Richardson v. National City Bank of Evansville

• Decision Date: 23 April 1998
• Docket Number: No. 97-2775,97-2775
• Citation: 141 F.3d 1228
• Parties: Todd A. RICHARDSON, individually and on behalf of a class of borrowers similarly situated, Plaintiff-Appellant, v. NATIONAL CITY BANK OF EVANSVILLE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1228

141 F.3d 1228

Todd A. RICHARDSON, individually and on behalf of a class of

borrowers similarly situated, Plaintiff-Appellant, v. NATIONAL CITY BANK OF EVANSVILLE, Defendant-Appellee.

No. 97-2775.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 10, 1998.

Decided April 23, 1998.

Andrew Ward, Berger & Berger, Evansville, IN, Michael P. Malakoff (argued), Malakoff, Doyle & Finberg, Pittsburgh, PA, M Scott Barrett, Plews, Shadley, Racher & Braun, Indianapolis, IN, for Plaintiff-Appellant.

David V. Miller (argued), Bowers, Harrison, Kent & Miller, Evansville, IN, for Defendant-Appellee.

Before CUMMINGS, COFFEY, and MANION, Circuit Judges.

MANION, Circuit Judge.

Todd Richardson financed the purchase of a car, and the National City Bank of Evansville (NCB) bought that debt. When Richardson financed the car, he promised to insure the vehicle, but he didn't. Accordingly, NCB bought insurance for the car and added the amount of the insurance premiums to the principal debt owed by Richardson. Richardson has sued, claiming that insurance premiums added to his debt constitute "interest" and the loan is therefore usurious. Concluding insurance premiums are not "interest," the district court dismissed the complaint for failing to state a claim. We affirm.

I. Background

On May 26, 1988, Todd Richardson bought a 1988 Chevrolet Camaro from Cooke Chevrolet Company, a Chevrolet franchise dealership in Evansville, Indiana. Richardson financed the Camaro through the dealership. Richardson signed a "Retail Installment Contract and Security Agreement." The installment agreement provided that Richardson would pay the balance of $12,649.87 in 72 payments of $250.23, with an annual interest rate of 12.25%. The installment agreement included a provision which stated: "I [Richardson] promise to purchase property and liability insurance against such risks and in such amounts as you [Cooke Chevrolet or assignee] may designate...." It further provided that in the event that Richardson fails to provide insurance, Cooke or its assignee "may advance the money necessary to purchase the insurance ... add this amount to [Richardson's] credit obligation, and charge [Richardson] interest on this amount...."

After Richardson executed the loan agreement, Cooke Chevrolet assigned its interest in the note to NCB. Richardson made regular payments on his installment note, but did not obtain the required insurance for the Camaro. Between 1989 and 1994, because Richardson did not purchase insurance, NCB bought insurance coverage for the Camaro. As a result, NCB added about $1000 each year to the principal amount of the loan. Richardson paid interest on these premium amounts advanced by NCB. Richardson concedes that the charges added to his loan were equal to the net amounts paid by NCB in premiums. In other words, it is undisputed that NCB did not retain any revenue or compensation when purchasing the insurance; rather it charged Richardson only for those additional amounts paid to the insurance companies. However, as these payments were added to the principal balance of the loan, NCB became entitled to interest for these amounts advanced. In July 1994, as the term of the original loan expired, there was still a balance of approximately $8,900. Richardson refinanced the vehicle, agreeing to repay $8,967.60 over 60 months, in monthly payments of $200.68.

In June 1995, Richardson brought a class action lawsuit against NCB, alleging state law violations, usury violations under the National Bank Act, 12 U.S.C. §§ 85 and 86, and violation of the Anti-Tying Amendments, codified at 12 U.S.C. § 1972. The district court initially dismissed the Anti-Tying count, and Richardson has not appealed this decision. Subsequently, the district court granted the defendant's motion to dismiss the usury count under the National Bank Act, holding that the insurance premiums paid by the bank and added to Richardson's principal balance were not interest. Having dismissed the counts containing federal questions, the district court then declined to exercise pendent jurisdiction over the remaining state law counts. Richardson has filed a complaint in state court to resolve the state law claims. Thus, the only issue we face in this appeal is whether the insurance premiums bought by NCB and charged to Richardson are interest under the National Bank Act.

