The opinion of the court was delivered by: KNAPP
The case is before us on cross-motions for summary judgment. On August 3, 1979 plaintiff bought an automobile from Toyota of Rockland, Inc. (the dealer). The transaction contemplated a partial down-payment of about $2,100, the balance of the price -- about $2,800 -- to be financed by Marine Midland Bank (the bank) in 48 equal monthly instalments. It is undisputed that the bank maintained a business relationship with the dealer. Pursuant to this relationship the bank regularly financed the dealer's sales, provided the dealer with forms, approved the creditworthiness of each borrower, and was immediately assigned the sales contract entered into between the customer and the dealer. The Retail Instalment Contract form supplied by the bank
contains an indication -- evidenced by plaintiff's additional signature in the appropriate box -- that plaintiff purchased credit life insurance, the premiums on which insurance were advanced by the bank and included in the total amount financed. Plaintiff contends, however, that such insurance was foisted upon him by the prevarication of the dealer who is alleged to have given a "vague answer to the effect that that was the way the [bank's] form was set up" in response to plaintiff's question why two separate signatures were required.
On October 22, 1979 -- after the instalments of September 3 and October 3 had been paid
-- plaintiff was ready to pay off the balance due on the loan. He inquired from the bank what was the outstanding balance and then paid the amount he was told to be due. A few weeks later, however, he received in the mail a $30.22 refund because -- so the bank advised him -- the amount due at the time of prepayment had been overstated.
This small refund piqued plaintiff's curiosity as to precisely how the correct amount due had been calculated. He was advised at the bank to write for information, but plaintiff elected initially to pursue his inquiries by telephone. Such efforts, however, proved unsuccessful. In December of 1979 he finally made a written request for information.
In response, the bank confirmed that the loan had been fully paid off, advised him that a refund on unearned credit life insurance might be due, but failed otherwise to respond as completely as plaintiff wished. Plaintiff appears to have been particularly irked by the bank's perceived parsimoniousness in providing the desired information combined with its suggestion that he apply to the dealer for a refund on unearned credit life insurance premiums. Later inquiries by an attorney also failed to produce a response which measured up to plaintiff's expectations. Finally, plaintiff brought this action charging the bank
with at least ten different violations of the Truth-in-Lending Act [TILA], 15 U.S.C. § 1601 et seq., and the regulations promulgated thereunder, Regulation Z [Reg. Z], 12 C.F.R. 226.1 (1982) et seq., reprinted in 15 U.S.C.A. fol. § 1700, and with several violations of various New York consumer protection laws.
THE TRUTH-IN-LENDING CLAIMS
The instalment contract includes the following clause on its front page:
4. PREPAYMENT OF CONTRACT. If I pay this contract in full before the final due date, what I owe you will be reduced by the amounts of the Finance Charge and insurance charge which have not yet been earned, figured by the RULE OF 78'S. (That is a method authorized by law for figuring earned charges and refunds.) You may deduct a fee of $15 from the Finance Charge before figuring the unearned portion. You don't need to give me any Finance Charge credit or insurance charge credit which amounts to less than $1. (Emphasis added).
Plaintiff argues that this statement is in violation of TILA because "the payoff balance [was] not reduced by the amount of unearned [insurance] charges, but in fact Marine Midland relegated the consumer to his own devices to seek out and attempt to obtain the insurance rebate from other sources." Plaintiff's Supplemental Brief at 16a-17 (emphasis in original). See also Plaintiff's Supplemental Memorandum at 30. This factual contention is undisputed. See Affidavit of F. G. Cologgi para. 6. The bank responds on two fronts. First, it claims that the quoted paragraph complies with Reg. Z 226.8(b)(7) which only requires "identification of the method of computing any unearned portion of the finance charge in the event of prepayment . . ."
Second it claims that it has no obligation -- under federal or state law -- to rebate any portion of the unearned insurance charges. See Defendant's Memorandum at 13; Defendant's Reply Memorandum at 10.
We hold that a violation of Reg. Z 226.6(a)
and Reg. Z 226.6(c)
has been established. The quoted paragraph cannot fairly be understood in any other way but to state that the buyer is not required -- in the event he were to prepay his debt -- to pay the bank an amount which includes the unearned insurance charges. As, in fact, the bank's practice is not to credit unearned insurance charges, the quoted paragraph can hardly be said to constitute a "clear" disclosure under Reg. Z 226.6(a), or one that is not "misleading" or "confusing" under 226.6(c). Cf. Wright v. Tower Loan of Mississippi, Inc. (5th Cir. 1982) 679 F.2d 436, 444 (statement that borrower subject to non-existent charges held to be misleading; burden on creditor to prove that additional information is not misleading); Smith v. Chapman (5th Cir. 1980) 614 F.2d 968, 977 (statement that a sum includes a particular item when it is not so included held to be misleading); Weaver v. General Finance Corp. (5th Cir. 1976) 528 F.2d 589, 590 (statement that premiums for voluntary insurance would be "deducted" from the amount financed, when, in fact, they were part of the total amount borrowed, held to be misleading).
