Greenleaf Finance Co. v. Small Loans Regulatory Bd.

• Decision Date: 12 February 1979
• Citation: 385 N.E.2d 1364,377 Mass. 282
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: GREENLEAF FINANCE COMPANY et al. 1 v. SMALL LOANS REGULATORY BOARD, Dorchester Community Action Council & East Boston People's Rights Group, Interveners.

Page 1364

385 N.E.2d 1364

377 Mass. 282

GREENLEAF FINANCE COMPANY et al. ¹ v. SMALL LOANS REGULATORY BOARD, Dorchester Community Action Council & East Boston People's Rights Group, Interveners.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Nov. 8, 1978.

Decided Feb. 12, 1979.

Harold Hestnes, Boston, for plaintiffs.

Leo S. McNamara, Asst. Atty. Gen., for Small Loans Regulatory Bd.

Robert Sable, Boston (Harry Pierce, Boston, with him), for Dorchester Community Action Council and another, interveners.

Before HENNESSEY, C. J., and KAPLAN, WILKINS, LIACOS and ABRAMS, JJ.

KAPLAN, Justice.

The Small Loans Regulatory Board (Board), consisting of the Board of Bank Incorporation (the Commissioner of Banks, the Commissioner of Revenue, and the State Treasurer ²) and two persons appointed by the Governor (see G.L. c. 26, § 5A), is charged by G.L. c. 140, § 100, with establishing a "maximum rate of charge" for small loans, i. e., loans of $3,000 or less. Such a rate of charge actually, as permitted by the statute, graduated charges was set in 1960 by a predecessor Board and, with a change introduced by St.1962, c. 795, § 1, remained in force for more than a decade. The unusual, poor years 1974 and 1975 were the first in which the industry suffered aggregate losses; even so, in 1975, the worse of the two years, fourteen of the fifty-five companies, making over 65% Of the loans, showed profits. ³ On December 27, 1974, Massachusetts Consumer Finance Association, representing about half the small loan companies licensed under c. 140, § 96, joined by Greenleaf Finance Company, one of those companies, petitioned the Board to grant rate increases. The Board held hearings on nineteen days between September 22, 1975, and July 16, 1976. Intervening to oppose the suggested increases were the Attorney General, Massachusetts Consumers' Council, Massachusetts Fair Share, Dorchester Community Action Council, and East Boston People's Rights Group. The petitioners presented eight witnesses, including an economist, an accountant, an investment banker, and various representatives of the small loan industry; both witnesses on the part of the interveners were economists. The transcript ran to more than 2,000 pages, with seventy-nine exhibits. Certain stipulations between petitioners and interveners were offered to the Board for its possible use. In very brief summary, the petitioners contended that increased costs justified larger revenues for the industry, and thus higher rates of charge; on the other side, there was argument that much of the industry was inefficient and that, because of intense competition from other lenders, higher charges were not necessary to provide adequate credit facilities for borrowers, nor would they be to the true advantage of the industry.

On November 1, 1976, the Board issued its report and a rate order to become effective on January 2, 1977. The order created a new rate structure believed to be in line with the more modern consumer finance practices. It increased the charges for some loans and decreased them for others. The new charges were not calculated to generate substantially more revenues than the old. Projected, they were expected to yield a return of 10% On equity assets to companies of acceptable efficiency.

Twenty-two of the fifty-five small loan companies, as plaintiffs, commenced the present action in the Superior Court on November 18, 1976, seeking to annul the order with a remand to the Board for further proceedings. The Attorney General represented the Board (see G.L. c. 12, § 3); the Dorchester Community Action Council and the East Boston People's Rights Group intervened on the side of the Board. The plaintiffs and interveners stipulated that the action should be regarded as one for a declaratory judgment; that the record should be limited to that made before the Board; and that "(f)or the purpose of this case, and for that purpose only, the proceeding before the Board will be treated by the parties as rulemaking, rather than adjudicatory in nature." In effect the plaintiffs claimed that the order violated the regulatory statute in that it did not properly find or assess the factors that should enter into the rate of charge. They also contended that it would result in confiscation. A judge of the Superior Court, with opinion, held for the Board. The case is before us on the plaintiffs' application for direct appellate review. We agree with the judge's decision. ⁴

We shall describe the rate order and the general findings on which it is based and then deal with the plaintiffs' particular contentions, indicating along the way the nature of the burdens cast on the plaintiffs in challenging such an order.

