Brown v. Marquette Sav. and Loan Ass'n

• Decision Date: 18 August 1982
• Docket Number: No. 81-2529,81-2529
• Citation: 686 F.2d 608
• Parties: Ronnie E. BROWN and Edith M. Brown, Plaintiffs-Appellees, v. MARQUETTE SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 608

686 F.2d 608

Ronnie E. BROWN and Edith M. Brown, Plaintiffs-Appellees, v. MARQUETTE SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant.

No. 81-2529.

United States Court of Appeals Seventh Circuit.

Argued March 31, 1982.

Decided Aug. 18, 1982. ^*

As Amended Oct.18, 1982.

Michael L. Sorgi, Schoendorf & Sorgi, Milwaukee, Wis., for defendant-appellant.

James N. Youngerman, Montie & Youngerman, Madison, Wis., for plaintiffs-appellees.

Before PELL, Circuit Judge, KASHIWA, ^** Judge, and ESCHBACH, Circuit Judge.

PELL, Circuit Judge.

This is an appeal from the district court's grant of summary judgment in favor of the plaintiffs-appellees, Ronnie and Edith Brown. The district court held, on stipulated facts, that the defendant, Marquette Savings and Loan Association (Marquette), had not complied with the requirements of the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-67e (1976 & Supp. IV 1980), and the Federal Reserve Board regulations issued pursuant thereto, collectively known as Regulation Z, 12 C.F.R. §§ 226.1-80 (1982). The appeal poses two questions: (1) whether the district court erred in treating mortgage interest rate increases, implemented pursuant to the variable rate provisions of the mortgage note, as new transactions requiring Truth in Lending (TIL) disclosures; and (2) whether the district court erred in determining that each of the joint-obligor plaintiffs was entitled to the statutory penalty for each disclosure violation.

I.

On December 5, 1972, the plaintiffs and the defendant entered a mortgage loan agreement, evidenced by a mortgage and a mortgage note. The original mortgage note provided for an interest rate of seven percent per annum, and imposed a prepayment penalty of ninety days interest on prepayment to the extent it exceeded twenty percent of the original amount of the loan. The note also contained an "adjustment of interest rate" clause, which permitted Marquette to decrease the interest rate, or after three years to increase the interest rate upon four months notice to the Browns. The clause permitted prepayment of the loan without penalty during the four month notice period.

The defendant also provided the plaintiffs with a TIL disclosure statement. That statement disclosed the original interest rate, expressed as an Annual Percentage Rate, the prepayment penalty, and the variable interest rate provision, without use of the term Annual Percentage Rate. It also failed to disclose the waiver of the prepayment penalty during the notice period.

The initial interest rate of seven percent remained in effect until August 30, 1979. In April 1979, Marquette notified the Browns that the interest rate would be raised to nine and one-quarter percent effective September 1, 1979. This raised the Browns' monthly mortgage payment from $247.52 to $301.37. In April 1980, Marquette mailed notice of another increase, to ten and one-quarter percent, effective September 1, 1980. This raised the Browns' mortgage payment from $301.37 to $324.81. Neither notice of increase used the term Annual Percentage Rate in disclosing the new interest rate, and neither mentioned the waiver of prepayment penalties during the notice period. No additional TIL disclosures accompanied either notice of increase.

The plaintiffs thereafter filed suit under the TILA, and both parties sought summary judgment. The court ruled that because the original contract failed to specify "the maximum and minimum limits of future alterations in the interest rate," the increases in the interest rate constituted new transactions under Federal Reserve Board Interpretation 226.810(c) of Regulation Z, 12 C.F.R. § 226.810(c), and were therefore subject to section 226.8 of the Regulation, which requires new disclosures for such transactions. The court further found that the letters of April 1979 and 1980 giving notice of the interest increases failed to make the requisite disclosures, including the number of remaining payments, the method of computing default charges, and the description of the security interest involved. The court rejected the plaintiffs' contention that use of the term "interest rate" rather than "Annual Percentage Rate" in the variable interest rate section of the December 5, 1972 disclosure violated the Act, finding the statement in substantial compliance with the Act. The court further ruled that the plaintiffs were entitled to recover the statutory damages of $1,000 for each plaintiff, and for each episode, for a total of $4,000.

