United States District Court, Northern District of Illinois, E.D
May 18, 1971
ELAINE STROMPOLOS, ON BEHALF OF HERSELF AND ALL OTHER CUSTOMERS SIMILARLY SITUATED OF PREMIUM READERS SERVICE, PLAINTIFFS,
PREMIUM READERS SERVICE, AND THE UNKNOWN OWNER OR OWNERS OF PREMIUM READERS SERVICE, DEFENDANT.
The opinion of the court was delivered by: Will, District Judge.
The issue presented by defendant's motion for summary judgment
is whether Section 226.1 et seq. of Volume 12 of the Code of
Federal Regulations (otherwise known as and hereinafter referred
to as Regulation Z) is a regulation constitutionally promulgated
by the Federal Reserve Board within the scope of the authority
granted to it by the Truth in Lending Act (hereinafter referred
to as the Act), 15 U.S.C. § 1601 et seq. For the reasons stated
below, we resolve this issue in the affirmative and therefore
deny defendant's motion for summary judgment.
This suit is a class action brought under the Act and
Regulation Z, alleging that the plaintiff Strompolos entered into
a retail installment contract with the defendant Premium Readers
Service for the purchase of a number of magazines to be delivered
over a period of sixty months and to be paid for over a period of
thirty months. The plaintiff alleges that the contract failed to
disclose the total cash price and amount to be financed under the
contract in violation of the Act and seeks to recover twice the
amount of the finance charges imposed in connection with the
transaction plus costs and reasonable attorney's fees pursuant to
Section 130 of the Act, 15 U.S.C. § 1640. The defendant contends
that it does not levy any finance
charge for the extension of credit but charges the same unitary
price for its magazine subscriptions irrespective of whether the
customer pays cash at the beginning of the contract term or over
the thirty months installment period. The defendant claims,
therefore, that it is not a creditor within the terms of the Act
and that if Regulation Z brings the activities under the terms of
the Act, the regulation is void as beyond the authority of the
Federal Reserve Board.
The Truth in Lending Act was promulgated by Congress as an
attempt "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 uniformed use
of credit." 15 U.S.C. § 1601. Under the Act, the Federal Reserve
Board is charged with the obligation of making regulations to
effectuate the purposes of the Act. 15 U.S.C. § 1604. Pursuant to
the above section, the Federal Reserve Board promulgated
Regulation Z, which defines the coverage and liability of the Act
to include persons who extend "consumer credit."
12 C.F.R. § 226.2(m). Consumer credit is defined in 12 C.F.R. § 226.2(k) to
mean credit extended to a natural person and for which either a
finance charge is or may be imposed, or which, pursuant to an
agreement, is or may be payable in more than four installments.
It is this so-called "four installment rule" which the defendant
urges was beyond the statutory authority of the Board to
promulgate because it renders any and all such four or more
installment transactions subject to the disclosure requirements
and liability provisions of the Act irrespective of whether the
transaction involves the imposition of a finance charge. The
defendant argues that this regulation ignores the language of the
Act and the Act's legislative history, and is a lawless extension
of the Act by the Board to cover persons and transactions such as
those involved in this suit which Congress did not intend to
Our starting point of inquiry as to the validity of this
challenge to Regulation Z must, of course, be the statute itself.
As stated above, the purpose of the Act is to foster the informed
use of credit by making the consumer aware of the cost of credit.
15 U.S.C. § 1601. The duty to disclose certain information is
imposed upon creditors by Sections 127-129 of the Act,
15 U.S.C. § 1637-1639, with the Act limited in its application
to creditors who are defined as "creditors who regularly extend,
or arrange for the extension of credit for which the payment of a
finance charge is required." 15 U.S.C. § 1602(f). Criminal
sanctions and potential civil liability are imposed upon those
who fail to comply with the Act by Sections 112 and 130 of the
Act, 15 U.S.C. § 1611 and 1640.
That portion of the Act which grants the Federal Reserve Board
the power to issue regulations, Section 105, states:
"The Board shall prescribe regulations to carry out
the purposes of this subchapter. These regulations
may contain such classifications, differentiations,
or other provisions * * * as in the judgment of the
Board are necessary to effectuate the purposes of
this subchapter, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith."
(emphasis added) 15 U.S.C. § 1604
As the defendant's sale of magazines clearly comes within the
four installment rule of Regulation Z and, if this regulation is
valid, under the purview of the Act, our inquiry focuses upon
Section 105 of the Act quoted above to determine if the Board has
gone beyond its powers in promulgating this Regulation.
We recognize that the judiciary is not obliged simply to rubber
stamp an administrative decision that is inconsistent with a
statutory mandate or that frustrates a Congressional policy
underlying a statute. N.L.R.B. v. Brown, 380 U.S. 278, 85 S.Ct.
980, 13 L.
Ed.2d 839 (1965); Dixon v. United States, 381 U.S. 68, 85 S.Ct.
