United-Bilt Homes, Inc. v. Teague

• Decision Date: 16 September 1968
• Docket Number: No. 5--4318,UNITED-BILT,5--4318
• Parties: HOMES, INC., Appellant, v. Donald L. TEAGUE et ux., Appellees.
• Court: Arkansas Supreme Court

Page 1

432 S.W.2d 1

245 Ark. 132

UNITED-BILT HOMES, INC., Appellant, v. Donald L. TEAGUE et ux., Appellees.

No. 5--4318.

Supreme Court of Arkansas.

Sept. 16, 1968.

Rehearing Denied Oct. 28, 1968.

James R. Hale, Fayetteville; John L. Wilson, Hope; and S. Hubert Mayes, Jr., Little Rock, for appellant.

Walter R. Niblock and William R. Hass, Fayetteville, for appellees.

GEORGE ROSE SMITH, Justice.

This is a usury case. On November 9, 1962, United-Bilt Homes, Inc., agreed to build and to finance a house for the plaintiffs, Teague and his wife. The basic cash price, after a $10 down payment, was $2,450, but that figure was not set forth in the building contract or in the note or in the mortgage, all executed on November 9. Instead, all three instruments simply recited the Teagues' obligation to make 90 monthly payments of $43.07 each, or a total of $3,876.30.

On October 5, 1965, the Teagues, after having made several payments at irregular intervals, brought this suit to cancel the debt for usury. United-Bilt denied usury and sought foreclosure of its mortgage. This appeal is from a decree canceling the note and mortgage, for usury.

The Teagues' indebtedness was initially $2,450. They signed documents ostensibly requiring them to pay more than 10% per annum on that debt. In the loan papers United-Bilt made no effort whatever to explain its finance charges. That omission brings the case within the rule that we adopted more than ten years ago in taking our stand on the matter of truth in lending. We then pointed out that when the lender writes the contract he has the opportunity to put down in black and white an intelligible description, and the exact amount, of every charge that is being added to the principal of the debt. When, as here, the lender gives the borrower no information at all about the deferred charges, the trier of the facts is justified in assuming, until he is convinced by proof to the contrary, that the difference between the principal of the loan and the face amount of the contract represents interest on the debt. Jones v. Jones, 227 Ark. 836, 301 S.W.2d 737 (1957). We have consistently adhered to the rule laid down in the Jones case, which is an important but completely fair weapon in the legal arsenal available to the courts in the continuing fight against usury.

In the case at bar the charges were excessive on their face. United-Bilt fixed the monthly payments at $43.07. That figure exceeds the maximum legal charge of $38.80--the amount needed monthly to retire a debt of $2,450 in 90 months at 10% interest. See Lake's Monthly Installment and Interest Tables (5th Ed., 1959), p. 149. Under the Jones case United-Bilt had the burden of explaining the excessive charges.

At the trial United-Bilt supplied an exact explanation of its monthly charge of $43.07. Dennis Wilson, its chief accountant, testified that United-Bilt's experience had shown that its closing costs always exceeded 11% of the principal debt. Hence the table which it furnishes to its salesmen was prepared by adding 11% to the principal and then charging 10% interest upon that total.

Lake's tables confirm Wilson's testimony. Here the principal was $2,450. Eleven percent of that amount is $269.50, making a total of $2,719.50. According to Lake, p. 149, a loan of $2,719.50, payable in 90 monthly installments at 10% interest, calls for monthly payments of $43.07. That, to the very penny, was the amount specified in this case.

Thus United-Bilt's task is that of proving legitimate closing costs--costs that may be passed on to the borrowers at 10% interest for the life of the loan--of, at least $269.50. United-Bilt now contends that it was entitled to charge the following closing costs to the Teagues, even though they were not told about any of the amounts involved:

                Title insurance                    $40.00
                Fire and extended coverage (FEC)   144.25
                Appraisal                           52.50
                Credit life insurance premiums     117.27
                                                  -------
                                                  $354.02
                

The chancellor correctly allowed the first two items, totaling $184.25, upon proof that United-Bilt had spent that amount for title and FEC insurance. The case turns upon the other two items.

United-Bilt attempts to sustain the appraisal charge by insisting that it was for the Teagues' benefit. That just is not true. The inspection and appraisal were not made until April 2, 1963, long after the consummation of the loan and the completion of the house. The Teagues were not even told about the appraisal, which did not benefit them in any way whatever. The appraisal fee was for United-Bilt's sole benefit and cannot be passed on to the Teagues. Winston v. Personal Finance Co., 220 Ark. 580, 249 S.W.2d 315 (1952).

