UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: June 27, 1989.
ANNABELLE SMITH, CHARLES COPLIN, MARGARET COPLIN, GLORIA YOUNG AND TITO MANOR
FIDELITY CONSUMER DISCOUNT COMPANY, JERRY SILVER, MARSHALL GORSON, KUTNER BUICK, INC. AND SAMSON MOTORS, INC. ANNABELLE SMITH, CHARLES COPLIN, MARGARET COPLIN, GLORIA YOUNG AND TITO MANOR APPELLANTS IN NO. 88-1444 FIDELITY CONSUMER DISCOUNT COMPANY APPELLANT IN NO. 88-1406
Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civ. No. 87-2026.
Seitz,*fn* Stapleton and Cowen, Circuit Judges.
Opinion OF THE COURT
Seitz, Circuit Judge.
Fidelity Consumer Discount Corporation ("Fidelity") appeals from the final judgment of the district court, specifically the order of the district court granting the motion of Annabelle Smith, Charles Coplin, Margaret Coplin, Gloria Young and Tito Manor (herein denominated "plaintiffs" unless otherwise indicated) for summary judgment on their claims under the Truth-in-Lending Act ("TILA"), 15 U.S.C. 1601 et seq. The plaintiffs cross-appeal from the final judgment of the district court granting the motion of Fidelity, Jerry Silver ("Silver"), and Marshall Gorson ("Gorson") for summary judgment on plaintiffs' claims under the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. 1961, et seq., the Pennsylvania Usury Law, 41 P.S. 502-504 and the Pennsylvania Unfair Trade Practice and Consumer Protection Law, 73 P.S. 201-1, et seq. The district court had jurisdiction pursuant to 28 U.S.C. § 1331 as well as the doctrine of pendent jurisdiction. We have jurisdiction under 28 U.S.C. § 1291.
Fidelity, a Pennsylvania corporation in the business of making loans to the general public, is a wholly owned subsidiary of Equitable Credit and Discount Company ("Equitable"). Silver is the President and chief operating officer of Fidelity. Gorson is the majority stockholder of Equitable. For the purposes of the cross-appeal, they will be referred to collectively as "Fidelity" unless otherwise indicated.
The claims of the plaintiffs arose in connection with three loans extended by Fidelity. In each of the three loan transactions, Fidelity extended credit for the purchase of an automobile and held as security the buyer's, or in one case the buyer's cosigner's, home as security for the car loan. Because the district court entered judgment on cross-motions for summary judgment, our review is plenary. Solomon v. Klein, 770 F.2d 352, 353 (3d Cir. 1985).
We begin by addressing plaintiffs' TILA claims and later discuss plaintiffs' usury, RICO and Unfair Trade Practice claims.
A. PLAINTIFF'S TILA CLAIMS
Through TILA, Congress sought to remedy the "divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them." Johnson v. McCrackin-Sturman Ford Inc., 527 F.2d 257, 262 (3d Cir. 1975). Indeed, the congressionally stated purpose of TILA is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him." 15 U.S.C. § 1601(a). TILA, as a remedial statute which is designed to balance the scales "thought to be weighed in favor of lenders," is to be liberally construed in favor of borrowers. Bizier v. Globe Financial Services, 654 F.2d 1, 3 (1st Cir. 1981). See Johnson, 527 F.2d at 262.
TILA achieves its remedial goals by a system of strict liability in favor of the consumers when mandated disclosures have not been made. 15 U.S.C. § 1640(a). A creditor who fails to comply with TILA in any respect is liable to the consumer under the statute regardless of the nature of the violation or the creditor's intent. Thomka v. A.Z. Chevrolet Inc., 619 F.2d 246, 249-250 (3d Cir. 1980). "[Once] the court finds a violation, no matter how technical, it has no discretion with respect to liability." Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976).
A single violation of TILA gives rise to full liability for statutory damages. Damages include actual damages incurred by the debtor plus a civil penalty equal to double the finance charge up to a maximum of $1,000. 15 U.S.C. 1640(a)(1) and (a)(2)(A)(i). Multiple violations of TILA in the course of a single loan transaction do not yield multiple civil penalties but result in only a single penalty. 15 U.S.C. § 1640(g).
In addition, when a creditor takes a security interest against property which is the principal dwelling of the debtor, the debtor has the right to rescind the transaction until the later of (1) midnight of the third day following the transaction or (2) the date on which the creditor delivers to the consumer the notice of the right to rescission and the material disclosures that TILA requires. 15 U.S.C. § 1635. Exercise of the right to rescind under § 1635 results in discharge of the consumer's liability for any finance or other charge and in a discharge of any security interest taken in conjunction with the extension of credit. 15 U.S.C. § 1635(b).