1301, 14 L.Ed.2d 223 (1965). We further recognize that the
Constitution requires the courts to inquire and determine if an
administrative agency has exceeded its statutory power, Elgin, J.
& E. Ry. Co. v. Benjamin Harris & Co., 245 F. Supp. 467 (N.D.Ill.
1965), and that the efforts of an administrator or administrative
agency to enlarge or restrict the application of a statute should
be subjected to close scrutiny. Celebrezze v. Kilborn,
322 F.2d 166 (5 Cir. 1963). Nevertheless, accepting the above governing
principles, we conclude that the Board's enactment of the four
installment rule was a proper exercise of the power granted to it
under Section 105 of the Act.
The Federal Reserve Board has concluded that its four
installment rule is "a significant part of (Regulation Z),
intended as a deterrent to those who might cease to charge a
finance charge but, instead, inflate their so-called `cash' price
and thus avoid compliance." Federal Reserve Board letter, No. 86,
August 26, 1969, from J.L. Robertson, Member, Board of Governors,
Federal Reserve Board (in Court file), summarized 1 C.C.H.
Consumer Credit Guide, ¶ 30,457. See, also, Federal Reserve Board
letter, July 24, 1969, 1 C.C.H. Consumer Credit Guide, ¶¶ 30,113,
30,114. We agree with the Federal Reserve Board's evaluation of
the necessity for this type of regulation.
The facts of this particular case may very well demonstrate why
the four installment rule is not only sensible but also necessary
to prevent the Truth in Lending Act from being a hoax and
delusion upon the American public. Although the defendant
contends that it charges the same unitary price for both credit
and cash sales, it is readily apparent that a seller in any
industry which sells primarily or almost exclusively on a long
term credit basis could easily set a theoretical unitary cash and
credit price which he knows no one will pay in less than four
installments and thus exempt himself and his industry from the
coverage of the Act. Merely because a so-called "cash" price is
the same as for a thirty installment repayment plan does not
indicate that the "cash" price does not include substantial
financing charges in a very real sense.
It is most logical that the Federal Reserve Board would,
consistent with its power to prevent circumvention of the Act and
consistent with the stated Congressional purposes of the Act,
plug a loophole by which a substantial portion of long term
credit dealers could escape from the Act's coverage. Neither the
law, the Federal Reserve Board nor the courts are so simplistic
as to believe that a person in the business of extending long
term credit should be permitted in effect to abolish the Truth in
Lending Act by merely charging a single "cash or credit" price
knowing full well that the great bulk of its customers will never
pay in less than, for example, thirty months. We conclude,
therefore, that the four installment rule falls squarely within
the scope of the Act's provision authorizing the Board to
promulgate regulations that are proper or necessary to prevent
circumvention or evasion of the Act.
The wording of Section 105 of the Act clearly indicates, not
only that Congress delegated to the Board authority to issue
regulations to effectuate the purposes of the Act, but that
Congress also went further and granted the Board the power to
promulgate, at its discretion, regulations necessary to prevent
circumvention of the Act. The use of the word "circumvention" in
the Act signifies that Congress was aware that some creditors who
would otherwise fall within the purview of the Act might, after
passage of the Act, attempt to restructure their consumer
business relations in such a manner that they might technically
avoid the wording of the Act.
Along with the recognition of this potential for evasion,
recognized the equally obvious fact that no legislative body
could conceivably put into a workable piece of legislation
regulations and restrictions covering every imaginable business
transaction wherein credit may be involved. Consistent with other
complex regulatory legislation, Congress granted an
administrative agency the power to apply the basic purposes of
the Act to the everyday world. Not only did Congress order the
Federal Reserve Board to promulgate regulations to effectuate the
purposes of the Act, it also took the further affirmative step of
enabling the Board to reach creditors, who in the Board's
judgment, were attempting to circumvent or evade the Act by
structuring their credit activities to fall a fine line outside
the Act ("* * * These regulations may contain such * * *
provisions * * * as in the judgment of the Board are necessary or
proper * * * to prevent circumvention or evasion [of the Act]").
That the four installment rule may bring within the purview of
the Act persons who otherwise would not have fallen under the
Act's technical language but only near its penumbra is consistent
with the authority given to the Board by Congress to prevent such
circumvention. Were the Board not to have promulgated this rule
nor the courts to sustain it, the Truth in Lending Act might
never achieve its stated goals. We conclude that the four
installment rule is a reasonable exercise of the authority
granted to the Board.
It is clear that the defendant has extended to the plaintiff
Strompolos consumer credit, as defined by Regulation Z, because
the plaintiff received a present contract right — magazine
subscriptions, in exchange for a promise to pay a certain sum in
more than four installments. As we conclude that the four
installment rule of Regulation Z, 12 C.F.R. § 226.2(k), is valid,
defendant's motion for summary judgment must be denied.
An appropriate order will enter.
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