226.18(r) of TILA. While this provision  refers only to "deposits," the Official Staff  Commentary to 12 C.F.R. sec. 226.18(r) interprets  the deposit exemption with reference to  "[i]nterest-bearing accounts." Official Staff  Commentary to Regulation Z, sec. 226.18(r). We read this comment to mean that the drafters did  not intend the deposit provisions to apply to any  kind of deposit, but only to traditional forms of  deposit accounts. It is our further understanding  that these traditional kinds of accounts, as  represented by the words "interest-bearing  accounts," or "deposits," are deposit accounts  held with federally-regulated institutions. This  understanding is initially based on the fact that  the acceptance and maintenance of deposit  accounts is a core function of the banking  industry. See 5A Michie on Banks and Banking Ch.  9, sec. 3 ("A deposit is a transaction peculiar  to the banking business."). As such, a natural  reading of the word "deposits" or "interest-  bearing accounts" would seem to refer to deposits  made within that industry. See id. ("The term  'deposit' signifies the act of placing money in  the 'custody' of a bank, to be withdrawn at the  will of the depositor.").

23
More significantly, the definitions given to  "deposit" in other provisions of TILA support the  conclusion that the deposit exemption applies  only to deposits held at federally-regulated  institutions. Although other provisions of TILA  assign multiple meanings to the word "deposit,"  all of those definitions involve placing money  with a "depository institution" or its affiliate.  12 C.F.R. sec. 204.2(a)(1). A "depository  institution" is then defined quite broadly, but  all of the institutions considered as such are  federally-insured and federally-regulated  entities or are eligible to become such. 12  C.F.R. sec. 204.2(m)(1). Thus, TILA itself  indicates that deposits are accounts accepted and  maintained by federally-regulated banks and other  savings institutions. Given that Chartwell is not  licensed to accept deposit accounts, and the cash  security it accepts is not federally insured or  federally regulated, Chartwell does not qualify  for the deposit exemption contained in 12 C.F.R.  sec. 226.18(r), note 45 simply by virtue of  collecting the cash collateral from its  customers.

24
Chartwell further argues, however, that even if  the deposit contemplated by 12 C.F.R sec.  226.18(r) of TILA must be with a federally-  regulated institution, the cash collateral it  requires nonetheless qualifies for this exemption  by virtue of the fact that the money was placed  in its general operating account. According to  Chartwell, its general operating account is the  kind of interest-bearing account referred to in  the regulation. Under this interpretation, the  cash security was placed in an interest-bearing  account returning more than 9% interest, and  Chartwell is exempt from the disclosure  requirements applicable to deposit accounts. We  find this argument meritless in light of the fact  that Chartwell did nothing to segregate the funds  given to it as security, nor can it point to any  interest-bearing accounts earning 9% interest  established in the name of its customers. See  Therrien v. Resource Financial Group, Inc., 704  F.Supp. 322 (D.N.H. 1989) (holding that a  creditor did qualify for the deposit exemption  where the security deposit was placed in a  separate account and the borrower retained  apparent title to, and benefit of, the funds).  Chartwell's inability to point to any such  accounts is notable because of what it says about  the substance of the transactions at issue. See  Cash Store, 195 F.3d at 329; Plaza Finance, 168  F.3d at 936. In demanding cash collateral from  its customers Chartwell did not take security  interests in deposit accounts, but rather lowered  its risk by reducing the effective amounts of the  original loans. See Cash Store, 195 F.3d at 329;  Plaza Finance, 168 F.3d at 936.

25
Because an examination of the economic substance  of the transactions reveals that the cash  collateral required by Chartwell does not  constitute a deposit account, and because the  cash collateral did not function as a security  interest, Chartwell's failure to disclose the  impact of that collateral on the APRs constitutes  a violation of TILA. In making this conclusion,  we again emphasize the importance of substance  over form in TILA litigation. See Cash Store, 195  F.3d at 329; Plaza Finance, 168 F.3d at 936. The  purpose of the cash collateral in these cases was  not to create additional security for the loans,  but rather to reduce the amounts of the loans  themselves. Having thus effectively reduced the  amounts of the loans given to the plaintiffs,  Chartwell was under an obligation to disclose the  APRs as calculated according to the effective  amounts of the loans. Chartwell did not calculate  the interest rates applicable to the plaintiffs'  loans based on the effective amounts of the  loans, however, and that failure resulted in  inaccurate disclosures in violation of TILA.  Accordingly, we reverse the decision of the  district court as to the cash collateral issue.

