Easy Living, Inc. v. Whitehead

• Decision Date: 08 August 1979
• Parties: , 16 O.O.3d 155, 19 O.O.3d 161 EASY LIVING, INC., F.D.B.A. Main Street U. S. A., Inc., Appellee, v. WHITEHEAD et al., Appellants. *
• Court: Ohio Court of Appeals

Page 206

65 Ohio App.2d 206

417 N.E.2d 591, 16 O.O.3d 155, 19 O.O.3d 161

EASY LIVING, INC., F.D.B.A. Main Street U. S. A., Inc., Appellee, v. WHITEHEAD et al., Appellants. ^*

Court of Appeals of Ohio, First District, Hamilton County.

Aug. 8, 1979.

Syllabus by the Court

1. The purpose of the Truth in Lending Act, as set forth in Section 1601, Title 15, U.S. Code, is to allow the consumer to more accurately shop for credit and to protect the consumer against unfair and inaccurate credit practices.

2. In a retail installment agreement, a description of the property secured by the agreement which purports to retain a security interest more inclusive than allowed by state law is a violation of Section 226.8(b)(5), Title 12, C.F.R.

3. One of the best ways of comparing credit terms is through comparison of interest rates. However, comparison of interest rates is meaningless if the finance charge includes more than interest; as a result, Section 226.8(c)(8) (i), Title 12, C.F.R., was promulgated requiring that the components of the finance charge be disclosed.

4. Section 1640(e), Title 15, U.S. Code, evinces a Congressional intent to avoid stale debtor claims; however, it would be patently unfair to bar a debtor from raising defenses which reflect the unfairness of the transaction, simply because the contract was over one year old when the creditor sued thereon.

5. It is well established that recoupment, when used only to defeat a plaintiff's claim, is not barred by the statute of limitations, if the main action is timely brought.

Shane & Rebel and Steven C. Shane, Cincinnati, for appellee.

R. Gregory Park and Stephen H. Olden, Cincinnati, for appellants.

PER CURIAM.

On March 3, 1975, defendant-appellant Linda Whitehead entered into a retail installment sales contract with plaintiff-appellee, Easy Living, Inc., for the purchase of a bar stereo. (The contract was also signed by defendant-appellant Michael Toney. Because the main party in interest was Whitehead, when speaking of appellants, we will hereafter refer only to Whitehead.) This purchase was financed by Easy Living, the total amount owed being $958.32, of which $783.90 was the price of the merchandise. Whitehead defaulted after paying $685.58, and Easy Living sued in the Hamilton County Municipal Court for the balance then owing on the contract. Whitehead counterclaimed, alleging violations of the Truth in Lending Act (82 U.S. Statutes 146, P.L. 90-321, Title I; Section 1601 et seq., Title 15, U.S. Code). Judgment was entered for Easy Living, and Whitehead timely filed her notice of appeal.

In her single assignment of error, Whitehead asserts that the trial court erred in ruling that Easy Living had not violated the Truth in Lending Act. We agree. Whitehead has pointed out two violations of this Act. The first occurred when Easy Living described the security interest covered by the contract in the following terms: "Seller retains a purchase money security interest, pursuant to terms on reverse in any goods described above together with all attachments, equipment, parts, and replacements until the Total of Payments is paid in full." The goods described were the bar stereo and a three piece living room set bought under a previous contract. Only $12.25 remained to be paid on the living room set.

The contract provision just quoted indicates that Easy Living would retain a security interest in both the bar stereo and the living room set until the contract price was paid in full. This is not in accordance with R.C. 1317.071 which limits the security interest which can be taken as follows:

"No retail seller, in connection with a retail installment contract arising out of a consumer transaction, shall take any security interest other than as authorized by this section.

" * * *

"A seller may secure the debt arising from the sale by contracting for a security interest in other property if, as a result of a prior sale, the seller has an existing security interest in the other property, and he may contract for a security interest in the property sold in the subsequent sale as security for the previous debt. If debts arising from two or more sales are thus secured or are consolidated into one debt payable on a single schedule of payments, and the debt is secured by security interests taken with respect to one or more of the sales, payments received by the seller after the taking of security interests in the other property or the consolidation are deemed, for the purpose of determining the amount of the debt secured by the various security interests, to have been first applied to the payment of the debts arising from the sales first made. To the extent debts are paid according to this section, security interests in items of property terminate as the debt originally incurred with respect to each item is paid."

