Vega v. First Federal Sav. & Loan Ass'n of Detroit

• Decision Date: 15 July 1980
• Docket Number: No. 77-1552,77-1552
• Citation: 622 F.2d 918
• Parties: Luis and Margaret VEGA, Individually and on behalf of others similarly situated, Plaintiffs-Appellants, v. FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF DETROIT, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 918

622 F.2d 918

Luis and Margaret VEGA, Individually and on behalf of others similarly situated, Plaintiffs-Appellants, v. FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF DETROIT Defendant-Appellee.

No. 77-1552.

United States Court of Appeals Sixth Circuit.

Argued Nov. 29, 1979.

Decided May 27, 1980.

As Amended on Denial of Rehearing July 15, 1980.

David W. Sinclair, Anthony C. Lutostanski, Detroit, Mich., for plaintiffs-appellants.

David M. Hayes, Clark, Klein & Beaumont, William B. Dunn, Dennis G. Bonucchi, Detroit, Mich., for defendant-appellee.

Before LIVELY, BROWN and JONES, Circuit Judges.

BAILEY BROWN, Circuit Judge.

In 1975, Luis and Margaret Vega applied for and received a residential loan from the First Federal Savings and Loan Association of Detroit (First Federal). The Vegas subsequently brought this action alleging that First Federal, providing the loan, had violated numerous provisions of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., and the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601 et seq. The Honorable Damon J. Keith, then chief district judge, in a careful and full opinion, granted summary judgment in favor of First Federal. Vega v. First Federal Savings and Loan Association, 433 F.Supp. 624 (E.D.Mich.1977). We affirm that decision in all respects except as to one issue, which is the last issue discussed in this opinion.

I. The Truth in Lending Act

The Truth in Lending Act was enacted in the wake of consumers' increasing use of credit. Its purpose was to require creditors to disclose relevant information to consumers so that they could make informed decisions as to the use of credit. Rather than create detailed statutory disclosure requirements, Congress "delegated to the Federal Reserve Board broad authority to promulgate regulations necessary to render the Act effective." Mourning v. Family Publications Service, 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973). In this manner, the Truth in Lending Act retains sufficient flexibility to adjust to new variations in credit plans. Thus, the regulations promulgated by the Federal Reserve Board as well as the statutory provisions of the Act establish the standard by which a creditor's disclosures must be measured.

The disclosure requirements applicable to a residential loan are set out in Section 129 of the Truth in Lending Act, 15 U.S.C. § 1639, and Section 226.8 of Regulation Z, 12 C.F.R. § 226.8. One of the items to be disclosed is the finance charge on the loan "expressed as an annual percentage rate." The term "finance charge" generally encompasses those charges "payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605. See also 12 C.F.R. § 226.4(a). In addition to the finance charge, a creditor must separately disclose "the default, delinquency, or similar charges payable in the event of late payments." 15 U.S.C. § 1639(a)(7), 12 C.F.R. § 226.8(b)(4). A delinquency charge "is not a finance charge if imposed for actual unanticipated late payment, delinquency, default, or other such occurrence." 12 C.F.R. § 226.4(c). While the Truth in Lending Act mandates the disclosure of several other types of information, the basic issues in this case are limited to whether certain items constitute either a finance charge or a delinquency charge and are therefore required to be disclosed under the Truth in Lending Act.

A. Acceleration clause

To obtain their residential loan, the Vegas signed both a promissory note and a mortgage. Both documents contained an acceleration clause allowing First Federal to demand the entire unpaid principal upon default. The disclosure statement received by the Vegas from First Federal did not reflect this power of acceleration. ¹ The Vegas maintain that the acceleration clause or the effect of such clause should have been disclosed under 15 U.S.C. § 1639(a)(7) as a delinquency charge.

The proper treatment of acceleration clauses under the Truth in Lending Act has recently been resolved by the Supreme Court in Ford Motor Credit Co. v. Milhollin, --- U.S. ----, 100 S.Ct. 790, 63 L.Ed.2d 22 (1980). Prior to Milhollin, however, the issue was one of considerable confusion and conflict. Most of the courts had held that the mere right of acceleration was not a "charge" which must be disclosed. See Ford Motor Credit Co. v. Milhollin, supra at note 7. But courts have diverged in their treatment of whether the effect of an acceleration clause was required to be disclosed. Compare United States v. One 1976 Chevrolet Station Wagon, 585 F.2d 978 (10th Cir. 1978); Griffith v. Superior Ford, 577 F.2d 455 (8th Cir. 1978); Begay v. Ziems Motor Co., 550 F.2d 1244 (10th Cir. 1977) with Price v. Franklin Investment Company, Inc., 574 F.2d 594 (D.C. Cir. 1978); McDaniel v. Fulton National Bank, 571 F.2d 948 (5th Cir. 1978); Johnson v. McCrackin-Sturman Ford, Inc., 527 F.2d 257 (3rd Cir. 1975) with St. Germain v. Bank of Hawaii, 573 F.2d 572 (9th Cir. 1977). In resolving this conflict, the Supreme Court deferred to the interpretations of the Act by the Federal Reserve Board and its staff. The Court emphasized that, in light of the Congressional delegation of authority to the Federal Reserve Board, such interpretations should be treated as dispositive unless "demonstrably irrational."