2.  The Alternative Payment Schedule

26
The plaintiffs next contend that Chartwell's  practice of issuing an alternative payment  schedule constitutes a violation of TILA.  According to Williams and Reed, they, along with  the rest of Chartwell's customers, were forced to  initial an alternative bi-weekly schedule at the  time they initially signed their loan agreements.  The plaintiffs allege that this alternative  payment schedule conflicted with the number and  schedule for payments Chartwell provided in the  federally-mandated TILA disclosures and that the  issuance of conflicting payment schedules is a  violation of TILA. The question before this  Court, then, is whether the alternative bi-weekly  payment schedule provided by Chartwell actually  conflicted with the one disclosed pursuant to  TILA.

27
The district court granted summary judgment to  Chartwell on the issues surrounding the  alternative payment schedule. The district court  based its ruling on two grounds. First, the  district court stated that there was no evidence  that the alternative payment schedule at issue  was mandatory. According to the court, as long as  Chartwell did not require its customers to adhere  to the alternative payment schedule, then that  schedule did not conflict with the mandated  schedule disclosed in the federal disclosures  box. Second, the district court determined that  even if the alternative schedule was mandatory,  it would still not constitute a violation of TILA  because payment according to the alternative bi-  weekly schedule would result in a lower interest  rate being paid by the consumer. In effect, a  mandatory bi-weekly schedule would result in an  overstatement of the applicable APRs. According  to the district court, a mere overstatement of  the interest rate, absent other circumstances  requiring the creditor to be held liable, does  not constitute a violation of TILA.

28
The district court was correct insofar as its  decision indicates that an overstatement of the  applicable interest rate alone cannot serve as a  basis for TILA liability. TILA specifically  provides that "[t]he disclosure of an amount or  percentage which is greater than the amount or  percentage required to be disclosed . . . does  not in itself constitute a violation of [TILA]."  15 U.S.C. sec. 1602(z). However, TILA also states  that a disclosed APR is considered accurate only  "if it is not more than 1/8 of one percentage  point above or below the [actual APR]." 12 C.F.R.  sec. 226.22 (a)(2). This provision indicates that  in some circumstances, overdisclosure of the APR  can constitute a violation of TILA. Recognizing  the apparent tension between these two provisions  of TILA, we must consider what conditions must be  present such that an overstatement of the APR  violates TILA. The district court did not reach  this issue because of its belief that the  plaintiffs based their complaints solely on an  overstatement of the applicable interest rates,  and because of the perceived failure of the  plaintiffs to plead the something extra required  by TILA. It is necessary for us to address this  question, however, in order to determine whether  summary judgment was appropriately granted as to  the alternative payment schedule.

29
In trying to determine what it is the  plaintiffs must show in addition to  overdisclosure, we first look to the Federal  Reserve Board's interpretation of the statute. See Ford Motor Credit Co. v. Milhollin, 444 U.S.  555, 557 (1980) (stating that courts should give  "a high degree of deference" to the Federal  Reserve Board's interpretation of TILA). In this  regard, we find note 45d to 12 C.F.R. sec. 226.22  illuminating. That note states that:

30
An error in disclosure of the annual percentage  rate or finance charge shall not, in itself, be  considered a violation of this regulation if: (1)  The error resulted from a corresponding error in  a calculation tool used in good faith by the  creditor; and (2) upon discovery of the error,  the creditor promptly discontinues use of that  calculation tool for disclosure purposes and  notifies the Board in writing of the error in the  calculation tool.

31
12 C.F.R. sec. 226.22 n.45d. It is our  understanding that this note clearly illustrates  the circumstances in which overdisclosure of the  applicable interest rate is not a violation of  TILA. See In re Cox, 114 B.R. 165, 168 (Bankr.  C.D. Ill. 1990). Except in circumstances where  the error arises from the good faith use of a  calculation tool, and where that error is  promptly remedied upon discovery, an  overdisclosure of more than 1/8 of one percent  constitutes a violation of TILA. See id.