The bank's arguments entirely miss the mark. It is altogether irrelevant whether the quoted paragraph complies with another provision of Reg. Z or whether the bank is or is not under an obligation to rebate or credit unearned life insurance premiums.
On the assumption that the bank is under no such obligation, a TILA violation nonetheless stems from the bank's misleading suggestion that it would so credit the buyer's account upon prepayment. We do not hold that the bank must rebate or credit unearned premiums, but only that it may not claim that it will do so when that is not, in fact, its practice.
We are mindful, of course, that TILA should not be used as an "instrument of harassment and oppression of the lending industry." Bates v. Provident Consumer Discount Co. (E.D.Pa. 1979) 493 F. Supp. 605, 607 (quoting Sharp v. Ford Motor Credit Co. (S.D.Ill. 1978) 452 F. Supp. 465, 468) aff'd (3d Cir. 1980) 631 F.2d 725. We are not concerned, however, with a violation of one of TILA's many minute technical requirements, with which -- except in truly de minimus cases -- strict compliance is demanded. Reneau v. Mossy Motors (5th Cir. 1980) 622 F.2d 192, 195 (citing cases). We are concerned here with a determination whether a particular disclosure is clear or confusing. In that exercise we must be guided by what is probable and reasonable, Williams v. Western Pacific Financial Corp. (5th Cir. 1981) 643 F.2d 331, 339, and -- more generally -- by TILA's purpose to promote the informed use of credit, Anderson Bros. Ford v. Valencia (1981) 452 U.S. 205, 219-20, 68 L. Ed. 2d 783, 101 S. Ct. 2266, and to deter lenders from making misleading disclosures. Williams v. Public Finance Corp. (5th Cir. 1979) 598 F.2d 349, 355. Plaintiff's submissions, see, e.g., Plaintiff's Supplemental Brief at 4 n.2, suggest that he was driven to sue primarily by his chagrin for being treated in what he perceived to be a cavalier fashion in connection with the rebates of unearned credit life insurance, rather than by an ambition to seek redress for the many alleged technical violations with which he charges the defendant. To the extent that plaintiff's perception of having been treated unfairly was caused by the above quoted paragraph, we cannot but agree with him that it would most reasonably be understood as promising him a reduction in his indebtedness which the bank was not prepared to vouchsafe. Particularly in light of the mandate that we interpret TILA liberally, James v. Ford Motor Credit Co. (10th Cir. 1980) 638 F.2d 147, 149, in the consumer's favor, Davis v. Werne (5th Cir. 1982) 673 F.2d 866, 869 (citing cases), we are compelled to find that the quoted paragraph is unclear and misleading and, therefore, violates the strictures of TILA.
In connection with the above-quoted paragraph, plaintiff also charges the bank with a TILA violation because of its practice to compute prepayment rebates "by a method which, while based upon the Rule of 78's tables, deviated from their prescribed manner of application in a way which penalized the consumer and benefited Marine Midland." Plaintiff's Supplemental Brief at 16a. See also Plaintiff's Memorandum at 30-31; Complaint para. 12(d).
The Rule of 78's -- also known as the sum-of-digits method -- is a procedure to compute rebates due on unearned charges when a loan is paid off before maturity. See, e.g., J. G. Donaldson, Retail Instalment Sales Legislation, 19 Rocky Mountain L. Rev. 135, 152 (1947); Comment, Consumer Protection: Truth-in-Lending Disclosure of the Rule of 78's, 59 Iowa L. Rev. 164 (1973); Comment, Rule of 78's and the Required Disclosures Under Regulation Z, 23 Kan.L.Rev. 709 (1975). Suppose that a loan is to be repaid in monthly instalments. Under the Rule, each month of the loan's term is assigned a number (digit), which -- for the first month -- is equal to the total number of months (payment periods) over which the loan is to be repaid. Each successive month is assigned a number one less than the previous month. Accordingly, the number assigned to the last month is always 1. For a twelve month loan, the sum of the digits is 78 (12 11 10 . . . 1 = 78). The sum of the digits varies, of course, with the number of agreed upon instalments: for a 3-instalment loan, for instance, the sum is 6, for a 6-instalment loan it is 21, and for a 24-instalment loan it is 300. See Bone v. Hibernia Bank (9th Cir. 1974) 493 F.2d 135, 136-37 (citing sources). The proportion of prepaid charges to be rebated is a ratio (percentage factor), the denominator of which is the loan's sum of digits and the numerator of which is a sum -- smaller than the denominator -- which excludes the digits assigned to the months during which the loan had remained outstanding.
