Franklin v. First Money, Inc., Civ. A. No. 75-2003.

• Citation: 414 F. Supp. 21
• Decision Date: 24 March 1976
• Docket Number: Civ. A. No. 75-2003.
• Parties: Eugene FRANKLIN v. FIRST MONEY, INC. d/b/a E-Z Finance Plan.
• Court: U.S. District Court — Eastern District of Louisiana

414 F. Supp. 21

Eugene FRANKLIN v. FIRST MONEY, INC. d/b/a E-Z Finance Plan.

Civ. A. No. 75-2003.

United States District Court, E. D. Louisiana.

March 24, 1976.

Mark G. Murov, Lawrence B. Fabacher, II, New Orleans, La., for plaintiff.

David S. Willenzik, New Orleans, La., for defendant.

Ford Dieth, Asst. U. S. Atty., New Orleans, La., for Intervenor, U.S.A.

ALVIN B. RUBIN, District Judge:

The sole issue in this case is whether the defendant violated the Federal Truth-in-Lending Act (15 U.S.C. § 1601 et seq.) and Regulation Z of the Board of Governors of the Federal Reserve System (12 CFR § 226.1 et seq.) by failing to disclose the amount, or method of computing the amount, of a default charge payable in the event of late payment, pursuant to the rules set forth in Section 226.8(b)(4) of Regulation Z.

The disclosure statement reads, in part, as follows:

DEFAULT CHARGE: If this consumer loan is pre-computed, and in the event any installment shall not be paid in full within 10 days after it becomes due, debtor agrees to pay an amount not exceeding the greater of (A) 5% of the unpaid amount of the installment but not exceeding $5.00, or (B) the deferral charge that would be permitted to defer the unpaid amount of the installment for the period it is delinquent.

The alternative possibility set forth in (B) makes it possible for the lender to impose a charge that is not defined in the disclosure statement. Part B is captioned a default charge. However, Part B imposes a charge that it calls a deferral charge. Regardless of semantics the issue is whether the charge referred to in Part B is a charge for the debtor's default or whether the charge it imposes is what the regulation calls a deferral charge. The importance of the distinction is that Section 226.8(l) requires a disclosure of a deferral charge only at the time when there is a deferral, should there be one, whereas Section 226.8(b)(4) requires disclosure of a default charge at the time the original contract is signed. Both sections of the regulations involved here are set forth in the footnote.¹ The charge imposed by (B) is allowable under the applicable provision of the Louisiana Consumer Credit Law (La.R.S. 9:3525), but that fact is irrelevant because the injury complained of is not that the exaction was illegal but that it was undisclosed.

In Kenney v. Landis Financial Group, Inc., 376 F.Supp. 852 (N.D.Iowa, 1973), reported at 4 CCH, CCG ¶ 98,937, the court held that a similar form did not violate the disclosure requirements because what it imposed was a deferral charge.

The default provision (Section 226.8(b)(4)) deals with disclosures that must be made to a borrower regarding actions that may be taken by the creditor unilaterally upon the borrower's default. It is not confined to the action that a creditor may take to accelerate the balance due or sue on the obligation, for it covers charges "payable in the event of late payments." The deferral charge regulation, Section 226.8(l), appears to relate to disclosure charges that are made in the event of a mutually agreed upon extension or deferral of one or more installments due on a loan. It requires disclosure not only of the amount of the charge but also of the amount deferred and the date to which payment is deferred.

Federal Reserve Board Letter 218, quoted in 4 CCH, CCG ¶ 30,869, deals with the timing of disclosures of deferral charges. The letter points out that the deferral charge regulation does not distinguish between the situation where the debtor initiates the deferral request and the one where the creditor offers a deferral—for example, by a letter at Christmas time. This letter implicitly recognizes that a deferral charge differs from a default charge in that a deferral charge is imposed—and disclosed— as a result of events occurring after the loan is made. If the charge is one that the creditor may unilaterally impose at the creditor's will, upon a...