32
This resolution effectuates the possibility of  liability for overstatements provided in 12  C.F.R. sec. 226.22(a), while at the same time  recognizing that creditors may at times be exempt  from liability for overstatements as provided for  in 15 U.S.C. sec. 1602(z). Moreover, liability  for overdisclosures is consistent with TILA's  goal of allowing consumers to accurately compare  credit rates. 15 U.S.C. sec. 1601(a); see Brown  v. Marquette S. & L. Ass'n, 686 F.2d 608, 612  (7th Cir. 1982) (stating that the fundamental  purpose of TILA is to provide information to  facilitate comparative credit shopping and  thereby the informed use of credit by consumers).  Where a rate is overdisclosed, a consumer may  pass up what is in reality a more favorable  interest rate for a less favorable one. When this  happens consumers are harmed, perhaps without  even knowing it, by the creditor's failure to  accurately disclose the interest rate. See  Gibson, 112 F.3d at 285 (stating that the purpose  of TILA "is to protect consumers from being  misled about the cost of credit"). Thus, in order  to effectuate the congressional desire to allow  consumers to compare the cost of credit, we hold  that an overdisclosure of the applicable interest  rate is a violation of TILA absent a showing that  the error in question falls within the exemption  provided in 12 C.F.R. sec. 226.22, note 45d.

33
The district court granted summary judgment to  Chartwell based on its finding that the  plaintiffs alleged only that Chartwell had  overstated the interest rates applicable to their  loans. Yet given our holding that such  overstatements are a violation of TILA absent a  showing of inadvertence, the plaintiffs'  allegations as construed by the district court  were more than sufficient to overcome Chartwell's  motion for summary judgment. The plaintiffs  alleged that Chartwell overstated the interest  rates applicable to their loans, and there is no  indication that this overstatement was the result  of an erroneous calculation tool. More  significantly, because Chartwell knew they were  providing conflicting schedules, and because  payment according to the bi-weekly rate results  in an overstatement of the annual percentage  interest rates, Chartwell has no basis for  arguing that the inaccurate disclosures in these  cases were inadvertent. See 15 U.S.C. sec.  1640(c) (stating that the "bona fide error"  defense does not apply to "an error of legal  judgment with respect to a person's obligations  under this subchapter").

34
By this analysis, we do not mean to indicate  that Chartwell has necessarily violated TILA by  the very act of providing an alternative payment  schedule. As we stated previously, the  determination as to whether the alternative  payment schedule issued by Chartwell violates  TILA centers on whether the alternative payment  schedule conflicts with the schedule provided in  the TILA disclosures. While TILA requires that  the number and schedule of payments be accurately  disclosed, it presumably does not prevent  consumers from repaying the loan more quickly if  that is more convenient. Nor does TILA prevent  creditors from accepting payments more frequently  than the consumer is required to pay according to  the number and schedule of payments disclosed  pursuant to TILA. In light of our understanding  that TILA requires accurate disclosure of the  number and schedule of payments, but does not  preclude consumers from deviating from that  schedule in all circumstances, we believe that  the issue of whether the alternative payment  schedule conflicts with the schedule disclosed  pursuant to TILA turns on the issue of  voluntariness.

35
To the extent the bi-weekly schedule was wholly  voluntary, and Chartwell's customers understood  that fact, the alternative schedule would not  violate TILA. While the district court resolved  the issue of voluntariness against the plaintiffs  on summary judgment, we do not believe this was  the proper disposition. The plaintiffs testified  that the alternative schedule was presented to  them as mandatory, and there is no indication  that the district court found this testimony to  lack credibility. Furthermore, the plaintiffs  contend that Chartwell required its customers to  initial the alternative schedule, a practice that  lends support to the plaintiffs' contention that  they were bound to that schedule. Chartwell's  practice of requiring its customers to initial  the alternative payment schedule, when coupled  with the plaintiffs' testimony that the schedule  was presented to them as mandatory, presented  issues of material fact as to the voluntary  nature of the alternative payment schedule and  the plaintiffs' understanding as to whether they  were bound by that schedule that should properly  have been resolved at trial.

