Herbst v. First Federal Sav. and Loan Ass'n of Madison

• Decision Date: 28 July 1976
• Docket Number: No. 75-2109,75-2109
• Citation: 538 F.2d 1279
• Parties: Jurgen HERBST et al., Plaintiffs-Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF MADISON, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1279

538 F.2d 1279

Jurgen HERBST et al., Plaintiffs-Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF MADISON Defendant-Appellee.

No. 75-2109.

United States Court of Appeals Seventh Circuit.

Argued April 7, 1976.

Decided July 28, 1976.

James N. Youngerman, Madison, Wis., for plaintiffs-appellants.

Frank J. Bucaida, Madison, Wis., for defendant-appellee.

Before HASTINGS, Senior Circuit Judge, BAUER, Circuit Judge, and WYZANSKI, Senior District Judge. ^*

WYZANSKI, Senior District Judge.

This is an appeal from the District Court's judgments dismissing complaints for failure to state a cause of action. In stating the facts and the relevant statutory provisions we cannot improve on the clear, succinct, indisputable recital in Judge Doyle's opinion, upon which the following paragraphs are directly based.

Relying on § 130(a)(1) of the Truth in Lending Act, 15 U.S.C. § 1640(a)(1), and alleging jurisdiction under 15 U.S.C. § 1640(e) and 28 U.S.C. § 1337, different plaintiffs separately brought seven parallel actions against First Federal Savings and Loan Association of Madison.

Each complaint was filed on December 11, 1974. All seven complaints contain substantially similar allegations except for the identity of the plaintiffs. In each complaint the plaintiffs there named allege that they executed in favor of defendant a mortgage and mortgage note. In 74-C-478 the date was April 15, 1969; in 74-C-479, April 24, 1969; in 74-C-480, June 22, 1967; in 74-C-481, August 22, 1961; in 74-C-482, March 2, 1964; in 74-C-483, August 15, 1968; and in 74-C-484, February 27, 1969.

The notes provided for interest on the indebtedness at the rate of 71/2% per annum in 74-C-478; 8% per annum in 74-C-479; 63/4% per annum in 74-C-480; 61/2% per annum in 74-C-481; 61/4% per annum in 74-C-482; 71/2% per annum in 74-C-483; and 71/4% per annum in 74-C-484. At no time before the execution of the mortgages and notes did defendant deliver or show to plaintiffs a disclosure form reflecting the terms of the loan. The mortgage notes, in accordance with permission granted by Wis.Stat. § 215.21, contained the following clause:

". . . The rate of interest stipulated herein may be increased at the option of the Association; provided, however, that the Association may not exercise such right in less than three years from the date of the loan, and then only upon at least four months' written notice to the borrower; and provided that in the event of such an increase in the stipulated rate of interest the borrower may prepay the loan within such notice period without penalty."

On various dates in September, 1973, plaintiffs received from defendant letters stating that as of February 1, 1974, the interest rate would be increased pursuant to the above clause to 81/2% in 74-C-478; 81/2% in 74-C-479; 73/4% in 74-C-480; 71/2% in 74-C-481; 71/4% in 74-C-482; 81/2% in 74-C-483; and 81/4% in 74-C-484. The interest rate was increased on February 1, 1974, to the rate specified in the notice, and that rate has remained in effect since that date. Defendant did not deliver or show to plaintiffs a disclosure form reflecting the terms of the loan at any time on or prior to February 1, 1974.

Section 130 of the Truth in Lending Act, 15 U.S.C. § 1640, makes liable in damages any creditor who fails to disclose certain information in connection with a consumer credit transaction. Subsection (e) of § 130, 15 U.S.C. § 1640(e) provides:

"Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation."

Section 129(a) of the Act, 15 U.S.C. § 1639(a), sets forth the information which a creditor is obliged to disclose. The timing of disclosure is controlled by subsection (b) of § 1639, which requires disclosure to be made "before the credit is extended" and permits it to be made "by disclosing the information in the note or other evidence of indebtedness to be signed by the obligor."