To implement TILA, Congress "delegated expansive authority to the Federal Reserve Board to elaborate and expand the legal framework governing commerce in credit." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 560, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980). "The Board exerted its responsibility by promulgating Regulation Z, 12 C.F.R. Part 226 (1979)," Id., which "absent some obvious repugnance to the statute should be accepted by the courts, as should the Board's interpretation of its own regulation." Anderson Brothers Ford v. Valencia, 452 U.S. 205, 219, 68 L. Ed. 2d 783, 101 S. Ct. 2266 (1981). As the Supreme Court has noted, "traditional acquiescence in administrative expertise is particularly apt under TILA, because the Federal Reserve Board has played a pivotal role in setting the statutory machinery in motion [and] . . . the Act is best construed by those who gave it substance in promulgating regulations thereunder." Ford Motor Credit Co. v. Milhollin, 444 U.S. at 566.
Here Smith as well as Charles and Margaret Coplin requested, and the district court awarded them, both statutory and rescissory damages. Young and Manor sought and were awarded only statutory damages. We will address Fidelity's attack on each liability determination in order.
1. Annabelle Smith
Herbert Smith is the son of Annabelle Smith. On January 27, 1984, the Smiths and Fidelity entered into a loan transaction to enable Herbert to buy a used car. Annabelle Smith used her house as collateral for the loan.
The total amount of financing was $5,500. Of the $5,500, $4,216.59 was given directly to Herbert and Annabelle in the form of a check made out to the two of them. In addition, $1,008.34 was charged as an "origination fee:" $990 as prepaid finance charges and $18.34 as prepaid interest. Finally, $257.07 was used to record the fact that the title to Annabelle Smith's house was clear and for other related costs. Among the $257.07 charges, was a charge of $13. This $13 was to be used to pay the filing fee to clear Smith's title of record and establish that Troy Acceptance Corporation, which previously held a lien on Smith's property, no longer had a lien on Smith's property. Fidelity, however, was never able to obtain the necessary release from Troy and the filing was never made; the $13 was not returned to Annabelle Smith.
In May, 1986, Annabelle Smith sought to rescind the transaction pursuant to TILA but Fidelity refused. Annabelle Smith then brought this action seeking both rescissory relief and monetary damages under TILA. Specifically, Smith claims, and the district court found, that Fidelity violated TILA (1) by failing to disclose the $13 fee as a finance charge; and (2) by failing to properly itemize in its disclosure form the amount financed. On appeal, Smith continues to rely on the above bases for TILA liability found by the district court as well as several other grounds for imposing liability. The district court did not consider the merits of these additional grounds. Fidelity challenges each of the findings of liability and asks us in the exercise of our discretion not to review the additional grounds.
a. $13 Filing Fee
Finance charges are defined at 15 U.S.C. 1605(a) as "the sum of all charges, payable directly or indirectly by the person to whom credit is extended, and is imposed directly or indirectly by the creditor as an incident to the extension of credit." Failure to disclose the total finance charge not only affords the consumer a remedy of statutory damages but also constitutes a material violation entitling the consumer to rescind the loan. 15 U.S.C. 1640(a); 12 C.F.R. 226.23(a)(3) n. 48.
In the Smith transaction, Fidelity withheld certain money from the loan proceeds distributed to Smith in order to pay for filing fees to clear title to Smith's house. Under 12 C.F.R. 226.4(e)(2) "[taxes] and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing or satisfying a security claim" are not finance charges. In this case, however, Fidelity was unable to obtain a signed release from Troy Acceptance because Troy was no longer in business and Fidelity simply retained the money, i.e. $13, which it had planned to use to clear Smith's title of Troy's lien. On these facts the district court found that the $13 was an undisclosed finance charge because the funds were never used to release a security interest.
We conclude, on the facts of this case, that the $13 charge cannot properly be considered a "finance charge." The effect of subsequent events on the accuracy of disclosures is dealt with in 12 C.F.R. 226.17(e) which states:
If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this regulation.
The purpose of this regulation is to relieve creditors from making disclosures regarding every contingency which might arise. Cf. Greer v. General Motors Acceptance Corp., 505 F. Supp. 692, 694 (N.D.Ga. 1980). Indeed, the Official Staff Interpretation of 226.17(e) states:
Inaccuracies in disclosures are not violations if attributable to events occurring after the disclosures are made. For example, when the consumer fails to fulfill a prior commitment to keep collateral insured and the creditor provides the coverage and charges the consumer for it, such a charge does not make the original disclosure inaccurate.