In considering the disclosure of acceleration clauses, the Board's staff has concluded that the mere right itself need not be disclosed. Official Staff Interpretation No. FC-0054. In addition, the staff has determined that the effect of an acceleration clause is only required to be disclosed in limited circumstances, specifically when the rebate of unearned interest upon acceleration is different from the rebate of unearned interest in other prepayment situations. Accordingly, as long as the rebate practices upon acceleration and other prepayment situations do not differ, and as long as the rebate of unearned interest in such prepayment situations is disclosed pursuant to 12 C.F.R. § 226.8(b)(7), separate disclosure of the acceleration rebate practice is not required. See Ford Motor Credit Co. v. Milhollin, supra at note 8. In Milhollin, the Supreme Court found this interpretation of the requirements of the Act was a reasonable one and therefore deemed it to be controlling.

That same interpretation is controlling in this case. Under the staff interpretation First Federal was not required to disclose the right of acceleration. Nor was it required to disclose the effect of the acceleration clause. The disclosure statement received by the Vegas from First Federal specifically indicated that "in no event will any portion of the unearned finance charge be charged for any prepayment." The effect of the acceleration clause contained in the note was consistent with this disclosure. It stated that upon default, "the entire principal amount outstanding hereunder and accrued interest thereon shall at once become due and payable." (Emphasis added.) The acceleration clause in the mortgage was somewhat less clear. It provided that upon default, the creditor "may declare all of the sums secured by this Mortgage to be immediately due and payable." The district court held that the note and mortgage, read in conjunction with one another, allowed the acceleration of the principal due plus earned interest. We believe that the district court's construction of the documents was correct. Accordingly, unearned interest was not retained by First Federal either upon acceleration or upon prepayment. Since the practice was the same in both situations and since the prepayment practice was disclosed under 12 C.F.R. § 226.8(b)(7), separate disclosure of the same practice was not required under 12 C.F.R. § 226.8(b) (4). Therefore, First Federal's failure to disclose either the acceleration clause or the effect of such a clause was not a violation of the Truth in Lending Act.

B. Attorneys' fees

Both the note and mortgage signed by the Vegas provided that in the event of a default, the bank "shall be entitled" to collection costs and reasonable attorneys' fees. This provision was not contained in the disclosure statement. The Vegas maintain that it should have been disclosed under 12 C.F.R. § 226.8(b)(4) as a default charge payable in the event of a late payment.

In Official Staff Interpretation No. FC-0054, the Federal Reserve Board staff concluded that charges for attorneys' fees and foreclosure costs need not be disclosed unless they are assessed automatically upon default.

Specifically, you ask whether attorney's fees and foreclosure costs assessed on a non-automatic basis at the sole discretion of the creditor need to be disclosed pursuant to that section. It is staff's opinion that, if the imposition of these charges is automatic (for example, if the charge becomes immediately due and collectible by virtue of default), the charges must be disclosed under § 226.8(b)(4). If, however, the imposition of the charge is not automatic but is conditioned upon employment of the services of an attorney to effect collection or expenditure of amounts in conjunction with foreclosure proceedings, such charge need not be disclosed under § 226.8(b)(4).

This staff interpretation is controlling unless it is demonstrably irrational. Ford Motor Credit Co. v. Milhollin, supra. Those courts which have considered this same issue have consistently followed the staff interpretation. Anderson v. Southern Discount Co., 582 F.2d 883 (4th Cir. 1978); Price v. Franklin Investment Company, Inc., 574 F.2d 594 (D.C. Cir. 1978); Mirabal v. General Motors Acceptance Corp., 537 F.2d 871 (7th Cir. 1976). We also believe that it is dispositive. Accordingly, since the imposition of attorneys' fees and foreclosure costs in this case was not automatic and was conditioned on incurring such expense, such charges were not required to be disclosed.

C. Late...