Both in the District Court and here defendant's position in these actions is: (1) that none of the provisions of the Truth in Lending Act applies to any part of the transactions in question; (2) that, nevertheless, the disclosures actually made meet the requirements of the Act and regulations; and (3) that if defendant did have a duty to disclose under the Act and if it violated that duty, the violation occurred no later than September, 1973, and therefore none of these actions was filed within the one-year limit.

In his opinion, District Judge Doyle held that (1) the Act and the regulations applied to the transaction between defendant and each of the plaintiffs which began in September 1973, (2) defendant's failure to make disclosure at the time it invoked the variable rate provision in these cases did not constitute a violation of the statute or regulations, and (3) however, if defendant did have a statutory or other obligation to disclose, such obligation would have begun in September 1973 and continued at least through December 11, 1973, and that actions based on alleged breaches of such supposed obligations would not be barred by the limitation embodied in § 1640(e).

Because we conclude that the second of the aforesaid holdings is sound, and such conclusion makes moot the other two holdings, we do not find it necessary to do more than to cover, substantially in the same words used by the lower court, the second of its holdings.

No provision of the statute nor any provision of the regulation deals directly with the legal significance of a variable rate provision in a loan. Only the Federal Reserve Board interpretation embodied in 12 C.F.R. § 226.810 deals directly with the matter. It reads:

(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. § 226.6(g) reads as follows:

"(g) Effect of subsequent occurrence. If information disclosed in accordance with this part (that is, all of Regulation Z) is subsequently rendered inaccurate as the result of any act, occurrence, or agreement subsequent to the delivery of the required disclosures, the inaccuracy resulting therefrom does not constitute a violation of this part." ¹

Subsections (a) and (b) of § 226.810 give rise to no difficulty. They clearly contemplate an initial extension of credit such as a home mortgage loan which occurs on or after July 1, 1969 (for example, August 1, 1969) in which a certain annual percentage rate (for example, 7%) is agreed upon, but in which provision is made that at some later time the rate may be varied. Subsection (a) asks what disclosures must be made before this initial extension of credit. Subsection (b) answers that the same disclosures must be made as those required in the absence of a variable rate provision, but that the existence of the variable rate provision must also be disclosed. Neither (a) nor (b) appears to be concerned with what disclosure, if any, need be made at that later time (for example, August 1, 1973) when the variable rate provision is invoked and the annual percentage rate is increased (for example, to 8%).

But subsection (c) is puzzling. Conceivably, it was intended to say that in the example, if the 7% annual percentage rate and the existence of the variable rate provision have been properly disclosed before August 1, 1969, then although the action increasing the annual percentage rate from 7% to 8% on August 1, 1973, renders inaccurate the disclosure made on August 1, 1969, this inaccuracy does not constitute a violation of Regulation Z. Conceivably, this proposition and only this proposition was intended to be expressed in subsection (c), and the draftsperson chose to express it by saying that the action on August 1, 1973, was the kind of "subsequent occurrence" under § 226.6(g) which renders the August 1, 1969, disclosure inaccurate but which nevertheless spares the inaccurate August 1, 1969 disclosure from being considered a violation of Regulation Z.

This contrivance is awkward because the foreseeable invocation of the variable rate provision seems quite dissimilar to the "subsequent occurrences" apparently contemplated by § 226.6(g), such as the unforeseeable failure of a borrower to perform and the unforeseeable measures which a creditor may then be compelled to take to protect the creditor's interests.

Despite the awkwardness of the reference to § 226.6(g), however, this view of all three subsections of § 226.810 would make sense. The interpretation embodied in § 226.810 would be limited to describing the disclosures which must be made before the initial extension of credit, on August 1, 1969, in the example, and to dealing with the legal significance of any apparent inaccuracy in the August 1, 1969, disclosures which might arise on August 1, 1973, solely from the invocation of the variable rate...