State v. Bankers Finance Corp.

• Decision Date: 29 April 1942
• Citation: 26 A.2d 220,41 Del. 566
• Court: Court of General Sessions of Delaware
• Parties: STATE OF DELAWARE v. BANKERS FINANCE CORPORATION, a corporation of the State of Delaware, and others

26 A.2d 220

41 Del. 566

STATE OF DELAWARE v. BANKERS FINANCE CORPORATION, a corporation of the State of Delaware, and others

Court of General Sessions of Delaware, New Castle County

April 29, 1942

Court of General Sessions for New Castle County, Indictments Nos 57, 58, 62 and 63, May Term, 1940.

This opinion covers four indictments found against the defendant for violation of the "Small Loan Act," being Sections 4045-4052, Revised Code of 1935. The cases were tried by the Court upon agreed statements of facts and without the intervention of a jury, and the questions arise upon motions in the nature of motions for directed verdicts.

The statute provides that all persons, corporations, &c transacting the business of making small loans hold certificates of Registration from the State Bank Commissioner and shall have the power to lend money in any sum not exceeding $ 500.00, to be repaid in periodical installments taking the obligation of the borrower therefor, with any security that may be acceptable to the lender; the statute further (by Section 4047) provides:

"Any such lender may charge in advance the legal rate of interest of six per cent upon the entire amount of the loan and may make such loan repayable in weekly, monthly or other periodical installments * * * and the lender may also charge an investigation fee or make a service charge of not exceeding two per centum of the amount of the loan. No additional interest or commission shall be charged nor shall any additional charge of any kind be made * * *."

Indictment No. 58, May T. 1940.

This indictment charges that the defendant, upon the security of an automobile, loaned to Richard M. Morris the sum of $ 275.00, to be repaid in 24 monthly payments, and that the note taken for the loan was $ 415.86 and the monthly payments were 23 for $ 17.32 each, and one for $ 17.50; that as a condition to the making of the loan the defendant required Morris to permit it to secure insurance on said automobile and to advance the premium for such insurance, which premium was included in the note; that subsequently (about three weeks after making the loan) the automobile was destroyed or damaged, and insurance of $ 400.00 was paid by the insurer and received by the defendant; that the defendant applied the $ 400.00 insurance proceeds to the obligation of Morris and demanded the balance thereafter of $ 15.86; that the defendant has not made or offered to make any refund or rebate with respect to interest charges in advance.

An agreed statement of facts and a "break-down" of the charges clearly present the issues. The agreed statement as to the insurance shows that the defendant (the lender) procured for the borrower an insurance policy in the National Liberty Insurance Company of America, at the actual manual insurance rates which were the same for borrowers or non-borrowers; that at the end of each month the insurance company billed the defendant for all premiums for insurance written by it during such month at the actual manual rates charged the borrower, and that thereafter the defendant (lender) paid to the insurance company the amount of such premiums less a commission of not less than 25%, and that the lender received no additional commissions or compensation as to such insurance.

The "break-down" of the charges as filed in the case with certain changes made by us, is as follows:

$ 275.00

amount financed

83.50

insurance charge (25% deductible coll. ins. $ 39.00

for 1st year & $ 31.00 for 2d year; fire and theft

insurance $ 7.50 for 1st year and $ 6.00 for 2d year)

$ 358.50

57.36

Charge made by lender. Interest for 2 yrs, in advance

would be $ 49.00 & service charge of 2%,

$ 8.32, or a total of $ 58.22

$ 415.86

400.00

Amount paid to lender by Ins. Co. due to damage

to borrower's automobile

$ 15.86

The motion for binding instructions granted and verdicts of not guilty entered.

James R. Morford, Attorney-General, and Thomas Herlihy, Jr., Deputy Attorney-General, for the State.

H. Albert Young for the defendants.

RODNEY and SPEAKMAN, J. J., sitting.

OPINION

RODNEY, J.

From the foregoing facts there is presented the propriety of the following charges or course of conduct by defendant:

1. (a) The amount required as insurance premium on the automobile taken as security for the loan, and

(b) the related question as to whether, if insurance was effected by the lender (as an agent for the insurer) and it received commissions on such insurance premiums, whether such commissions should not inure to the benefit of the borrower.