12 C.F.R. 226.17(e) (Supp. I 1988).
It is undisputed that the $13, when charged by Fidelity, was taken by Fidelity for the purpose of releasing the lien of Troy of record. There is no contention that Fidelity, at the time when it charged the $13, knew that Troy was no longer in business or that it would be unable to obtain a signed release from a Troy representative.*fn1 Therefore, when Fidelity disclosed to Smith that $13 was being charged to release Troy's lien of record, the disclosure was accurate. It was only the subsequent inability on the part of Fidelity to obtain the release, despite diligent efforts, that prevented compliance with TILA. We conclude that because Fidelity charged $13, intending to use it to release a lien of record, Fidelity's subsequent inability to obtain this release, due to no fault of its own, does not render the fee a "finance charge" within the meaning of the statute. Fidelity therefore did not violate the statute when it failed to include the sum as a finance charge. Thus, we find ourselves in disagreement with the district court.
b. Inaccuracy In Itemization of Amount Financed
In the Smith transaction the TILA disclosure statement listed the "amount given to me directly" as $5,224.93 while the actual amount given directly to Annabelle Smith was only $4,216.59. Based on this inaccuracy Smith asks for both statutory and rescissory relief.
Section 226.18 of Regulation Z sets forth the disclosures required to be made by a creditor in a closed-end credit transaction. In enumerating more than fifteen items to be disclosed, 226.18 provides in pertinent part:
For each transaction, the creditor shall disclose the following information, as applicable:
(b) Amount Financed. The "amount financed" using the term, and a brief description such as "the amount of credit provided to you or on your behalf."
(c) Itemization of amount financed.
(1) A separate written itemization of the amount financed including:
(i) The amount of any proceeds distributed directly to the consumer.
The district court concluded that Fidelity violated 226.18(c)(1) of Regulation Z in failing to disclose accurately the amount distributed directly to Smith. The district court then determined that this violation entitled Smith both to statutory damages and to rescind the loan transaction. Fidelity does not dispute the fact that it violated 226.18 and that Smith is entitled to the $1,000 in statutory damages which the district court awarded to her. Fidelity, however, claims that Smith is not entitled to rescission based on this violation.
Smith's right to rescission is found at 15 U.S.C. 1635. This section allows a borrower to rescind a loan transaction until all "material disclosures" are delivered to him or her. Footnote 48 to 12 C.F.R. § 226.23 (a) (3) states that "[the] term 'material disclosures' means the required disclosures of annual percent rate, the finance charge, the amount financed, the total of payments, and the payment schedule."*fn2 Thus, on its face the applicable regulation appears to foreclose Smith's argument that the itemization of the amount financed is a material disclosure.
Moreover, in using the term "means" in defining material disclosures, rather than a phrase such as "including but not limited to" or "among other things," one is driven to the conclusion that the list of material disclosures was meant to be exhaustive rather then illustrative. Cf. Official Staff Interpretations, 12 C.F.R. 226(4)(a) (Supp. I 1988). The language of the regulation therefore appears to leave no room for a construction which expands upon the stated language. See Official Staff Interpretation 12 C.F.R. 226.23(a)(3) (Supp. I 1988) ("Footnote 48 sets forth the material disclosures which must be provided before the rescission period can begin to run. . . . Failure to give the other required disclosures does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions.").
In an attempt to circumvent the language of 226.18, Smith argues that the disclosure of the finance charges and the disclosure of the itemization of the amount financed are in reality indistinguishable as the former merely requires disclosure of the sum while the latter requires disclosure of the parts. Thus, Smith argues, it is anomalous to treat a breach of one of the disclosure requirements differently from the other.
While Smith's position is superficially attractive, it is analytically flawed. The Federal Reserve Board in promulgating § 226.18 created, as separate disclosure requirements, the need to disclose the amount financed and the need to disclose the itemization of the amount financed. Furthermore, as discussed above, the Board decided that different consequences would flow from the failure to adhere to the different disclosure requirements. To accept Smith's argument would be tantamount to a rejection of the Board's decision to promulgate and treat as separate the two disclosure requirements in question. While we do not know for certain the reason for the Board's decision, we cannot find that the choice is "obviously repugnant" to TILA, and it must therefore carry the day. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 560, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980).
Accordingly, we conclude, contrary to the district court's ruling, that Fidelity's inaccurate disclosure of the itemization of the "amount given to me directly" does not warrant rescissory relief. Fidelity's inaccurate disclosure does, however, entitle Smith to statutory damages pursuant to 15 U.S.C. 1640.
c. Additional Grounds For Relief
Smith proffers two additional grounds which were raised before the district court and which, she contends, this Court could employ to afford her relief. The merits of neither of these grounds was addressed by the district court. While neither of the grounds can enable Smith to collect additional statutory damages under 15 U.S.C. § 1640 because multiple awards are prohibited, these grounds are pertinent insofar as they might provide the predicate for granting rescissory relief.
First, Smith asserts that Fidelity violated 12 C.F.R. § 226.18(b) in failing to disclose a $50 document preparation fee as a finance charge. Smith argues that while document preparation fees which are "bona fide and reasonable in amount" are excludable from the finance charge calculus, 12 C.F.R. § 226.4(c)(7)(ii), the charges in question were not so excludable because they were neither bona fide nor reasonable in amount. Second, Smith argues that Fidelity improperly set out the payment schedule of her loan in violation of 12 C.F.R. § 226.18(g).*fn3 In making this contention Smith acknowledges that a creditor is not liable for a TILA violation which "resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid any such error," 15 U.S.C. § 1640(c), but contends that Fidelity failed to produce evidence that it maintained any procedures designed to avoid error.
