Dаvid GANTT and Phyllis Gantt, Appellants, v. COMMONWEALTH LOAN COMPANY, a Delaware Corporation, d/b/a Beneficial Finance Company, Appellee.
No. 76-1552.
United States Court of Appeals, Eighth Circuit.
Decided Feb. 17, 1978.
573 F.2d 520
For the foregoing reasons, the defendants’ convictions are affirmed.
AFFIRMED.
George S. Newman, Legal Aid Society of St. Louis, Clayton, Mo., on brief for appellants.
Michael H. Wetmore, Thompson & Mitchell, St. Louis, Mo., for appellee; David Wells, St. Louis, Mo., on brief.
Before HEANEY, WEBSTER and HENLEY, Circuit Judges.
David and Phyllis Gantt appeal from a judgment for defendant Commonwealth Loan Co. in their Truth-in-Lending Act action.
On December 5, 1973, the Gantts borrowed $2,481.20 from Commonwealth in a consumer loan transaction in St. Louis County, Missouri. This loan was refinanced three times: on May 24, 1974, November 20, 1974, аnd February 28, 1975. In connection with each of the four transactions, the parties executed disclosure statements. Each disclosure statement provided that, in the event of prepayment, the unearned portion of the finance charge would be refunded to the borrowers as computed by the “Direct Ratio Refund Method, generally known as the Rule of 78ths.” On each refinancing, the Gantts were credited with unearned finance charges computed using the Rule of 78‘s.
Each disclоsure statement also included David Gantt‘s indication that he desired, for himself, credit disability and credit life insurance. Phyllis Gantt did not indicate a similar desire for such insurance to cover either David or herself. As clearly noted on the disclosure statements, the loans were not contingent upon the Gantts’ obtaining this insurance. In each instance, the insurance premium was included in the amount financed rather than as a finance charge.
On May 23, 1975, the Gantts filed their complaint seeking money damages under the Truth-in-Lending Act,
In their appeal, appellants contend that: (1) appellee‘s failure to obtain Phyllis Gantt‘s signature in the insurance autho
I.
The Truth-in-Lending Act and Regulation Z require that certain significant aspects of consumer credit transactions be disclosed to the consumer. A clear distinction is made between the amount actually financed (amount financеd) and the amount charged for financing the transaction (finance charge). Neither the statute nor the regulation purport to regulate the amount of the finance charge or compel that such charge be computed in any specific way, assuming it meets the requirements of the applicable state law. Rather, the components of a finance charge are set forth, and disclosure of the finance charge must include the aggregate of its components.
In this case, it is conceded that the approval of credit extension was not in any way contingent upon obtaining credit life insurance. David Gantt, the person insured, gave a specific written indication of his desire to purchase insurance in connection with the original loan and each refinancing. Nonetheless, appellants argue that the insurance premium should have been included in the finance charge, rather than the amount financed, because Phyllis Gantt did not consent to obtaining credit life insurance on her husband‘s life.
At first reading, the language of
The staff of the Federal Reserve Board, in an opinion letter, has specifically considered the question presented here. See Federal Reserve Board Letter No. 624 (Aug. 9, 1972) [Truth-in-Lending Special Releases—Correspondence April, 1969 to April, 1974] Cons.Cred.Guide (CCH) ¶ 30,873. Considering hypothetical facts identical to those present in this case the Board‘s staff has concluded that even if only the insured customer requests the insurance, the premiums may be excluded from the finance charge.
Under
Congress has delegated to the Federal Reserve Board broad power to promulgate regulations under the Truth-in-Lending Act. See Mourning v. Family Publications Service, Inc., 411 U.S. 356, 371-72, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973). This delegation resulted in part from an expectation that the Board‘s expertise would be valuable in combatting the evils to which the statute was directed. Id. at 373.
This opinion letter represents the considered judgment of the Board‘s staff charged with enforcing the statute and insofar as it interprets the regulations promulgated pursuant to the statute, it is entitled to substantial deference. See Udall v. Tallman, 380 U.S. 1, 16-17, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965); Anthony v. Community Loan & Investment Corp., 559 F.2d 1363, 1367 (5th Cir. 1977); Moore v. Great Western Savings & Loan Ass‘n, 513 F.2d 688, 690 (9th Cir. 1975); Philbeck v. Timmers Chevrolet, Inc., 499 F.2d 971, 976-77 (5th Cir. 1974); Bone v. Hibernia Bank, 493 F.2d 135, 139 (9th Cir. 1974); Gerasta v. Hibernia National Bank, 411 F.Supp. 176, 186 (E.D. La.1975); English v. MCC Financial Services, Inc., 403 F.Supp. 679, 683 (D.Ga.), aff‘d, 520 F.2d 941 (5th Cir. 1975).
The opinion letter‘s conclusion that consent to insurance by all borrowers in a multi-party transaction is not required is in accord with “the sense of the circumstances.” See Philbeck v. Timmers Chevrolet, supra, 499 F.2d at 981. The purpose of the Truth-in-Lending Act, of course, is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit . . . .”
In these circumstances, each borrower was sufficiently informed that the cost of insurance was not a cost required to obtain this loan. This is all the information about credit life insurance that the borrowers needed in order to compare this loan with other available forms of credit. A further disclosure requirement would have been needless formalism.
Adoption of appellants’ argument would create a serious practical problem when one borrower specifically consents to insurance and the other does not. The premiums would then be included in the principal amount of the consenting borrower but would have to be included in the finance charge of the nonconsenting borrower. In Mason v. General Finance Corp. of Virginia, 401 F.Supp. 782, 790 (E.D.Va.1975), modified in, 542 F.2d 1226 (4th Cir. 1976), Judge Merhige pointed out:
If [appellants‘] argument were accepted by the Court, however, creditors would be obliged, in circumstances like the instant case, to give co-obligors disclosure statements which revealed different “amounts of finance charge” and different “annual percentage rates” for each. Disclosure statements which reveal different costs of credit for the same transaction, the Court believes, would have the effect of confusing and misleading consumers and would make it more difficult for consumers to make informed judgments about the comparative cost оf credit.
