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Krenisky v. Rollins Protective Services Co.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT


decided: February 3, 1984.

JOSEPH KRENISKY, PLAINTIFF-APPELLEE,
v.
ROLLINS PROTECTIVE SERVICES COMPANY AND ROLLINS ACCEPTANCE CORPORATION, DEFENDANTS-APPELLANTS

Appeal from a judgment of the District Court for the District of Connecticut (T.F. Gilroy Daly, Chief Judge) finding a violation of the Truth in Lending Act.

Timbers, Newman, and Cardamone, Circuit Judges.

Author: Newman

NEWMAN, Circuit Judge:

The Rollins Protective Services Company ("Rollins") and their finance subsidiary, the Rollins Acceptance Corporation, appeal from a judgment of the District Court for the District of Connecticut (T.F. Gilroy Daly, Chief Judge) finding them in violation of the Truth in Lending Act (TILA) and awarding plaintiff-appellee John Krenisky damages of $307.84, 15 U.S.C. § 1640(a)(2)(A)(i) (1982), and attorney's fees and costs of $1,971.48, 15 U.S.C. § 1640(a)(3) (1982). The issue is whether Rollins' failure to disclose the date on which the finance charge on Krenisky's promissory note began to accrue violated the disclosure requirements of the Act. We conclude that no violation was shown and therefore reverse the judgment and remand with instructions to dismiss the complaint.

On August 22, 1978, Krenisky contracted with Rollins for the installation of an alarm system at a price of $1,920. Krenisky agreed to make a down payment of $380 and to finance the balance. He simultaneously executed a promissory note for $1,540, plus a finance charge of $153.92. Two days later, on August 24, the date on which Rollins completed the installation of the alarm system, Krenisky made the $380 down payment.

On its face, the promissory note that Rollins required Krenisky to sign does not indicate the date on which the finance charge began to accrue. The note provided for twelve monthly payments of $141.16, with the first payment due October 6, 1978. Subsequently, however, Krenisky received a payment book which indicated that the monthly payments were due on the 10th of each month.

In the District Court Krenisky argued that Rollins' documents failed to comply with Regulation Z, 12 C.F.R. § 226.8(b) (1) (pre-October 1, 1982, version),*fn1 reprinted in 15 U.S.C.A. following § 1700 p. 398 (West 1982), which requires, in any transaction extending other than open-end credit, disclosure of "the date on which the finance charge begins to accrue if different from the date of the transaction." Krenisky reasoned that since his first monthly payment was due either October 6 or 10, interest must have begun to accrue one month earlier, on September 6 or 10. Because this date differed from the date of the transaction, August 22, and Rollins had not disclosed an accrual date, Krenisky contended that Rollins had violated section 226.8(b)(1) (pre-October 1, 1982, version).

Rollins agreed that the date of Krenisky's transaction was August 22 and that its documents failed to indicate the "accrual date." However, Rollins disputed the need for a separate disclosure of the accrual date, maintaining that interest began to accrue on the date of the transaction, August 22. In addition, Rollins argued that even if the accrual date were different from the transaction date, Krenisky had failed to prove this alternate date and therefore could not prevail.

Chief Judge Daly ruled that a TILA violation had occurred. The District Court did not find that interest had begun to accrue at a date different from the date of the transaction. Rather, noting the confusion resulting from the various dates on which the finance charge might have begun to accrue, the Court concluded that Rollins was obligated to disclose the accrual date.

The central purpose of the regulatory requirement of disclosure of the accrual date (where different from the transaction date) is to permit accurate calculation of the annual percentage rate, perhaps the single most useful disclosure mandated by the Act. In a closed-end transaction such a Krenisky's consumer loan, the annual percentage rate is a derived figure, calculated from (i) the amount of the finance charge, (ii) the amount of credit extended, and (iii) the term of the extension of credit -- the time period between the date interest starts accruing and the date of the last payment. If the transaction date and the accrual date do not coincide, the effective interest rate will be lower than the rate derived from the transaction date if the accrual date is later, and higher if the accrual date is earlier. If two creditors claim to be charging identical annual rates but one commences accruing finance charges months prior to the date of the transaction, he charges a higher effective annual rate although the disclosed rates are identical.

Krenisky infers from the irregularly long first-payment period, August 22 to October 6 or 10, that the accrual date could not have been the transaction date. Working backward from the disclosed finance charge, annual percentage rate, and last-payment date, he derived an accrual date slightly later than the transaction date. This conclusion does not necessarily follow. In fact, an available inference, fully consistent with Rollins' disclosures and the regulatory framework implemented by Regulation Z, is that the transaction date is also the accrual date. Two modes of analysis each support this conclusion.

First, the regulations permit a creditor, without disclosure, unilaterally to reduce the annual percentage rate, provided no other credit terms are altered. 12 C.F.R. §§ 226.8(j) and 226.817 (pre-October 1, 1982, version), reprinted in 15 U.S.C.A. following § 1700 pp. 402, 489 (West 1982); see also 12 C.F.R. § 226.6(h) (pre-October 1, 1982, version), reprinted in 15 U.S.C.A. following § 1700 p. 385 (West 1982).*fn2 The annual percentage rate may be reduced, without disclosure, in one of two ways: by lowering the amount of the finance charge, or by extending the time period of the extension of credit. If Rollins accrued interest from the transaction date and simply permitted Krenisky an irregularly long first payment period, Rollins would thereby have accomplished a permitted reduction in the annual percentage rate. To assume, as Krenisky does, that the accrual date must have been no earlier than thirty days prior to the first payment date (and hence different from the transaction date) is to deny the creditor his right to reduce the annual rate by lengthening the term of the loan.

Moreover, this construction is fully consistent with the broad purposes of the Act and with the specific concerns animating the requirement of disclosure of the accrual date, 12 C.F.R. § 226.8(b)(1) (pre-October 1, 1982, version). The protections extended to consumers against creditor overreaching are not compromised by non-disclosure of unilateral reductions in credit terms.*fn3

Second, the regulations specifically contemplate an irregular first payment period, either lengthened or shortened. Under 12 C.F.R. §§ 226.5(d), 226.503, and 226.505 (pre-October 1, 1982, version), reprinted in 15 U.S.C.A. following § 1700 pp. 381, 471-73 (West 1982), a creditor may, at his option,

in determining [and disclosing] the annual percentage rate . . . or the finance charge . . . consider the payment irregularities set forth in this paragraph as if they were regular in amount or time, as applicable, provided that the transaction to which they relate is otherwise payable in equal installments at equal intervals . . . [and] the interval between the date on which the finance charge begins to accrue and the date the first payment is due is . . . not less than 20 [or more than 50 days] for an obligation otherwise payable in monthly installments.

(Emphasis added). Since Krenisky's first payment period is at most 49 days (August 22 to October 10), Rollins is entitled to benefit from this exception. This provision permits ignoring, on administrative convenience grounds, de minimis discrepancies in the annual percentage rate or the finance charge attributable to an irregular first payment period. It is entirely consistent with this provision that interest began to accrue on August 22.*fn4

The burden was on the plaintiff to prove that the accrual date differed from the transaction date, thereby requiring disclosure. Though accrual might have begun after the transaction date, it could just as likely have begun on the transaction date, and that result would be consistent with either a permitted unilateral reduction in the percentage rate or a permitted irregular first payment period. In the absence of a finding based on evidence that the accrual date differed from the transaction date, no violation was established. We need not consider whether departure from strict compliance with the regulations would be permissible when a violation is both de minimis and of benefit to the consumer.*fn5

Reversed.

Disposition

Reversed.


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