In addressing these questions, the district court found that the record was insufficient to determine whether the document preparation fee was reasonable and found that a material fact existed as to whether there was a bona fide error in the disclosure of the payment schedule. We agree with the district court's conclusions and accordingly we will remand these claims to the district court for resolution of the factual disputes.
2. Gloria Young and Tito Manor
Tito Manor is the nephew of Gloria Young. Manor sought to purchase a car from Samson Motors and was told by a Samson Motors salesman that in order to obtain financing for the purchase he would need a co-signer for the loan. His aunt, Gloria Young, agreed to act as his co-signer. The Samson Motors salesman then took a credit application from Young over the telephone; this credit information was passed on to Fidelity. Later, the salesman called Manor and told him that the credit had gone through and asked Manor and Young to come to Samson Motors. The salesman also asked that Young bring the deed to her house when she came.
On July 9, 1986, after arriving at Samson Motors, Manor and Young were driven by a Samson Motors employee to Fidelity's office in order to sign the loan documents, including the execution of a mortgage on Young's house. While at Fidelity's office, Young and Manor signed the loan documents and were issued a check dated July 15, 1986 in both their names for the purchase price of the car, i.e. $3,613.87. Young and Manor immediately endorsed the check to the order of Samson Motors and delivered the check to a Fidelity representative.*fn4 The total loan to Manor and Young was for $4,537.01 which included a $544.44 origination fee and other related administrative costs. Thereafter, the Samson Motors employee drove Manor and Young back to Samson Motors and Manor was allowed to drive away with the car for which he had just arranged financing. Subsequently, Manor lost his job, ceased making his loan payments and Fidelity began foreclosure proceedings against Young's house.
In the action filed by Manor and Young, they do not seek rescission of the loan transaction but rather seek statutory damages under TILA. The district court held that Young and Manor's endorsement of the loan check prior to the expiration of the three day rescission period violated 15 U.S.C. 1635 and the regulations promulgated thereunder in that it constituted premature disbursal of loan proceeds and undermined the plaintiffs' perception of their right to rescind. The district court also found that the record was insufficient to determine whether the fees charged by Fidelity for document preparation and for a credit report were bona fide and reasonable. Fidelity attacks the district court's finding of liability on Young and Manor's premature performance claim and asks that this Court refrain from ruling on the merits of Young and Manor's other claim.
a. Delay of Creditor's Performance
In a transaction such as the instant one, where a security interest is granted by a borrower against the borrower's principal dwelling, TILA requires that the borrower be given a right to rescind the loan transaction for three business days. 15 U.S.C. 1635. Pursuant to 1635, 12 C.F.R. 226.23(c) has been promulgated by the Board of Governors of the Federal Reserve System and provides in pertinent part:
(c) Delay of creditor's performance.
Unless a consumer waives the right of rescission under paragraph (e) of this section, no money shall be disbursed other than in escrow, no services shall be performed and no materials shall be delivered until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded.
The meaning of this regulation is elucidated by the relevant Official Staff Interpretation which provides in pertinent part:
23(c) Delay of creditor's performance.
1. General Rule. Until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded, the creditor must not, either directly or through a third party:
* Disburse the loan proceeds to the consumer
* Begin performing services for the consumer.
* Deliver materials to the consumer
2. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited by state law, the creditor may, for example:
* Prepare the loan check
* Perfect the security interest
* Prepare to discount or assign the contract to a third party
* Accrue finance charges during the delay period.
The discrete question presented on appeal is whether Fidelity's acts of drafting the check, making it payable to Manor and Young, and presenting the check to them for their endorsement prior to the expiration of the rescission period violated 15 U.S.C. 1635 and the applicable regulation. Stated even more narrowly, this Court must decide if the prohibition against the performance of any services for the consumer prior to the expiration of the three day wait period has been violated.
The Official Staff Commentary to the applicable regulation notes that a creditor, while able to "prepare a check," is prohibited from "beginning actual performance." 12 C.F.R. 226.23(c) (Supp. I 1988) (emphasis added). Admittedly the line between preparation and beginning actual performance is a fine one. Fidelity's acts, however, crossed the line and constituted impermissible acts of performance.