Appellants’ position, if it were accepted, might lead not only to meaningless disclosure but in some circumstances to unnecessary confusion of the borrower.
We therefore think the interpretation of the Federal Reserve Board staff provides the answer to this question that will best enhance the statutory purpose: furthering the informed use of credit. Particularly, in
II.
Appellants also contend that appellee‘s failure, in this refinancing transaction, to include in the new finance charge the difference between unearned finance charge rebates as calculated under the actuarial method and the Rule of 78‘s method violated
Under
Appellants claim that the lender‘s mere identification of the Rule of 78‘s as the method of computing the unearned portion of the finance charge was an inadequate disclosure and violated this provision.
It is common practice in the consumer lending business to precompute interest on loan transactions. The lender computes the total finance charge to be paid during the life of the loan, adds this to the principal, and divides this total among the periods in which payment is to be made to compute equal, periodic payments. This practice, while convenient in many ways, see Comment, Rule of 78‘s and the Required Disclosures Under Regulation Z, 23 Kan.L.Rev. 709, 711 (1975), creates problems when the loan is prepaid. At any given time, the total obligation “consists of both the outstanding principal and the portion of the finance charge that has not yet been earned by the lender.” Id. at 711-12. Most state small loan laws require, see, e. g.,
Computation of unearned finance charges by means of the Rule of 78‘s method is expressly recognized and authorized under Missouri law, the law of the situs in this case.
The Rule of 78‘s method, however, allocates a greater рortion of the finance charge to the creditor in the earlier part of the period than does the actuarial method. In some cases, the results obtained under the Rule of 78‘s closely approximate those of the actuarial method. See Bone v. Hibernia Bank, supra, 493 F.2d at 137; H. Kripke, Consumer Credit Regulation: A Creditor-Oriented Viewpoint, 68 Colum.L. Rev. 445, 455 (1968). In other circumstances, however, the difference can be substantial. See Hunt, supra, at 338.
It is generally accepted that calculations under thе Rule of 78‘s are less burdensome and expensive than the repeated calculations of monthly principals required by the actuarial method. See Comment, Rule of 78‘s and the Required Disclosures Under Regulation Z, 23 Kan.L.Rev. 709, 711 (1975); Comment, Consumer Protection: Truth-in-Lending Disclosure of the Rule of 78‘s, 59 Iowa L.Rev. 164, 169 (1973). Therefore, it is widely used by banks and other consumer lenders. See Bone v. Hibernia Bank, supra, 493 F.2d at 137.
The Federal Reserve Board has taken the position, adopted by many courts, that the difference between amounts сalculated under the Rule of 78‘s and the actuarial method is not a “prepayment penalty,” and hence, disclosure is not required by
The Board has also stated that because of the difficulty of explaining the Rule of 78‘s in a disclosure statement, mere identification of the rule by name is a sufficient disclosure.
In this appeal, appellants argue that because this was a refinancing transaction, greater disclosure was required. They contend that, on refinancing, the difference between the amount calculated under the Rule of 78‘s and the actuarial method сonstitutes an “unearned portion of the finance
The Truth-in-Lending Act does not require the lender to use any particular method of computing unearned finance charges; rather, the statute is aimed solely at assuring that the method ultimately used by the lender is disclosed to the consumer. Bone v. Hibernia Bank, supra, 493 F.2d at 138; see
Appellant‘s construction would require the lender, on refinancing, to compute unearned interest under both methods. This would eliminate the advantage. We are reluctant to reach this result in the absence of a clear directive from Congress or the Federal Reserve Board. Moreover, appellants’ interpretation would effectively require the lender to explain the source of the unearned interest included in the new finance charge, which would require explanation of the Rule of 78‘s. This would create problems the Board sought to avoid by requiring disclosure only of the method by which prepaid interest is computed, rather than an explanation of the method, which is necessarily difficult. See
We hold that the disclosure made in this case was all that the statute and applicable regulation required. The regulation is not arbitrary or capricious but rather is within the discretion delegated to the Federal Reserve Board. We affirm the judgment of the District Court.5
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
The Truth-in-Lending Act is designed to assist consumers in understanding the true costs of using credit.
The problem is compounded by the frequency of refinancing transactions. Since the penalty will always cause thе 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
I fully understand that deference is to be accorded the Federal Reservе 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
With respect to this issue, I wоuld reverse the judgment of the District Court.
Notes
1. If a note or loan contract providing for an amount of interest, added to the principal of the loan is prepaid in full (by cash, renewal, or refinancing) one month or more before the final installment date, the lender shall either:
(1) Recompute the amount of interest earned to the date of prepayment in full on the basis of the rate of interest originally contracted for computed on the actual unpaid principal balances for the time actually outstanding; or
(2) Give a refund of a portion of the amount of interest originally contracted for which shall be computed as follows: The amount of the refund shall be as great a proportion of such amount of interest as the sum of the full monthly balances of the contract scheduled to follow the installment date after the date of prepayment in full bears to the sum of all the monthly balances of the contract, both sums to be determined according to the payment schedule provided by the contract; provided, however, that if prepayment in full occurs during the first installment period, interest shall be recomputed and charged only for the actual number of days elapsed. When the period before the first installment is more or less than one month, the portion of the interest eаrned for such period shall be determined by counting each day in such period as one-thirtieth of a month and one-three hundred and sixtieth of a year.