2. Whether the investigation fee or service charge of 2% provided by the Act was one allowable fee regardless of the term of the loan, or whether it should be computed on an annual basis.

3. Whether upon payment of a loan or a substantial part of it before maturity the lender should rebate the proportionate part of the interest discounted in advance.

Before entering upon a discussion of the propriety of the actual and specific charges made by the lender it is necessary to give some consideration of the purpose of the Delaware Act and to determine, under that Act, the propriety of any charge whatever against the borrower, other than the interest and service charge as set out in the statute.

Beginning about 1900 public consciousness became aroused as to the evils of unrestricted "small loan" transactions, and the inordinate profits exacted by a group called "loan sharks", from a class of people whose limited financial and social standing and lack of credit prevented their withstanding the unconscionable demands made upon them. Legislation controlling the business was adopted in almost all of the States, and exhaustive surveys were made under the leadership of the Russell Sage Foundation and other social and economic agencies. These laws to 1938 are collected in Camalier's Personal Finance Laws, and hundreds of cases are collected in Hubachek's Annotations on Small Loan Laws.

The constitutionality of "small loan" acts has been sustained by a myriad of cases, including the Delaware case of State v. Wickenhoefer, 6 Penne. 120, 64 A. 273.

Between 1916 and 1936 some six drafts of a so-called Uniform Small Loan Act were prepared, and the legislation of most of the States is based upon some one of these drafts. The salient features of the Uniform Act, insofar as of interest in this case, are that the Act applies to loans not exceeding $ 300.00; that interest at rate of 3 1/2% per month may be charged on such part of the loan not exceeding $ 100.00, and 2 1/2% upon the portion above that sum; that interest may not be charged in advance or compounded, and shall only be paid on unpaid balances. The first four drafts included fees actually paid out to a public officer for recording or releasing any instrument securing the lien, but the later drafts seem silent as to this point and affirmatively cover only interest.

We now come to the consideration of the Delaware Act. Its structure and provisions differ widely from the Uniform Act, but we may assume its general purpose was the same, viz. the protection of needy borrowers of small sums, and to furnish them with the opportunity of borrowing through a system of regulated lenders. The limitation of profits of the lenders is largely a method of attaining the primary purpose of limiting the burdens of the needy borrower. The Delaware Act covers loans not exceeding $ 500.00; it provides for registration of those in the business of making small loans, and for supervisory jurisdiction of the State Bank Commissioner. It allows loans to be made payable in weekly, monthly, or other periodical installments, with the lender taking the obligation of the borrower, with any security that may be acceptable to the lender. The Act provides that the lender may charge in advance the legal rate of interest of 6%, and an investigation fee or service charge of not exceeding 2 per centum of the amount of the loan. The Act then provides "no additional interest or commission shall be charged nor shall any additional charge of any kind be made * * *." It is around the quoted words that all the difficulties cluster. Do the words "any additional charge of any kind" refer to some charge or increment which, in any way, could inure to the benefit of the lender, or do they, as contended by the State, prohibit any charge at all against the borrower, even though made at his request and payable to a third person, and as to which the lender has no beneficial interest of any kind whatever? Similar words in other and analogous provisions have not received a uniform construction, and the true meaning of the words can best be had by a consideration of the history of our Act and of the pertinent decisions of other States.

The first Delaware Act concerning small loans was approved March 29, 1905 (Vol. 23, c. 149, p. 256). Section 3 provided that on loans not exceeding $ 100.00 the legal rate of 6%, together with an additional 5% could be charged "and no further interest, commission or charge shall be made." Section 5 provided that either a registered or unregistered lender should be guilty of a misdemeanor who should, on a loan of $ 100.00 or less, exact, require or demand interest in excess of 6%, together with an additional sum of 5% per annum "whether said additional sum be in the form of interest or for services rendered or expenses incurred."

The constitutionality of the cited statute was sustained in State v. Wickenhoefer, 6 Penn. (22 Del.) 120, 64 A. 273, 281, it being the only decision of this State on the Small Loan Act. In the course of its opinion the Court said that the Legislature intended "that such additional 5 per cent. should cover all extra charges, including those for services rendered and expenses...