In this case, Fidelity actually delivered the post-dated check to Young and Manor so that they could endorse the check to the order of Samson Motors and then return it to Fidelity. This was done in apparent anticipation that the check would be delivered by Fidelity to Samson Motors at the end of the rescission period. We conclude that Fidelity's actions were of such a nature as to be labeled the "beginning of actual performance" rather than mere preparation.*fn5 Accordingly, we agree with the district court, albeit on a different ground, that Young and Manor are entitled to statutory damages under TILA. See 15 U.S.C. 1640.
b. Reasonableness of Fees
Young and Manor only sought statutory damages and not rescissory relief. Having found that they are entitled to such damages based on the above described TILA violation, we need not reach the issue of whether the fees charged by Fidelity for document preparation and credit reports were bona fide and reasonable.
3. Charles and Margaret Coplin
Plaintiffs Charles and Margaret Coplin are the son and daughter-in-law of John Coplin. John Coplin is now deceased. On October 31, 1984, John Coplin, then a 75 year old illiterate, entered into a loan transaction with Fidelity to enable him to purchase a used car from Paschall Auto.
Four aspects of this loan transaction are worthy of extended note. First, while John Coplin was in Fidelity's office on October 31, 1984, he endorsed a check dated November 5, 1984 in the amount of $1,761.50 to the order of Paschall Auto; the check had been issued by Fidelity to John Coplin. Second, Fidelity and John Coplin signed a deed conveying Coplin's home to Equitable as security for the loan. Third, Fidelity, in order to obtain a first priority lien on John Coplin's home, lent John Coplin $3,429.50 in order to satisfy then existing liens on his home. In addition, Fidelity lent John Coplin $91.00 which was used by Fidelity to pay filing fees to record properly the satisfaction of prior liens. Finally, Fidelity charged John Coplin $1,072 as a service charge for extending the loan.
In December 1985, John Coplin passed away. Plaintiffs Charles and Margaret Coplin, as successors in interest, succeeded to the ownership of John's home. By a letter to Fidelity dated November 3, 1986, Charles and Margaret sought to rescind the October 31, 1984 transaction. Fidelity refused to allow the Coplins to rescind the transaction and thereafter the Coplins filed this action seeking both rescissory relief and statutory damages under TILA.
The district court awarded the Coplins both rescissory relief and statutory damages. The district court advanced the following three grounds for its decision. First, the district court found that Fidelity inaccurately itemized the amount financed by misstating on the TILA disclosure form the amount given directly to John Coplin. Second, the district court held that Fidelity violated the letter and the spirit of 15 U.S.C. § 1635 by delivering the loan proceeds check to John Coplin, and receiving his endorsement thereon, prior to the expiration of the three day rescission period. Finally, the district court determined that Fidelity failed to disclose certain finance charges in violation of 12 C.F.R. § 226.23(a)(3) n. 48. Fidelity attacks each of these grounds for liability and they will be dealt with in turn.
a. Statute of Limitations
We first examine the two relevant periods of limitations under TILA to determine if the Coplins' TILA claims are time barred.*fn6 First, under 15 U.S.C. 1635(f) a borrower has three years after the date of consummation of the transaction within which to bring an action for rescission. In this case, the transaction was consummated, i.e., a contractual relationship was created, no earlier than October 31, 1984. See Moor v. Travelers Insurance Co., 784 F.2d 632, 633 (5th Cir. 1986) (credit transaction consummated and statute of limitations begins to run from "the moment a contractual relationship is created between a creditor and a customer."). Because this action was filed on April 18, 1987, the Coplins' claim for rescission is timely under the statute.
Second, in order to maintain an action for damages under TILA, 15 U.S.C. § 1640, the action must be brought "within one year from the occurrence of the violation." 15 U.S.C. § 1640(e). The Coplins allege several violations which derive from the disclosures made to John Coplin on and around October 31, 1984. Therefore, as to each of these claimed TILA violations, the statute of limitations has run.*fn7
The Coplins also argue that Fidelity wrongfully refused to allow them to rescind the loan transaction. The Coplins sent Fidelity a notice on November 3, 1986, stating that they wished to rescind the loan transaction in question. Fidelity, however, refused to allow the Coplins' to rescind. If the Coplins are correct in their assertion that they were entitled to rescind the instant transaction, then Fidelity is liable for statutory damages based on the Coplins' timely claim that Fidelity wrongfully denied their request to rescind the transaction. The Coplins' entitlement to statutory damages under 15 U.S.C. § 1640 is, therefore, wholly dependent upon, and flows directly from, their entitlement to rescissory relief. We turn to this issue.
b. Inaccuracy in Itemization of Amount Financed
In the Coplin transaction, Fidelity erroneously disclosed that the amount given to John Coplin directly was $2,833.50 when in fact John Coplin only received $1,761.50. This error, as previously discussed, violated 12 C.F.R. § 226.18(c), requiring a creditor to state accurately the amount of any proceeds distributed directly to the consumer. However, as we noted above, this type of a violation of 226.18(c) does not support a claim for rescission. This being so, the Coplins are not entitled to any relief based on Fidelity's inaccurate disclosure of the amount given directly to John Coplin. This is so because of our conclusion above that any entitlement to damages would flow from an entitlement to rescissory relief.
c. Delay of Creditor's performance
While John Coplin was in Fidelity's office on October 31, 1984 he endorsed a post-dated check to the order of Paschall Auto. Fidelity's act of delivering the post-dated check to John Coplin so that he could endorse the check and return it to Fidelity, prior to the expiration of the three day rescission period, violated 15 U.S.C. § 1635 and 12 C.F.R. § 226.23(c). The question with which this Court must now grapple is whether this violation warrants rescissory relief.