The defendants contend that the interest rate increases were not new transactions, but were mere "subsequent occurrences," implementing the original contract, and therefore did not require new disclosures under the provisions of the Act. They also challenge the court's damages award. We turn first to the question of liability.

II.

We note as a preliminary matter the well-established rule that a judgment will be affirmed if the record supports it, even though the district court relied upon a wrong ground or gave a wrong reason for its decision. Panter v. Marshall Field & Co., 646 F.2d 271, 281 (7th Cir. 1981), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631.

The threshold issue is whether the rate increase must be treated as a new transaction within the meaning of section 226.8(j) of Regulation Z, which would then require the issuance of new disclosures. Although section 226.8(b)(8) of the Regulation now governs the relationship between the disclosure requirements and variable rate provisions, it deals only with transactions consummated on or after October 10, 1977. The only relevant authority in effect at the time of the December 5, 1972, transactions dealing with such provisions was Official Board Interpretation 226.810. That Interpretation provided:

(a) In some cases a note, contract, or other instrument evidencing an obligation provides for prospective changes in the annual percentage rate or otherwise provides for prospective variation in the rate. The question arises as to what disclosures must be made under these circumstances when it is not known at the time of consummation of the transaction whether such change will occur or the date or amount of change.

(b) In such cases, the creditor shall make all disclosures on the basis of the rate in effect at the time of consummation of the transaction and shall also disclose the variable feature.

(c) If disclosure is made prior to the consummation of the transaction that the annual percentage rate is prospectively subject to change, the conditions under which such rate may be changed, and, if applicable, the maximum and minimum limits of such rate stipulated in the note, contract, or other instrument evidencing the obligation, such subsequent change in the annual percentage rate in accordance with the foregoing disclosures is a subsequent occurrence under § 226.6(g) and is not a new transaction.

12 C.F.R. 226.801 (Rescinded October 10, 1977).

The Board has consistently relied on this interpretation as establishing that any rate increase pursuant to a variable rate provision constitutes a refinancing and thus a new transaction unless there has been compliance with the conditions of 226.810(c). (Transfer Binder, May, 1974-Dec., 1977) Cons.Cred. Guide (CCH) P 31,137; (Transfer Binder, April, 1969-April, 1974) Cons.Cred. Guide (CCH) PP 31,068; 30,858; 30,713; 30,712 ; 30,695; 30,413; 30,345; 30,270. Such Interpretations and Opinions are entitled to substantial deference, and are dispositive "(u)nless demonstrably irrational." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 556, 100 S.Ct. 790, 792, 63 L.Ed.2d 22 (1980).

We are not persuaded that the Board Interpretation and subsequent Opinions based upon it are demonstrably irrational. The TILA is a disclosure statute whose fundamental purpose is to provide information to facilitate comparative credit shopping and thereby the informed use of credit by consumers. 15 U.S.C. § 1601 ("Findings and declaration of purpose"); Haynes v. Logan Furniture Mart, Inc., 503 F.2d 1161, 1163 (7th Cir. 1974). Consumers are likely to be shopping for credit when there is an interest increase pursuant to a variable rate provision, particularly when, as here, any prepayment penalty is waived during the notice period prior to interest escalation. Thus considering such increases as refinancing or new extensions of credit comports with the purpose of the TILA. Furthermore, the economic reality of the rate increase situation is that the increase dramatically alters the borrower's financing obligation. That is clearly demonstrated in this case, where the Browns' mortgage obligation increased from the original $247.52 to $324.81 following the second increase. In light of this substantial alteration in the plaintiff's obligation, it is not irrational to treat the increase as a new transaction.

Marquette contends that implementation of the variable rate provision is an implementation, rather than a modification, of the contract and therefore is not an extension of credit. It further urges that under Board Interpretation 226.810(c) what controls the need for additional disclosure is not the nature of the transaction, but rather the adequacy of the original disclosures. This not only exceeds the statutory mandate, which limits regulation to "when credit is extended," but also extends liability for inadequate original disclosure far beyond the one-year limitations period of the Act. We disagree. As discussed above, Board interpretation of an increase as a new transaction is not demonstrably irrational, and the provision of the subsection (c) exception for occasions when full disclosure has already been made eliminates the need for redundant disclosures. We find, therefore, that the provisions of Official Interpretation 226.810 are applicable, and unless this transaction meets the criteria of the subsection (c) exception, it is a new transaction subject to the TIL disclosure requirements of ...