This claim turns on a dispute as to precisely how many months should have been excluded from the computation of the numerator.
Plaintiff argues that on October 22 -- when the loan was prepaid -- it had been outstanding for only two complete months, and consequently, that only the digits of the first two months should have been excluded from the computation of the numerator. This yields a rebate ratio of 91.92 percent of prepaid charges, rather than the 88.01 percent used by the bank.
Plaintiff's method -- he claims -- is the only correct way to apply the Rule of 78's. A different computation is a "bank-favoring misuse of the Rule of 78's", Plaintiff's Memorandum at 31, and thus a violation of TILA. In response, the bank states that it is licit to use a "version" of the Rule of 78's method which excludes from the calculation of the numerator of the rebate ratio all the months during which the loan was outstanding, including the one that has not fully run at the time of prepayment. See Affidavit of F. G. Cologgi paras. 3-5. As the loan was prepaid on October 22, the bank's method calls for the exclusion (from the sum of digits in the numerator of the rebate ratio) of three instalments -- the two which plaintiff concedes plus the third instalment that would have been due November 3. This, of course, yields a rebate ratio of 88.01 percent of prepaid charges, and consequently, a rebate approximately $31 smaller than had the method advocated by plaintiff been used.
The germane facts are not in dispute.
We note, at the outset, that the legal question before us is not whether -- under federal law -- the bank is entitled to calculate the rebate with the method it used. In fact, TILA contemplates the possibility that a creditor will rebate no unearned charges upon prepayment. See Reg. Z 226.8(b)(7).
TILA "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." Gantt v. Commonwealth Loan Co. (8th Cir. 1978) 573 F.2d 520, 526. The issue is whether, having chosen this particular method of calculating unearned charges, the bank was entitled under TILA to refer to it as the "Rule of 78's."
The parties' meagre efforts notwithstanding,
we are not entirely without guidance on this matter. The Fifth Circuit recently rejected precisely the claim before us. Gallois v. Commercial Securities Co. (5th Cir. 1981) 661 F.2d 901, 904. The Court noted that the problem arises from there being "no single 'Rule of 78'." Id. n.3. However, it pointed out that the drafts of another "one month after" provision -- the method of computation in the Uniform Consumer Credit Code (UCCC), see UCCC (1968 act) § 2.210(3), 7 U.L.A. 326 (1978)
-- had been referred to by the Federal Reserve Board as "present[ing] the 'Rule of 78's.'" F.R.B. Official Staff Interpretation No. FC-0044, 41 Fed.Reg. 9385, February 4, 1977, reprinted in 12 C.F.R. at 719-20 (1982). Furthermore, in later versions of the UCCC its drafters specifically referred to a method that is consistent with the bank's approach as "permit[ting] . . . the 'Rule of 78 method' of calculating the unearned portion of the finance charge . . ." UCCC (1974 Act) § 2.510 comment 5, 7 U.L.A. 693 (1978)
The foregoing demonstrates that methods which, as to timing, are consistent with the bank's approach, have been termed a "Rule of 78's" at least by one Court of Appeals, by the drafters of the UCCC, and by the Federal Reserve Board. Accordingly, we join the Gallois court in holding that what it called the "one month after" method, Gallois, supra, 661 F.2d at 904 n.3, can properly be referred to as a "Rule of 78's."
There being, of course, no dispute that reference to a "Rule of 78's" is sufficient to satisfy the identification requirements imposed by Reg. Z 226.8(b)(7), see Gallois, supra, 661 F.2d at 904; Gantt v. Commonwealth Loan Co., supra, 573 F.2d at 525-26 (citing cases); Reg. Z 228.818(c), we conclude that defendant's identification of its method of calculating prepayment rebates is not in violation of TILA.
The quoted paragraph is also the bone of contention in another claim, namely, that the bank violated Reg. Z 226.6(a)
by failing to set out the term "finance charge" more conspicuously than its surrounding language. Plaintiff's Memorandum at 29-30; Plaintiff's Supplemental Brief at 16; Complaint para. 12(b).
Regulation Z 226.6(a) requires the term "finance charge" to be printed "more conspicuously than other terminology", but only where the term is "required to be used." Thus, the simple legal question before us is whether -- in the quoted paragraph -- the term "finance charge" is "REQUIRED TO BE USED" within the meaning of Reg. Z 226.6(a). We answer that question in the negative and, ...