1. The Rate Order and Its General Basis. General Laws c. 140, § 100, as appearing in St.1956, c. 689, § 4, directs the Board to "investigate from time to time the economic conditions and other factors relating to and affecting the business of making (small) loans," and to "ascertain all pertinent facts necessary to determine what maximum rate of charge should be permitted." That rate is to "induce efficiently managed commercial capital to be invested . . . in sufficient amounts to make available adequate credit facilities to individuals seeking such loans at reasonable rates," and also to "afford those engaged in such business a fair and reasonable return upon the assets." ⁵

A. In its findings on the experience of the companies under the existing rate order, ⁶ the Board noted that, despite substantial aggregate profits in the years through 1973, the industry since 1970 had been suffering a decline in business, which contrasted with a dramatic increase enjoyed by other lending institutions in the Commonwealth in the same period. (In making small loans, trust companies, savings banks, cooperative banks, savings and loan associations, credit unions, national banking associations, and Federal savings and loan associations also are limited to the maximum rate of charge established under § 100. See § 114A.) Thus personal loans outstanding at year-end 1975 made by other lenders in Massachusetts were $714,000,000 more than for 1970, yet the outstandings of small loan companies for 1975 were $9,000,000 less than those for 1970. The Board ascribed the divergence to aggressive (and comparatively recent) ⁷ competition from credit unions and banks which, as the Board said, were exploiting powerful advantages. Credit unions had access to volunteer labor, were frequently subsidized by their parent organizations, and, most important, lent to their own members, thereby reducing costs of obtaining credit information and making collections. The strategic position of banks was exemplified by the fact that small loan companies were often borrowing from the very banks with which they competed for small loan business. Banks were also able to benefit from cost saving aids such as computerized lending processes. In the result, credit unions and banks were simply able to charge less for small loans. ⁸ The competition was direct as there was testimony that these lenders were serving the same general group of borrowers as the small loan companies. ⁹

B. There was wide disparity in the "efficiency" of small loan companies as reflected in the three principal expense items. As to overhead expense (taken to include State taxes), the median cost per account was about $79 in 1975, but some companies incurred costs of nearly twice that amount. Some companies in the same year had been able to borrow money at considerably lower interest charges than others. ¹⁰ So also there was large variation of experience with bad debts (defaulted loans). ¹¹ The latter two elements had been worsened by the unusual conditions facing the industry in 1975, a year in which unprecedented high interest rates were combined with a recession. Yet the Board found that in 1975 efficient companies those controlling their costs were able to earn profits under the existing order. ¹²

C. Before the Board the companies had proposed a target rate of return to the companies of 13% On equity capital. The Board, as already noted, allowed 10%. (The 1960 order had provided a 7.4% Return.) In argument before us, the plaintiffs indicated that 10% Was not unreasonable leaving open the question where the line was to be drawn of efficient companies entitled to such a return. The Board could consider that the small loan business carries relatively little risk, for only small fixed capital is required and borrowed funds account for about 80% Of total assets. The 10% Figure was taken to reflect approximately this risk, and thus the industry's attractiveness to putative investors, but the situation did not suggest that there would be much if any need or desire to attempt to attract additional capital in the near future.

D. The foregoing considerations led the Board to decide that the industry did not require total revenues measurably in excess of those generated by the existing rate order. As seen at the time, the statutory aims adequate credit facilities, reasonable charges to borrowers, and fair returns to efficient companies could be, and therefore should be, attained without such an increase.

E. Although no material increase in revenues was necessary, changes were called for in the scaling and character of the rates of charge for small loans. These changes would bring the existing rate order into conformity with modern practice and at the same time permit rate increases on loans shown to be least profitable.

Under the existing order maximum charges to borrowers were composed of interest and certain additional charges for late payments. The interest was 30% Per year on unpaid principal balance up to $200; 24% On so much as was between $200 and $600; 21% On so much as was between $600 and $1,000; and 9% On any remainder exceeding $1,000. The companies were also allowed to make extension, default, and deferment charges as described in...