Court Opinion

ID: 9464674
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:39:53.023565+00
Date Added: 2024-06-11T17:38:45.600636
License: Public Domain

HEANEY, Circuit Judge,
concurring and dissenting.
I agree that it was unnecessary to include the insurance premiums on David Gantt’s life in the finance charge because Phyllis Gantt failed to sign the form authorizing the life insurance. I disagree that it was unnecessary to include in the new finance charge the difference between the unearned finance charge rebates as calculated actuarially and under the Rule of 78’s. I conclude that the difference was a “penalty” for purposes of 12 C.F.R. § 226.8(b)(7) and should have been included in the new finance charge. See 12 C.F.R. § 226.8(j); Bailew v. Associates Financial Services Co., CV 75-L-119 (D.Neb. December 28, 1976).
The Truth-in-Lending Act is designed to assist consumers in understanding the true costs of using credit. 15 U.S.C. § 1601; Hunt, The Rule of 78: Hidden Penalty for Prepayment in Consumer Credit Transactions, 55 B.U.L.Rev. 331, 349 (1975) (hereinafter Hunt). This goal is frustrated when the Rule of 78’s is used to calculate the *527unearned finance charge since the true amount of the unearned finance charge is concealed from the consumer. A consumer receiving a rebate of the unearned finance charge computed according to the Rule of 78’s always receives less than if the calculation was performed aetuarially. Hunt, supra at 338. The consumer, in effect, is paying an additional charge over and above the interest actually earned up to that point. Ballew v. Associates Financial Services Co., supra.1
The problem is compounded by the frequency of refinancing transactions. Since the penalty will always cause the yield to the creditor upon prepayment to exceed the true interest rate disclosed in the contract, Hunt, supra at 347, the creditor has a strong incentive to encourage prepayment. Existing data indicates that creditors are usually successful; approximately eighty percent of small loan transactions involve refinancing or consolidation and approximately fifty percent involve four or more consolidations. Hunt, supra at 333.
The actuarial method lies at the heart of the Act. See 15 U.S.C. § 1606; Hunt, supra at 336 n.23. I cannot reach any other conclusion than that Congress intended that this method be used. In an earlier day, there may have been some justification for using the Rule of 78’s. Today, however, there is no excuse for continuing its use given the prevalence of actuarial tables and calculators. The difficulty and expense of utilizing the actuarial method are vastly overestimated. See Hunt, supra at 359-360.
I fully understand that deference is to be accorded the Federal Reserve Board. However, a careful reading of their analysis with respect to the use of the Rule of 78’s makes it apparent that the Board failed to make the thorough and independent study necessary to justify their conclusion.
As the rebate calculated by the Rule of 78’s was less than the unearned portion of the finance charge, the lender should have included this difference in the new finance charge. The failure to do so resulted in a violation of 12 C.F.R. § 226.8(j).
With respect to this issue, I would reverse the judgment of the District Court.

. This difference is not as insubstantial as the majority suggests. For example, the maximum dollar error is $6.16 in a 24-month contract with a 24 percent annual percentage rate per $1,000 financed, with prepayment in the eighth month. This error increases dramatically if both the rate and the term increase. The maximum dollar error is $1,157 in a 144-month contract with a 14.12 percent annual percentage rate if the amount financed is $15,000. See Hunt, The Rule of 78: Hidden Penalty for Prepayment in Consumer Credit Transactions, 55 B.U.L.Rev. 331, 345-347 (1975).