This section is clearly meant to cover precisely this situation where goods sold under a previous contract are added security for a subsequent contract. The effect of this statute is to release the goods from the previous contract as soon as the amount outstanding on that contract is paid. Here, since Whitehead's monthly installment payments were $39.93 each, the $12.25 balance from the prior contract was paid off with the first payment, and at that point the living room set could no longer lawfully be security.

The regulations implementing the Truth in Lending Act are found in Regulation Z, Part 226, Title 12, C.F.R. Section 226.8(b)(5) of Part 226 requires a creditor, in a transaction other than open end, to disclose: "(a) description or identification of the type of any security interest held or to be retained or acquired by the creditor in connection with the extension of credit, and a clear identification of the property to which the security interest relates * * *."

While we have not found a case interpreting this regulation in a situation similar to ours, it seems clear that this regulation requires that " * * * (t) he description of that security interest should accurately reflect the type of security interest that may be legally acquired under the appropriate State law." FRB Staff Opinion Letter, 1974-1977 Transfer Binder, CCH Consumer Credit Guide, paragraph No. 31,151 (1974). A description, such as the one Easy Living used, which purports to retain a security interest more inclusive than that allowed by state law is a violation of Section 226.8(b)(5), Title 12, C.F.R. FRB Staff Opinion Letter, 1974-1977 Transfer Binder, CCH Consumer Credit Guide, paragraph No. 31,581 (1977). See Pollock v. General Finance Corp. (C.A.5, 1976), 535 F.2d 295, petition for rehearing denied (C.A.5, 1977), 552 F.2d 1142, certiorari denied (1977), 434 U.S. 891, 98 S.Ct. 265, 54 L.Ed.2d 176; Jones v. Allied Loans (D.S.C.1977), 447 F.Supp. 1121. Contra Pinkett v. Credithrift of America (N.D.Ga.1977), 430 F.Supp. 113.

The second violation of the Truth in Lending Act was the failure to disclose the components of the finance charge. The pertinent regulation at the time the contract was signed required disclosure of "(t)he total amount of the finance charge, with description of each amount included, using the term 'finance charge.' " Section 226.8(c)(8)(i), Title 12, C.F.R. Whitehead's contract states only that the finance charge is $168.32. This finance charge consisted of $154.28 in interest and a $14.04 service charge. Directly below the finance charge on the contract is an item indicating an annual percentage rate of 19.53 percent. The logical assumption is that the finance charge consists only of this interest. The $14.04 service charge was never disclosed.

The Congressional purpose in enacting the Truth in Lending Act is set forth in Section 1601(a), Title 15, U.S. Code, as follows:

"The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices."

One of the best ways of comparing credit terms is through comparison of interest rates. However, comparison of interest rates is meaningless if the finance charge includes more than interest. As a result, the regulation (Section 226.8(c)(8)(i)) was promulgated requiring that the components of the finance charge be disclosed.

Easy Living argues that the regulation only requires disclosure of the finance charge as a single figure, and further, that the regulation is confusing. Easy Living does not offer any explanation of what the language, "each amount included," in the regulation could possibly mean if it does not refer to the components of the finance charge.

R.C. 1317.06 provides for different methods for computing the base finance charge and the service charge, both of which are included in the finance charge. Logically, these are therefore separate "amounts" required to be separately disclosed. See Barber v. Kimbrell's (W.D.N.C.1976), 424 F.Supp. 42, modified on other grounds (C.A.4, 1978), 577 F.2d 216, certiorari denied (1978), 439 U.S. 934, 99 S.Ct. 329, 58 L.Ed.2d 330; Johnson v. Associates Finance (S.D.Ill.1974), 369 F.Supp. 1121 (involving a loan transaction, but the pertinent regulation is identical); but see Belton v. Columbus Finance & Thrift Co. (Ga.App.1972), 1969-1973 Transfer Binder, CCH Consumer Credit Guide, paragraph No. 99,101. Since Easy Living did not adequately describe the security interest and did not disclose the components of the finance charge, it violated the Truth in Lending Act. The assignment...