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May 19, 1998

Dennis Sampler, Jr., on behalf of himself and all others similarly situated, Plaintiffs,
City Chevrolet Buick Geo, Inc., Auto Capital Enterprises, Inc., and Al Ravin, Defendants.

The opinion of the court was delivered by: LINDBERG


 Plaintiff Dennis Sampler, Jr., brought this class action against defendants City Chevrolet Buick Geo, Inc. ("City"), City finance manager Al Ravin, and Auto Capital Enterprise ("ACE") alleging that they included hidden finance charges in the price of vehicles sold on credit. Count I of the Second Amended Complaint alleges that these charges violated the Truth in Lending Act ("TILA"), 15 U.S.C. § 1638(a), and implementing Federal Reserve Board Regulation Z, 12 C.F.R. § 226. Count II alleges violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962. Count IV alleges violations of the Illinois Consumer Fraud Act ("ICFA"), 815 ILCS 505/2. Counts VII and VIII allege that City sold plaintiff a defective and unmerchantable vehicle in violation of the Magnuson-Moss Consumer Product Warranty Act ("Magnuson-Moss"), 15 U.S.C. § 2301, and the Uniform Commercial Code ("UCC"), 810 ILCS 5/2-314. Count IX alleges that City breached its express limited warranty of plaintiff's vehicle. Defendants City and Ravin have filed a motion for summary judgment and, for the reasons below, their motion will be granted in part and denied in part.

 I. Factual and Procedural Background

 This is one of several recent cases in this district which have invited judicial scrutiny of auto financing practices. Defendant City Chevrolet sells up to seventy percent of its used cars on credit. Although City assigns all of its credit contracts to lending institutions, it sends high risk contracts to subprime lenders which purchase the contracts at an amount below their face value. The difference between the face value of a contract and the value at which it is purchased by a subprime lender is known as a discount or holdback. City assigns up to thirty percent of its used car financing contracts to subprime lenders.

 On March 16, 1996, plaintiff Dennis Sampler purchased a used automobile from City Chevrolet on credit. He signed a retail installment contract with Mercury Finance Company stating that the price of the vehicle was $ 5,362 and was payable in twenty-four monthly installments of $ 248.18 with an annual percentage rate of 29 percent. A few days after plaintiff signed the contract, he learned that Mercury had turned down his credit application and that he needed to sign another credit agreement. On March 23, 1996, plaintiff returned to City and signed a retail installment contract with Auto Capital Enterprises ("ACE"). The ACE contract provided for a price of $ 5,200 with twenty-four monthly payments of $ 222.45 and an annual percentage rate of 34 percent. At $ 7,356.32, the total sale price under the ACE contract was thirty-two dollars higher than the sale price under the Mercury contract.

 ACE typically purchases retail installment contracts from City at a discount of eight to twelve percent below the face value of the contract. When ACE receives a request from a dealer to bid on a retail installment contract, it returns a set of variable terms under which it is willing to purchase the contract. These variables include the term of repayment, the interest rate or "buy rate," and the amount of the discount. At its option, the dealer may fix the interest rate in the customer's retail installment contract at up to five percent above the buy rate set by ACE. ACE then returns half of the additional interest to the dealer. City recovered between $ 113 and $ 119 from splitting the difference between the buy rate and the APR on plaintiff's contract sold to ACE.

 City prepares a "manager sheet" for each transaction which lists the cost of the lender discount and any warranties. The manager sheet is completed by a salesperson and manager before the deal is sent to the financing office for approval. When the deal is finalized, City prepares a recap sheet which lists the price that City paid for the car and any additional dealer costs. In a section of plaintiff's manager sheet identifying "Additional Equipment Shown on Order," a sales manager listed a holdback of $ 410 and a warranty of $ 95. The deal recap sheet listed the profit on plaintiff's vehicle as $ 196, a figure derived from the purchase price of $ 5,200 less costs of $ 3,755 and less an overallowance of $ 1,249 on plaintiff's trade-in. Although the financing discount was included in the costs of plaintiff's vehicle, it was not separately disclosed to plaintiff.

 When plaintiff's car began to overheat four or five days after he signed the ACE contract, he returned it to City for repairs but was told to come back another day. Although the vehicle was still within its thirty-day or thousand-mile limited warranty when it was initially tendered for repairs, the warranty had lapsed by the following day and plaintiff was obliged to repair the overheating problem at his own expense. Since then, plaintiff's vehicle has had problems with its alternator, brake lights, headlights, starter, heating system, air conditioner, power steering, axles, and belts.

 On July 17, 1996, plaintiff filed a lawsuit alleging that City routinely passes on the cost of lender discounts to its customers as a hidden finance charge. Following dismissal of the action for failure to state a claim, plaintiff filed a Second Amended Complaint on October 22, 1996. On July 8, 1997, the court certified a class of plaintiffs including all persons who signed a retail installment contract to purchase a vehicle from City, whose transaction was documented as a consumer credit transaction, and for whom the finance company did not pay City the full amount financed. On October 29, 1997, the court certified a subclass consisting of all members of the City class whose contracts were assigned in whole or in part to ACE. On April 17, 1998, the court approved a final settlement agreement as to all members of the ACE subclass, an agreement which resulted in the dismissal of Counts III and V of the Second Amended Complaint and all pending claims against defendant ACE. Defendants City and Ravin have filed a motion for summary judgment on all of the remaining claims.

 II. Discussion

 The court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The nonmoving party must then come forward with specific facts demonstrating that there is a genuine issue for trial. Fed.R.Civ.P. 56(e). The court must review the evidence and draw all permissible inferences in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 A. Truth in Lending Act

 Count I alleges that City imposes hidden finance charges on car buyers in violation of the Truth in Lending Act, 15 U.S.C. § 1683. The purpose of TILA 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, and to protect the consumer against inaccurate and unfair billing and credit card practices." 15 U.S.C. § 1601(a). The statute therefore requires lenders to make a clear and accurate disclosure of all finance charges imposed on the consumer in credit transactions. 15 U.S.C. § 1638(a)(3). TILA defines a finance charge as the "sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a). Federal Reserve Board Regulation Z further defines a finance charge to include "charges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation, or as deduction from the proceeds of the obligation." 12 C.F.R. § 226.4(b)(6).

 The official staff commentary to Regulation Z provides that certain charges are exempt from TILA disclosure requirements even if they fall within the regulatory definition of a finance charge. It explains that "charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or service sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition." Official Staff Commentary to 12 C.F.R. § 226.4(b)(6) at § 226.4(a)(2) (Supp.I). By way of example, the commentary specifies that a "discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance ...

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