There remains the premium for credit life insurance. In an earlier United-Bilt case we disallowed that premium because it was not actually paid in advance. United-Bilt Homes v. Knapp, 239 Ark. 940, 396 S.W.2d 40 (1965). United-Bilt now seeks to distinguish that case by insisting that here its proof shows that the credit life premium would have been paid eventually, so that it was entitled to take the premium into account as part of the closing costs.

There are two unanswerable objections to that argument. First, even though United-Bilt intended in good faith to pay the credit life premium, its own undisputed proof shows that the premium was not an interest-bearing charge susceptible of being included in the closing costs. Wilson, United-Bilt's own accountant, testified that the premium was not paid to the credit life insurance company in advance. Instead, had the Teagues paid their monthly installments as they came due, the monthly credit life premium would have been taken out of each payment, so that United-Bilt would never have been in the position of having advanced any of the premium as a loan to the Teagues. Hence, just as in the Knapp case, United-Bilt is not entitled in the case at hand to charge interest upon a sum of money that was not meant to be lent to the Teagues. Of course the issue of usury is to be determined as of the date of the contract and not by subsequent events. General Contract Corp. v. Duke, 223 Ark. 938, 270 S.W.2d 918 (1954).

Secondly, United-Bilt was not contractually bound to carry one penny's worth of credit life insurance. The only reference to each insurance was contained in the printed building contract, prepared by United-Bilt and to be construed in the borrowers' favor: 'Owner agrees to pay all attorney's fees, installment loan expenses (including cost of credit life insurance), title and property insurance, and recording costs, incurred and to be incurred in connection with creating and fixing the first lien and mortgage * * * and in financing the time sale hereby contemplated.'

It will be seen that the Teagues agreed to repay the cost of credit life insurance, but there was no requirement whatever that United-Bilt carry such insurance. The matter was discussed during the negotiations for the loan, but the written contract expressly provided that it contained all items and conditions agreed upon by the parties. Hence the Teagues had no legally enforceable right to compel United-Bilt to carry credit life insurance. United-Bilt might therefore have dropped the coverage at any time--a fact which obviously precludes it from now contending that the contemplated premium was an interest-bearing charge subject to inclusion in the closing costs. (As a matter of fact, the coverage that was actually obtained would not have benefited the Teagues if Donald Teague had died at any time within fifteen months before the date of trial. That is so because the policy provided that the insurance would not be payable if the monthly payments to United-Bilt were in arrears by more than 90 days at the death of the insured. The Teagues' payments were more than 90 days in arrears for fifteen months before the trial; so they had no protection.)

During our discussion of the case the suggestion was made that credit life premiums should be treated in the same way as unaccrued interest; that is, in a suit to collect an accelerated debt unaccrued and unpaid credit life premiums should not be considered in the determination of the issue of usury. The analogy is fallacious. Unaccrued legal interest can be disregarded, as in Mid-State Homes v. Knight, 237 Ark. 802, 376 S.W.2d 556 (1964), because the contract would not have been usurious if the debtors and made all payments as they came due. But when the interest rate was originally usurious, the lender cannot validate the contract by bringing suit for legal interest only. Brooks v. Burgess, 228 Ark. 150, 306 S.W.2d 104 (1957).

Similarly, if United-Bilt had been contractually bound to make the credit life premium payments every month, the future unpaid monthly premiums would not have made usurious an agreement that was originally legal. But here the matter of paying the monthly premiums lay entirely within United-Bilt's uncontrolled discretion. It might have dropped such insurance at any time and still have continued to collect the premiums as a part of the Teagues' monthly payments. Such a contingency, lying wholly within the lender's power, opens the door to usury. Sosebee v. Boswell, 242 Ark. 396, 414 S.W.2d 380 (1967). There would evidently be no ceiling upon the permissible interest rate if lenders were allowed to include in their finance charges items that they were free to pay or not to pay as they later saw fit.

We have not overlooked the fact that the Teagues' first monthly payment was not due until January 6, 1963, giving them the benefit of a 58-day interval instead of the usual 30-day interval in the computation of interest. Even so, that windfall of $20.50 in interest (Lake, supra) is far short of offsetting the excessive interest charges.

Affirmed.

BROWN, J., not participating.

HARRIS, C.J., and FOGLEMAN, J., dissent.

FOGLEMAN,...