According to 15 U.S.C. § 1635(a) an "obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and the rescission forms required under this section together with a statement containing the material disclosures required by this subchapter, whichever is later." This language is effectively parsed by the Official Staff Interpretation of 12 C.F.R. § 226.23(a) (3) which provides in pertinent part:
The period within which the consumer may exercise the right to rescind runs for 3 business days from the last of 3 events
* Consummation of the transaction.
* Delivery of all the material disclosures.
* Delivery to the consumer of the required rescission notice.
As the notice of rescission was not sent until November 3, 1986, much later than three days after the consummation of the loan transaction, this Court must determine whether Fidelity's actions in beginning performance of the loan transaction constituted a failure to deliver either the required material disclosures or the required rescission notice to John Coplin. Material disclosures for the purpose of the right to rescind are defined as the "annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule." 12 C.F.R. 226.23(a)(3) n. 48. Because Fidelity's premature performance neither itself constituted a breach of the material disclosure requirement nor directly or indirectly impugned any of the material disclosures, we cannot find a basis for rescission in the material disclosure language.
In reaching this conclusion this Court is aware of decisions to the contrary. In re Celona, 90 Bankr. 104, 110 (Bankr. E.D.Pa. 1988), aff'd mem., 98 Bankr. 705 (E.D.Pa. 1989); In re Gurst, 79 Bankr. 969, 975 (Bankr. E.D.Pa. 1987). In both these cases the court determined that a violation of 226.23(c), specifically, the premature disbursal of loan proceeds, was "sufficiently material to accord the Debtors a right to rescind the transaction." In re Celona, 90 Bankr. at 110. We find this reasoning unpersuasive as it expands the meaning of "material violations" beyond the parameters clearly set forth by the Board. Given the deference with which we must treat the Board's regulations, we cannot accept the holdings of the Bankruptcy Court in In re Celona and In re Gurst.
Based on similar reasoning, we find that Fidelity's actions did not violate the disclosure requirements associated with the notice of rescission. TILA provides at 15 U.S.C. § 1635(b) that "[the] creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section." Pursuant to this section the Board has promulgated 12 C.F.R. 226.23(b) which provides:
(b) Notice of right to rescind. In a transaction subject to rescission, a creditor shall deliver 2 copies of the notice of the right to rescind to each consumer entitled to rescind. The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following:
(1) The retention or acquisition of a security interest in the consumer's principle dwelling.
(2) The consumer's right to rescind the transaction.
(3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business.
(4) The effects of rescission, as described in paragraph (d) of this section.
(5) The date the rescission period expires.
The premature performance in this case, while a violation of 226.23(c), is most certainly not a violation of § 226.23(b). The two subsections, while adjacent in the C.F.R., are separate with a violation of only 226.23(b) extending the rescissory period. Thus, the cases cited by the Coplins, Gill v. Mid-Penn Consumer Discount Co., 671 F. Supp. 1021 (E.D.Pa. 1987), aff'd mem. op., 853 F.2d 917 (3d Cir. 1988) and In re Tucker, 74 Bankr. 923 (Bankr.E.D.Pa. 1987) in which violations of § 226.23(b) were alleged and proven are unhelpful in the instant context.
The Coplins rely on Curry v. Fidelity Discount Co., 656 F. Supp. 1129 (E.D.Pa. 1987) to support their position. In Curry the borrower, on the day the transaction was consummated, signed both a post-dated certificate of confirmation that the transaction had not been rescinded and a post-dated check for the loan proceeds. On these facts the court concluded that the borrower was entitled to rescission because the creditors "failed their legal obligation to provide clear notice to the plaintiff of the rescission rights in direct violation of 1635(a)." Id. at 1132.
While this reasoning is not unsound, we are not persuaded that it applies to the undisputed facts of the instant case. The requirements found in § 226.23(b) all pertain to disclosures which must be provided within the written notice containing the borrower's right to rescind the transaction. Although there may be a case in which the creditor's acts or words effectively negate the written notice provided to a borrower, we cannot conclude that Fidelity's act of issuing the proceeds check to John Coplin, and obtaining John Coplin's signature thereon, rendered the disclosures made pursuant to 12 C.F.R. 226.23(b) a nullity.