36
In finding that the alternative schedule was  not mandatory, the district court placed a great  deal of weight on the fact that it resulted in  less favorable terms for Chartwell. However, it  is not clear to us that this gives rise to a  strong presumption that Chartwell did not intend  for its customers to abide by the bi-weekly  schedule. Payment at a faster schedule may well  be advantageous to a company like Chartwell.  Adherence to the bi-weekly schedule increases the  speed of repayment, a factor which is  particularly important to a small company like  Chartwell with few cash reserves. In addition,  repayment according to a bi-weekly schedule may  decrease the possibility of default. While this  is not to say that the alternative payment  schedule was mandatory, it does indicate that the  district court was too quick to rely on the  perceived disadvantage of the alternative  schedule to Chartwell. The plaintiffs presented  evidence that gave rise to a material issue of  disputed fact, and their claim that the  alternative payment schedule violated TILA should  not have been dismissed on summary judgment.  Accordingly, we remand this issue for further  proceedings in the district court consistent with  this opinion.

B.

37
We now turn to the procedural issues. The  plaintiffs challenge both the district court's  entrance of a protective order on behalf of  Chartwell, and the court's refusal to grant class  certification in the Williams matter. In  considering these issues on appeal, we review the  district court's decision to deny class  certification on Williams's complaint, as well as  the court's entrance of a protective order on  behalf of Chartwell, for an abuse of discretion.  See Gulf Oil Co. v. Bernard, 452 U.S. 89, 100-01  (1981) (protective orders); Keele v. Wexler, 149  F.3d 589, 592 (7th Cir. 1998) (class  certification).

1.  The Protective Order

38
The plaintiffs challenge the district court's  entrance of a protective order on behalf of  Chartwell. That order prevented documents marked  as confidential from being used for any purpose  other than prosecuting or defending this action,  and made any other use of these documents  contingent on class certification being granted.  The order also prohibited the plaintiffs from  contacting members of the putative class of  Chartwell's customers. The plaintiffs claim that  this order unconstitutionally deprived them of  relevant documents, put them at a great  disadvantage in responding to Chartwell's summary  judgment motion, and deprived them of useful  information to support Williams's motion for  class certification.

39
The decision to grant a protective order is a  discretionary one to be used by courts to control  the course of class action litigation. The  discretion to issue such orders has been vested  with trial courts because it is well-recognized  that class actions present

40
opportunities for abuse as well as problems for  courts and counsel in the management of cases.  Because of the potential for abuse, a district  court has both the duty and the broad authority  to exercise control over a class action and to  enter appropriate orders governing the conduct of  counsel and parties.

41
Gulf Oil, 452 U.S. at 100. In these cases, the  district court was clearly concerned about the  potential for abuse if the plaintiffs were  allowed to contact Chartwell's customers, and  expressed concern over the effect of such  contacts on Chartwell's business. This is a  legitimate concern, and certainly presents a  potential justification for the district court's  limitations on discovery.

42
Nevertheless, a district court's discretion in  this area is not unlimited. See id. The  plaintiffs have a right to contact members of the  putative class, see id.; EEOC v. Mitsubishi Motor  Mfg. of America, Inc., 102 F.3d 869, 870 (7th  Cir. 1996), and any discovery limitations should  be carefully drawn, see Gulf Oil, 452 U.S. at  104. The district court's decision as to the  protective order must involve a careful balancing  of the potential for abuse created by the class  action and the right of the plaintiffs to contact  potential class members. See id. Because this  balancing is involved, and because this area  involves important competing concerns, "an order  limiting discovery communications between parties  and potential class members should be based on a  clear record and specific findings that reflect  a weighing of the need for a limitation and the  potential interference with the rights of the  parties." Id. at 101, 101 S.Ct. 2193.

43
After examining the district court's decision to  grant a protective order against the backdrop of  the competing concerns at work in this area, it  is apparent that the district court did not  develop a sufficient appellate record for us to  determine whether the interests of both parties  were adequately considered. The Supreme Court was  clear in stating that when a protective order  such as the one in these cases is entered, that  order should be based on a clear record and  specific findings. See id. Other than the  district court's concern over the impact the  plaintiffs' contact with putative class members  would have on Chartwell's business, it is not  clear from the record what factors the district  court considered. This is not to say that the  district court was wrong. As we have stated,  given the potential for abuse in class actions a  protective order is permissible under certain  circumstances. However, we cannot determine from  the record below and from the district court's  findings whether those circumstances were present  in these cases. We therefore vacate the  protective order entered by the district court  and remand this issue for further proceedings  consistent with this opinion.

