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JOHNSON v. ASSOCIATES FINANCE

February 6, 1974

JUDITH JOHNSON, PLAINTIFF,
v.
ASSOCIATES FINANCE, INC., DEFENDANT.



The opinion of the court was delivered by: Robert D. Morgan, Chief Judge.

DECISION AND ORDER

By this action plaintiff seeks relief for alleged violations by the defendant of the Federal Truth in Lending Act, 15 U.S.C. § 1601-1665, Title I of the Consumer Protection Act, and the regulations promulgated thereunder, FRB Regulation Z, 12 C.F.R. § 226.1 et seq. Jurisdiction is provided by 15 U.S.C. § 1640(e).

The introductory provision of the Federal Truth in Lending Act clearly and concisely states that it is the purpose of the statute:

  "* * * 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.

Congress recognized that, to the borrower, the consumer credit field was a frequently incomprehensible jungle, and by the passage of this Act it hoped to alleviate that situation. The remedial objectives of this statute can, however, only be achieved through a rigorous application of the requirements of the law. Any interpretation of the Act and the regulations implementing it should be made with the full realization that "meaningful disclosure" is the byword of the statute.

The first of the plaintiff's three contentions is that the Loan Disclosure Statement prepared in connection with the subject loan is inadequate because it fails to disclose a "description of each amount included" in the finance charge, as required by Section 226.8(d)(3) of Regulation Z.*fn1 The "finance charge" is stated as such in a box at the top of the defendant's Disclosure Statement and, although it is nowhere stated, the parties now agree that it actually includes interest only here, and no other additional fee or charge. Associates insists that because the finance charge consists of only one element — namely, interest — there has been full disclosure in compliance with the law. Plaintiff, on the other hand, contends that Regulation Z requires a breakdown of the finance charge, i.e., a clear statement of what it includes in all cases, even when it includes only one element, as here.

Though the defendant's argument may seem reasonable on its face, it actually represents an attack on the basic scheme of disclosure fundamental to Regulation Z. The term "finance charge" is highly ambiguous and a borrower can hardly be expected to know whether it denotes one type of charge or embraces a whole host of fees. The lender does know. Section 226.8(d)(3) amounts to a recognition of this difficulty and prescribes a sensible and uniform way to resolve the disparity of information — i.e., it requires the lender in all cases to disclose individually the existence and amount of each component part or parts of the finance charge. The defendant herein failed to comply with that requirement and is therefore liable under the Act.

Secondly, plaintiff alleges that a provision in the security agreement attempts to create a security interest in all consumer goods thereafter acquired by the debtor, in contravention of state law which only permits a security interest to attach on consumer goods acquired within 10 days after the date of the security agreement. Ill.Rev.Stat., ch. 26, § 9-204(4)(b). It is urged that this provision violates Sections 226.6(c)*fn2 and 226.8(b)(5)*fn3 of Regulation Z.

With little hesitancy, the court is inclined to agree with the plaintiff. The challenged provision fails to clearly and accurately define the extent of the defendant's security interest and seems almost patently designed to mislead and confuse the borrower in that regard. As such, it violates the spirit of the law as well as the letter of Sections 226.6(c) and 226.8(b)(5) of Regulation Z.

Lastly, plaintiff alleges that the defendant violated Section 226.8(b)(7)*fn4 of Regulation Z, for the reason that the Loan Disclosure Statement merely identifies, without explanation, the "Rule of 78's"*fn5 as the method by which a refund of precomputed interest will be determined in the event of prepayment of the loan.

While the "Rule of 78's" is undoubtedly a commonly used term having a definite meaning among persons engaged in the consumer loan business, as defendant asserts, the layman cannot be expected to understand it by name. The kind of meaningful disclosure sought by Congress requires that the lender communicate in an intelligible manner — with words or with numbers, or with both — the way in which a rebate of precomputed interest is to be determined. To require less of the lender would frustrate congressional policy and defy any reasonable interpretation of 12 C.F.R. § 226.8(b)(7).

In respect to the plaintiff's first and third points, defendant points out that its Loan Disclosure Statement is patterned after a model form appended to a pamphlet published by the Board of Governors of the Federal Reserve System, entitled "What You Ought to Know About Truth in Lending." Reliance on this form as a defense is misplaced, however.

In the first place, such forms and other "outside pamphlet material" are not law, even though they are prepared by a governmental body authorized to promulgate regulations having the force of law. The pamphlet recognizes this and refers in bold face type to the text of Regulation Z for exact information on what is required. See Bone v. Hibernia Bank, 354 F. Supp. 310 (N.D.Cal. 1973). Moreover, the particular form relied upon by defendant here appears in said pamphlet for the express purpose of ...


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