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December 17, 1981

John ENRIGHT and Patricia Enright, Plaintiffs,

The opinion of the court was delivered by: MCCURN


Plaintiffs John and Patricia Enright brought this action against Beneficial Finance Company of New York, Inc. ("Beneficial") for declaratory relief and to recover statutory penalties for defendant's alleged violations of the Truth in Lending Act, as amended, 15 U.S.C. § 1601 et seq. ("TILA"), regulations promulgated under TILA, 12 C.F.R. Part 226 (Regulation Z) and section 358 of the New York Banking Law (McKinney's 1971). Subject matter jurisdiction over the TILA claims exists under 15 U.S.C. § 1640(e); jurisdiction over plaintiffs' state law claims depends on the exercise of pendent jurisdiction.

The matter is before the Court on renewed cross-motions for summary judgment. The issues concern the proper treatment of interest imposed on the unpaid balance of a precomputed interest loan following default and acceleration. Plaintiffs contend that the imposition of post-default interest constitutes a default or delinquency charge which must be disclosed under TILA and Regulation Z, 12 C.F.R. § 226.8(b)(4). Defendant, on the other hand, asserts that so long as the post-default interest rate does not exceed the rate charged before default, there is no default or delinquency charge and therefore no duty to disclose under TILA or Regulation Z.


 On July 28, 1977, plaintiffs entered into a loan agreement with Beneficial. Plaintiffs' obligation was evidenced by a Note which provided that plaintiffs were to repay the principal and a precomputed interest charge in regular monthly installments. The first paragraph of the Note describes the interest charge as follows:

The agreed monthly rate of interest is 21/2% per month on that part of the unpaid principal balance of the loan not in excess of $ 100.00, 2% per month on that portion of the unpaid principal balance of said loan in excess of $ 100.00 but not in excess of $ 300.00, and 11/2% per month on that portion of the unpaid balance in excess of $ 300.00 but not in excess of $ 900.00, and 11/4% per month on any remainder of such unpaid principal balance. If this note is not paid at the Final Due Date or the deferred final due date, if any, the unpaid balance of the Principal Amount of Loan shall bear interest thereafter at said agreed monthly rate.

 The Note goes on to describe the installment amounts, the predetermined default charge applicable in the event of a temporary default on a particular installment, the borrowers' option of prepayment and the rebate provisions, and the lender's option of deferring unpaid installments on which no default charge has been collected. The Note then describes the lender's right to accelerate payment of the entire debt upon the borrowers' default and provides that, after crediting the unpaid balance of the total amount of the Note in accordance with the rebate provisions governing voluntary prepayment, "interest on the unpaid balance of the Principal Amount of Loan shall be payable at the aforementioned agreed rate of interest."

 This loan transaction was covered by both the federal Truth in Lending Act and Article IX of the New York Banking Law. As required by those laws, Beneficial also provided plaintiffs with a Statement of Disclosure which contained the TILA and Regulation Z disclosures on one side and the state-mandated disclosures on the reverse side. The front side of the Statement of Disclosure contains numerous specific disclosures, including: "prior account" information; the first and final due dates of the monthly installments; the number of monthly installments; the amount of the first and remaining installments; the amounts attributable to insurance and filing fees; the AMOUNT FINANCED ($ 2500.00); the FINANCE CHARGE ($ 1048.15); the TOTAL OF PAYMENTS ($ 3548.15); the ANNUAL PERCENTAGE RATE (18.06%); the amount delivered to plaintiffs; a description of the security interest; the amount of the Default Charge *fn1" ($ 0.87), and a notation pertaining to execution of a wage assignment. The TILA disclosure statement also contains paragraphs explaining the default charge (see note "1"), the deferment charge and the lender's refund policy in the event of prepayment. The last of these descriptive paragraphs, which occupies center stage in this litigation, provides as follows:

ACCELERATION: Default in the payment of the full amount of the monthly installment on said loan, at the option of the Lender, shall cause the unpaid balance thereof to become at once due and payable. The Lender shall credit to the unpaid balance of the Total of Payments an amount equivalent to what would be the refund of the Finance Charge, calculated on the same basis as that set forth under REFUNDS, as if the loan were prepaid in full on the date of acceleration and, thereafter, interest on the unpaid balance of the Amount Financed shall be payable at the agreed rate of interest.

 On the reverse side of the disclosure form, immediately under the heading "STATEMENT OF LOAN," are five short paragraphs that explain the "agreed monthly rate of interest" on the loan and inform the borrower that this interest schedule shall apply to any unpaid balance remaining after the maturity date or in the event of default and acceleration of the entire loan amount. Following these State-mandated disclosures, there appears an extract from section 352 of the New York Banking Law which authorizes the interest schedule set out in the Note and the STATEMENT OF LOAN, and further provides that where the loan contract requires repayment in substantially equal and consecutive monthly installments of principal and interest combined, the interest may be precomputed according to the schedule quoted above on scheduled unpaid principal balances and each payment received may be applied to the combined total of principal and interest until the loan is fully repaid.

 In this case, periodic monthly payments totaling approximately $ 500.00 were made in accordance with the contract and thereafter, no further payments were made.

 Plaintiffs then commenced this action on July 17, 1978. On July 24, 1978, Judge Foley entered a preliminary injunction restraining Beneficial from executing upon its security interest in plaintiffs' automobile or upon a wage assignment contained in the loan contract. Thereafter, the parties cross-moved for summary judgment on two claims asserted by plaintiffs. Judge Foley denied those motions without prejudice to renew on the grounds that the proper characterization of the post-default interest provision is a matter which should be submitted in the first instance to the Federal Reserve Board ("FRB"), the agency charged with overseeing enforcement of the TILA. Accordingly, Judge Foley directed the parties to secure an Official Staff Interpretation by the FRB concerning the nature and effect of the disputed post-default interest provision. Enright v. Beneficial Finance Co. of New York, 527 F. Supp. 1149 (cdN.D.N.Y. 1980).

 In response to Judge Foley's suggestion, the parties sought a formal response from the FRB. Unfortunately, the FRB staff's response does not directly address the issue posed in this case. Rather, as will be discussed below, the response consists of two unofficial staff responses that were issued to other inquirers some years ago. This matter is now before the Court on the parties' renewed cross-motions for summary judgment. Since it appears ...

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