II. Analysis

The National Bank Act provides that if a bank knowingly charges interest greater than that allowed under section 85, it forfeits the entire interest associated with the note. 12 U.S.C. § 86. Section 85 establishes the maximum allowable interest rate as the rate allowed by the law of the state where the bank is located. ¹ 12 U.S.C. § 85. Indiana law establishes the maximum annual rate of interest to be 21%. I.C. 24-4.5-3-201(1). However, § 85 does not define what is interest and what is not interest. The Supreme Court (and thus the parties here) recognizes that in certain contexts the term "interest" can cause some ambiguity. Smiley v. Citibank (South Dakota) N.A., 517 U.S. 735, 737-39, 116 S.Ct. 1730, 1732, 135 L.Ed.2d 25 (1996) ("It would be difficult indeed to contend that the word 'interest' in the National Bank Act is unambiguous....").

In 1996, the Office of the Comptroller of Currency promulgated Regulation 7.4001, interpreting the term "interest" as used in 12 U.S.C. § 85. 12 C.F.R. § 7.4001. As this case turns on the exact meaning of this regulation, we set out the entire relevant subsection:

(a) Definition. The term "interest" as used in 12 U.S.C. § 85 includes any payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower of a condition upon which credit was extended. It includes, among other things, the following fees connected with credit extension or availability: numeric periodic rates, late fees, not sufficient funds (NSF) fees, overlimit fees, annual fees, cash advance fees, and membership fees. It does not ordinarily include appraisal fees, premiums and commissions attributable to insurance guaranteeing repayment of any extension of credit, finders' fees, fees for document preparation or notarization, or fees incurred to obtain credit reports.

12 C.F.R. § 7.4001(a) (emphasis added). This regulation draws a distinction between fees which compensate the bank for extending credit, and fees which reimburse the bank for actual expenses associated with the loan.

The Supreme Court addressed Regulation 7.4001(a) in Smiley. Smiley involved the question of whether late fees, i.e. additional fees charged borrowers who fail to make timely payments, are "interest" under § 85. The Supreme Court unanimously held that "interest" as used in § 85 was ambiguous, and the interpretation given "interest" by the Office of the Comptroller of the Currency was entitled to deference pursuant to Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). See Smiley, 517 U.S. at 737-41, 116 S.Ct. at 1732-33. ² The Supreme Court held that late fees were interest under § 7.4001(a). It further commented that the regulation draws a distinction "between those charges that are specifically assigned to such expenses [as insuring the loan,] and those that are assessed for simply making the loan, or for the borrower's default," the latter being interest; the former, not. 517 U.S. at 741-42, 116 S.Ct. at 1734 (emphasis in original). Thus, customer charges unrelated to a specific expense incurred by the bank were termed interest; charges related to a specific expense were excepted.

While Smiley did not specifically address insurance premiums except in dicta, the Eighth Circuit recently addressed the exact arguments made by the plaintiff in this case. ³ In Doe v. Norwest Bank Minnesota, N.A., 107 F.3d 1297, 1303 (8th Cir.1997), as in our case, a consumer bought a vehicle and failed to insure it. After the bank purchased insurance and added the premiums to the consumer's loan balance, the consumer sued the bank, claiming a usury violation under the National Bank Act. The Eighth Circuit held that "there is a notable difference between a late fee, which compensates the creditor solely for the effects of the debtor's default, and an insurance charge, which compensates the creditor for the cost of protecting its security, a cost the debtor is supposed to bear anyway." Id. We agree with the Eighth Circuit, and would further comment that the insurance charge is really a reimbursement. ⁴ The bank is not at all enriched by the purchase of force placed insurance. Rather, it is incurring an expense which the borrower had promised to pay, thus requiring it to add the cost of the insurance to the borrower's principal loan balance. Moreover, the bank apparently does not pass on the administrative cost of having an employee obtain insurance on its customer's vehicle.

There...