Accordingly, the Coplins are not entitled to rescissory relief based on Fidelity's premature performance in violation of 12 C.F.R. § 226.23(c).
d. Undisclosed Finance Charges
The failure to disclose accurately the finance charge is a material violation of TILA entitling the borrower to rescind the loan transaction. 12 C.F.R. § 226.23(a)(3) n. 48. The Coplins contend that Fidelity inaccurately disclosed the finance charge in that Fidelity failed to include in the finance charge calculus tax and mortgage debts which were paid out of the loan proceeds as well as certain document preparation, appraisal and credit report charges.*fn8
The district court found as fact that Fidelity "required Mr. Coplin to satisfy a number of obligations which were prior liens on his property as . . . follows
1983-84 delinquent real estate taxes $521.14
Germantown Savings Bank 865.13
Fleet Consumer Discount Company 362.09
Central Credit 1,681.14"
These liens were satisfied by monies lent by Fidelity to John Coplin as part of the transaction in issue. The Coplins claim that the monies lent to satisfy the prior liens were finance charges in that they were charges imposed directly by Fidelity as an incident to the extension of credit. 15 U.S.C. § 1505(a). Thus, the argument continues, because these finance charges were not disclosed as such, the Coplins are entitled to rescissory relief and statutory damages. 15 U.S.C. § 1635; 12 C.F.R. § 226.23(a)(3) n. 48; 15 U.S.C. § 1640.
The question presented to this Court is whether monies lent to the debtor to satisfy the debtor's previously owing taxes and prior mortgages are charges imposed directly or indirectly by Fidelity as an incident to the extension of credit as those terms are defined by statute and applicable regulation. As with all questions of statutory interpretation, our analysis begins with the language of the statute. TILA provides as follows:
(a) Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all 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. The finance charge does not include charges of a type payable in a comparable cash transaction. Examples of charges which are included in the finance charge include any of the following types of charges which are applicable:
(1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges.
(2) Service or carrying charge.
(3) Loan fee, finder's fee, or similar charge.
(4) Fee for an investigation or credit report.
(5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss.
While the statutory language charges . . . "imposed directly or indirectly as an incident to the extension of credit" is extremely broad, this language is not unlimited. This is demonstrated by the examples of finance charges listed in conjunction with it. Examining this list, we are left with the firm impression that prior liens are not within the definition of finance charge as that phrase was used by Congress.
Our conclusion is reinforced when we examine both 12 C.F.R. § 226.4(b) and 12 C.F.R. § 226.20(a). It is provided at § 226.4(b):
(b) Examples of finance charge. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for the similar account without a credit failure.
(3) Points, loan fees, assumption fees, finder's fees, and similar charges.
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance protecting the creditor against the consumer's default or other credit loss.
(6) Charges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or loss of income insurance, written in connection with a credit transaction.
(8) Premiums or other charges for insurance against loss or damage of property, or against liability arising out of the ownership or use of property, written in connection with a credit transaction.
(9) Discounts for the purpose if inducing payment by a means other than the use of credit.
As the charges in question do not resemble any of the types of "finance charges" listed in the applicable regulation, the reasonable inference is that such charges are not "finance charges."
This inference is further supported by the language of 226.20(a), which provides in pertinent part:
(a) Refinancing. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation.
The necessary implication from the inclusion of the unearned portion of the old finance charge within the new finance charge -- without any mention of the prior debt being part of the new finance charge -- is that refinanced debts are not "finance charges" within the meaning of TILA.
In rebuttal, the Coplins argue that the purpose of TILA to promote the informed use of credit is ill served if the taxes and prior mortgages are not classified as finance charges. This argument lacks a basis in reality. In holding that Fidelity did not have to include the prior debts within the finance charge calculus, this Court is not allowing Fidelity to avoid disclosure of the charges. In fact, each of the charges was accurately disclosed on the TILA disclosure form in the section entitled "itemization of amount financed."*fn9
Accordingly, we hold that the district court erred in finding that the unpaid taxes and unpaid mortgages were finance charges within the meaning of TILA.
e. Obtaining Unrecorded Deed
In the Coplin transaction, Fidelity had John Coplin sign a deed conveying his home to Equitable, Fidelity's parent corporation. This deed, however, was never recorded. On the face of the TILA disclosure statement it was noted: "Security: I am giving you a security interest in my real estate." Moreover, on the Notice of Right to Cancel given to and signed by John Coplin, it was stated: "You are entering into a transaction that will result in a (mortgage/lien/security interest) (on/in) your home."
Fidelity argues that whatever security interest, if any, can be said to have arisen by the execution of the deed by John Coplin to Equitable, such security interest was adequately disclosed. The Coplins disagree and contend that the above statements were insufficient to meet the requirements that the "retention or acquisition of a security interest" and the "effects of rescission" be clearly and conspicuously disclosed. 12 C.F.R. § 226.23(b)(1), (4). The Coplins argue that the disclosures do not indicate the full nature of the security interest taken by Fidelity but only disclose that the transaction would result in a mortgage on Mr. Coplin's home.