2.  Class Certification

44
Williams also challenges the district court's  denial of class certification. In order to show  that class certification is justified, Williams  must satisfy the four requirements of Rule 23(a)  of the Federal Rules of Civil Procedure. These  requirements include: (1) that the class is so  numerous that joinder of all members is  impracticable; (2) that there are questions of  law or fact common to the class; (3) that the  claims or defenses of the representative parties  are typical of the claims or defenses of the  class; and (4) that the representative parties  will fairly and adequately protect the interests  of the class. Fed.R.Civ.P. 23(a). In addition,  the district court must determine that Williams  meets one of the requirements of Rule 23(b) of  the Federal Rules of Civil Procedure. As applied  to this type of case, that rule requires that  common questions of law and fact predominate over  questions involving individual members, and that  a class action is superior to other forms of  adjudication. Fed.R.Civ.P. 23(b)(3).

45
In denying Williams's motion for class  certification, the district court found that she  satisfied all the requirements of Rule 23(a).  Specifically, the court held that Williams had  successfully demonstrated numerosity,  commonality, typicality, and representativeness.  However, the district court went on to deny class  certification on the grounds that the class would  be unmanageable, and that it was not convinced  that a class action would be superior to other  forms of adjudication. The district court noted  that the class certification proposal separated  the potential plaintiffs into two different  classes, which would multiply and burden the  expense of class management. The district court  was further concerned about confusion on the part  of potential class members, particularly as to  their opt-out rights.

46
In considering the class certification issue  under Rule 23(b), the district court properly  considered the issue of whether a class action  would be superior to other forms of adjudication.  Fed.R.Civ.P. 23(b). A central question for the  district court in this regard was that of  manageability. Fed.R.Civ.P. 23(b)(3)(D); see  Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 164  (1974) (noting that manageability "encompasses  the whole range of practical problems that may  render the class action format inappropriate for  a particular suit"). While appropriately  considering the manageability issue, however, it  appears as if the district court may have placed  too much weight on the issue of subclasses. Rule  23 specifically provides for multiple classes in  a single case, Fed.R.Civ.P. 23(c)(4)(B), and  classes have been certified in cases where  multiple classes were required. See, e.g., Keele  v. Wexler, 149 F.3d 589 (7th Cir. 1998). The fact  that Rule 23 provides for subclasses when they  are efficient makes it clear that the existence  of multiple classes, in and of itself, is not  sufficient to justify the district court's denial  of class certification.

47
In stating that the district court may have  placed too much emphasis on the issue of  subclasses, we do not mean to imply that the  district court erred in refusing to grant  Williams's request for class certification. The  district court did express specific concerns as  to the manageability of multiple classes that may  justify denying Williams's request for class  certification. However, it is not clear from the  record whether the district court based its  denial of class certification on general issues  of manageability, or whether the district court  erroneously believed that the very existence of  subclasses justified the denial. Our concern in  this regard is heightened by the importance of  the class certification issue in TILA cases,  where the small amounts of money involved and the  difficult financial situations of many of the  litigants may inhibit individualized litigation.  See Crawford v. Equifax Payment Serv., Inc., Nos.  99-1973 & 99-2122 (7th Cir. Dec. 7, 1999); Mace  v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th  Cir. 1997); Haynes v. Logan Furniture Mart, Inc.,  503 F.2d 1161, 1164-65 (7th Cir. 1974).  Accordingly, we remand the class certification  issue to the district court for further  proceedings consistent with this opinion.

III.  Conclusion

48
In regard to the TILA issues in these cases, we  REVERSE the decision of the district court as to  the cash collateral issue, and REVERSE and REMAND  the court's decision regarding the alternative  payment schedule for further proceedings  consistent with this opinion. We also VACATE the  protective order entered by the district court  and REMAND the issue to the district court for  further proceedings consistent with this opinion.  Lastly, we REMAND the decision of the district  court denying Williams's motion for class  certification.