The opinion of the court was delivered by: LUONGO
Plaintiffs are four borrowers, each of whom entered into loan contracts with one of the three commercial lending company defendants.
Count 1 of plaintiff's complaint challenges the defendants' practice of failing to disclose to the borrower that they do not rebate unearned finance charges when, as the result of borrower's default, they accelerate the loan and institute suit to recover all amounts due under the defaulted loan prior to the maturity of the loan. Count I alleges that this practice violates the Truth in Lending Act, 15 U.S.C. §§ 1638(a)(9), 1639(a)(7) (hereinafter the Act) and Regulation Z thereunder, 12 C.F.R. § 226.8(b)(4). Count II alleges that the non-rebate practice itself is contrary to the Pennsylvania Banking Code, 7 P.S. § 309(f) and the Pennsylvania Consumer Discount Company Act, 7 P.S. § 6213K.
Plaintiffs seek to maintain the suit as a class action on behalf of all Pennsylvania residents who have in the past entered into loan transactions which have been accelerated or which are subject to such acceleration provisions, and which did not provide for the rebate of pre-computed unearned finance or insurance charges upon acceleration. Plaintiffs also seek to maintain the suit against the class of Pennsylvania lending institutions which have entered into loan agreements with members of the proposed plaintiff class providing for pre-computed interest, but not for the rebate of the unearned portion of such interest if the loan is accelerated.
The court's jurisdiction is asserted under 28 U.S.C. § 1337, providing for jurisdiction over suits "arising under any Act of Congress regulating commerce . . .," and under 15 U.S.C. § 1640(e), providing for jurisdiction for suits alleging, inter alia, violation of the Truth in Lending Act's disclosure requirements. Pendent jurisdiction is asserted over the alleged state law violations.
Before me are the motions of defendants Provident National Bank and Associates Consumer Discount Company to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim, and the motion of Liberty Consumer Discount Company to dismiss the federal claim under Fed. R. Civ. P. 12(b) for failure to state a claim and to abstain as to the state claim. The respective plaintiffs have filed memoranda in opposition to each defendant's motion. The primary ground for dismissal is common to each of the three motions: Unearned finance charges which are not rebated at the time the loan is accelerated after default are not "default, delinquency, or similar charges payable in the event of late payments," within the meaning of the Truth in Lending Act, 15 U.S.C. § 1638(a)(9), or Regulation Z, 12 C.F.R. § 226.8(b)(4), thereunder, therefore, there is no requirement that their non-rebate be disclosed, and no violation of the Truth in Lending Act or Regulation Z has occurred. Liberty Consumer Discount Company seeks to have this court abstain from adjudicating the instant suit on the ground that the issue of the validity under state law of the practice challenged here is presently before the Pennsylvania state courts in the suits seeking recovery of the defaulted loans, and the issue has not previously been interpreted by the Pennsylvania state courts.
The specific facts of each loan arrangement are unimportant for purposes of the present motions. The relevant facts may be generally summarized as follows. Each of the named plaintiffs entered into loan agreements with one of the named defendant-lenders. The amounts borrowed range from $452.05 to $3051.35. The loans were made to enable the borrower to purchase items of personal property (none was for the purchase of a motor vehicle) or to refinance a previous loan from the same lender. Some of the loans were unsecured and others were secured with "household goods" and/or an automobile. Each loan was to be repaid in installments, with finance charges, and in some instances insurance charges, added to the principal. The total amount owed is referred to as the Total Amount Due. Each agreement includes a disclosure statement setting forth the amount financed (principal), the finance charge (interest), any life insurance charge, the total amount due, and the annual percentage rate (interest rate). Charges for late payments are also disclosed. Each loan agreement contains an acceleration clause giving the lender the right to declare the total unpaid balance (total amount due less payments made) immediately due and payable in the event that the borrower defaults on any payment. Finally, each agreement contains a prepayment clause which states, in effect, that the total unpaid balance may be paid by the borrower at any time before it is due, and in the event of such prepayment, the lender would rebate to the borrower unearned finance charges, i.e., finance charges included in the total unpaid balance which at the time the loan was prepaid had not yet accrued.
Each plaintiff, after making only a few, or in some cases no, installment payments defaulted on the loan. After some period, the respective lender exercised its right of acceleration and instituted civil suit in state court against the borrowers for the total unpaid balance due under the loan. Neither at the time suit was instituted, nor at any time subsequent thereto, did the lender rebate to the plaintiffs any portion of the finance charges that were unearned as of the time suit was instituted. The disclosure statement accompanying each loan agreement contains no statement that such unearned finance charges would not be rebated to the borrowers upon acceleration.
The recent decision of the Court of Appeals for the Third Circuit in Johnson v. McCrackin-Sturman Ford, Inc., 527 F.2d 257 (3d Cir. 1975), bears heavily on the issues presented in the instant case. In that case plaintiffs entered into a retail installment contract with an automobile dealer to finance the purchase of an automobile. The contract, but not the disclosure statement, contained a typical acceleration provision giving the dealer "the right to declare all amounts due or to become due hereunder to be immediately due and payable" in the event of default in any payment by the buyer. The disclosure statement delineated the charges that would be assessed against plaintiffs in the event of late payment of an installment, but it did not include a description of the right of acceleration in the event of late payment. Plaintiffs made none of the payments required under the contract, and the automobile was ultimately repossessed by the dealer. Thereafter, plaintiffs instituted suit in District Court alleging that the disclosure statement delivered with the contract did not comply with the Truth in Lending Act and Regulation Z thereunder. They sought statutory damages for the inadequate credit disclosures.
The District Court held that the acceleration provision was a "default, delinquency, or similar charges payable in the event of late payments" under § 128(a)(9) of the Truth in Lending Act, 15 U.S.C. § 1638(a)(9), and § 226.8(b)(4) of Regulation Z, 12 C.F.R. § 226.8(b)(4) which, therefore, had to be disclosed. The Court of Appeals reversed. It began its analysis by paraphrasing the Congressional declaration of purpose set forth in 15 U.S.C. § 1601: The Truth in Lending Act's "purpose is to assure credit customers a meaningful disclosure of credit terms, thus enabling these consumers to compare more readily the various available credit terms and thereby avoid the uninformed use of credit." 527 F.2d at 262. "The Act is a remedial statute that should be construed liberally to ensure achievement of these goals." Id. (citations omitted). See also N.C. Freed Co. v. Board of Governors of the Federal Reserve System, 473 F.2d 1210, 1214 (2d Cir.), cert. denied, 414 U.S. 827, 38 L. Ed. 2d 61, 94 S. Ct. 48 (1973). The Court of Appeals recognized that acceleration clauses could have substantial impact on the borrowing consumer:
"Absent a provision to the contrary, a creditor receives a windfall when he accelerates payment of a contractual obligation because the accelerated debt obligation includes an unearned finance charge. This results from the fact that the finance charge on the stated debt was computed on the basis of the full credit period until maturity, which period has now been shortened. To remedy this inequitable result, the laws of many states, and some contracts, require the ...