Lipson v. Burlington Sav. Bank, Civ. A. No. 76-124.
| Decision Date | 29 March 1977 |
| Docket Number | Civ. A. No. 76-124. |
| Citation | 428 F. Supp. 1073 |
| Parties | Michael H. LIPSON et al. v. BURLINGTON SAVINGS BANK. |
| Court | U.S. District Court — District of Vermont |
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Nancy E. Kaufman, Rubin & Kaufman, Plainfield, Vt., for plaintiffs.
Richard H. Gregory, III, Dinse, Allen & Erdmann, Burlington, Vt., for defendant.
This action has been instituted by three plaintiffs who obtained loans from the defendant Burlington Savings Bank (Bank) to obtain monetary damages, declaratory and injunctive relief for alleged violation of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq. All are agreed that there is no conflict among them concerning the controlling facts and that the case is proper for final disposition by way of summary judgment.1
The defendant is a mutual savings bank that is in the business of making loans and extending credit for which the payment of a finance charge is required. On June 25, 1975 the plaintiff Michael Lipson and wife Marjorie entered into a credit transaction with the defendant and acknowledged receipt of a disclosure statement for a mortgage loan of $26,200 to purchase their home. The plaintiff William A. Dalton and his wife obtained a mortgage loan of $36,500 from the defendant and acknowledged receipt of a disclosure statement. The plaintiff Frank L. Kochman and his wife Jennifer entered into a mortgage loan agreement and obtained a loan of $23,265 on September 16, 1971 to finance their purchase of a home in Huntington, Vermont and received a disclosure statement. In each transaction the disclosure statements were required by the provisions of the Act and Regulation Z, 12 C.F.R. §§ 226.1 et seq., which called upon the lender to furnish the borrower with a statement of the effects of the loan agreement. The mortgages were given to secure promissory notes which are substantially the same in all important respects.
Prior to making the loans involved here, the Bank worked up a repayment schedule which amortized the loans over a period of years. The schedule provided for repayment of principal and interest earned on the principal over the life of the loan in equal monthly payments. Each installment is designed to pay, first, the interest accrued during the preceding month, with the balance of the installment applied to reduce the principal. The amount of interest earned each month is determined by applying the specified rate of interest to the principal balance for that month. The total interest earned on a particular loan represents the sum of interest charges for each monthly period with the varying principal balances due for monthly periods regressively during the term of the mortgage obligation. In calculation of the interest earned on a loan the Bank anticipates that each installment will be paid on the first day of each month. In the event the borrower did not make his monthly payment on the first of the month, the schedule did not reflect the adjustment required to represent the interest actually earned by reason of the payment made out of time.
The mortgage notes executed by the plaintiffs specified the principal amount of the note, the interest rate and the number and amount of the installments. The notes further provided:
The disclosure statements furnished to the plaintiffs also set out the interest rate and annual percentage rate, the number, amount and due dates of each payment, and amount financed in each case. The statement furnished to plaintiff Dalton further disclosed the finance charge and total of payments regarding his loan, which was not a first mortgage of a dwelling.2
The present litigation was generated by the defendant's decision to compute and charge interest on a daily basis. The Bank informed its debtors that effective March 1, 1976, it would charge on the daily principal balance due on all loans. The Bank sent its customers information about the new system and explained its new billing forms. This adjustment caused those who made payments prior to the due date to receive a reduction in interest owing according to the number of days of the advance payment, to be reflected in a reduced final payment at termination of the note. Those who made payments after the due date, the first of each month in the case of the present plaintiffs, would be charged the daily interest for each day after the due date, which would be reflected in an increased or additional payment due and paid on final termination of the obligation.
The plaintiffs charge separate theories of statutory or regulatory violations in each of three counts. Count I of the complaint alleges that the change in the bank's practices effects an undisclosed penalty in the nature of a default or delinquency charge, in violation of 15 U.S.C. § 1639(a)(7). Count II claims that the new interest computation system results in an undisclosed change in the number or amount of payments, in contravention of 15 U.S.C. § 1639(a)(6).3 Count III charges a violation of 12 C.F.R. § 226.4(a)(1) regarding time price differentials or systems of discount.
The pertinent provisions of 15 U.S.C. § 1639(a) are:
12 C.F.R. § 226.4 provides:
The principal question presented for decision at this point, as framed by the parties at the hearing on the defendant's motion, is whether any additional obligation imposed by the computation of daily interest, due by reason of late payment during the term of the loan, constitutes an undisclosed default or delinquency charge. The defendant's position is that additional interest at the contract rate on default is not a delinquency charge which must be disclosed under the Act. Alternatively, the Bank submits that the promissory notes' provision that "the same interest rate shall apply after default"4 sufficiently discloses the required information in this regard.
In Fisher v. Beneficial Finance Co., 383 F.Supp. 895 (D.R.I.1974), it was held that "additional interest charged at the contractual rate, in the event of late payment, falls within the finance charge and does not constitute a default delinquency, or similar charge." Id. at 898.5 In Fisher, however, the Statement of Disclosure specifically informed the borrower:
Each instalment shall be as shown hereon if the loan is paid according to contract; otherwise, the final instalment shall be equal to the unpaid principal balance plus charges accrued and unpaid at the time said final instalment is paid.
Id. The plaintiffs distinguish their case on the basis that the promissory notes, rather than the disclosure forms, were employed to set out the information regarding post-default accumulation of interest. The plaintiffs' distinction is undercut by 15 U.S.C. § 1639(b) which permits disclosure in the note, and 12 C.F.R. § 226.8(a)(1), which specifies that all of the disclosures shall be made together on either:
Here, of course, as appears above, the mortgage notes provide that interest shall be computed on the unpaid balance payable on the first day of each and every month and "the same interest rate shall apply after default."
Even without this disclosure, the defendant's change in practice would not appear to violate the requirements of the Act and Regulation Z. A default or delinquency charge is a...
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...has replaced this practice, those letters remain persuasive authority. See, e.g., Bright, 616 F.2d 328; Lipson v. Burlington Sav. Bank, 428 F.Supp. 1073 (D.Vt.1977). In issuing such letters, the Federal Reserve Board consistently found credit practices that are substantially more liberal th......
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