We find the Coplins' position without merit. Both the TILA disclosure form and the Notice of Right to Cancel indicated clearly and conspicuously that Fidelity was taking a security interest in Mr. Coplin's residence. Indeed, these disclosures nearly mirror those found on the model forms which have been drafted by the Board. See 15 app. 1700, HI, H-8 (Supp. 1989). Therefore, Fidelity accurately disclosed to John Coplin that a security interest was taken in Mr. Coplin's home.*fn10
Thus, we conclude that on the factual record before this Court, the Coplins were improperly awarded summary judgment on their claims for both statutory damages and rescissory relief.
B. PLAINTIFFS' USURY RICO AND UNFAIR TRADE PRACTICE CLAIMS
Plaintiffs argue on their appeal that the district court erred in granting Fidelity summary judgment based on its conclusion that the Depository Institution Deregulation and Monetary Control Act of 1980 ("DIDMCA"), 94 Stat. 165, as amended, 12 U.S.C. 1735f-7 note (Supp. 1989), preempted the Pennsylvania Usury statutes. It is undisputed that if we find that the Pennsylvania Usury statutes are not preempted then Fidelity will have violated these statutes, the most generous of which allows lenders to charge up to 24% interest per annum. Consumer Discount Company Act, 7 P.S. 6201 et seq. Resolution of this question turns on whether the transactions between plaintiffs and Fidelity fell within the scope of 501(a) of DIDMCA. The plaintiffs concede that their RICO and Unfair Trade practice claims are, as the district court determined, derivative of their Usury claims. Plaintiffs, thus, ask this Court to reinstate and remand the RICO and Unfair Trade Practice claims if we conclude that the Usury claims are not preempted.
Section 501 of DIDMCA provides in pertinent part:
(a) (1) The provisions of the constitution or the laws of any State expressly limiting the rate of interest, discount points, finance charges or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale or advance which is --
(A) secured by a first lien on residential real property, by a first lien on all stock allocated to a dwelling unit in a residential cooperative housing corporation, or by a first lien on a residential manufactured home;
(B) made after March 31, 1980; and
(C) described in section 527(b) of the National Housing Act
12 U.S.C. 1735f-7 note (emphasis added).
Thus, for the state usury laws to be preempted all three of the requirements outlined above must be met. The parties both agree and the district court found that subsections (B) and (C) are clearly established. The only question then is whether each of the loans in the instant case is secured by a first lien on residential real property as required by 501(a)(1)(A).
Our analysis of the scope of 501(a)(1)(A) must begin, as in all cases of statutory interpretation, with the language of the statute. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 1030, 103 L. Ed. 2d 290 (1989). A literal reading of the phrase "any loan secured by a first lien on residential real property," puts the instant transactions within the purview of the statute. In each case, Fidelity, after any previously incurred debts were paid by checks issued by Fidelity, obtained a first priority security against the borrowers' real property. This much is beyond dispute.
On the facts of this case, however, the statutory language is only the beginning of our analysis. We must keep in mind Judge Learned hand's admonition that "there is no surer way to misread any document than to read it literally." Guiseppi v. Walling, 144 F.2d 608, 624 (2d Cir. 1944). As the Supreme Court has stated: "When aid to construction of the meaning of words, as used in a statute, is available, there certainly can be no 'rule of law' which forbids its use, however clear the words may appear superficially." Train v. Colorado Public Interest Research Group. 426 U.S. 1, 10, 48 L. Ed. 2d 434, 96 S. Ct. 1938 (1976), quoting, United States v. American Trucking Assoc., 310 U.S. 534, 543-44, 84 L. Ed. 1345, 60 S. Ct. 1059 (1940). Only recently the Supreme Court noted that the plain meaning of a statute should not be automatically followed where it "would produce results demonstrably at odds with the intention of the drafters." United States v. Ron Par Enterprises, Inc., 109 S. Ct. at 1031.
In examining the legislative history of DIDMCA to divine the intended breadth of the words used by Congress, this Court must seek to find both the purpose for which Congress enacted the law and whether our ruling would further or detract from the congressional purpose. See United Steelworkers of America AFL-CIO v. Weber, 443 U.S. 193, 201, 61 L. Ed. 2d 480, 99 S. Ct. 2721 (1979) ("[A] thing may be within the letter of the statute and yet not within the statute, because not within its spirit nor within the intention of its makers."). Thus, we must arrive at "that interpretation which can most fairly be said to be imbedded in the statute in the sense of being most harmonious with its scheme and with the general purposes that Congress manifested." Commissioner of the Internal Revenue Service v. Engle, 464 U.S. 206, 217, 78 L. Ed. 2d 420, 104 S. Ct. 597 (1984). "The circumstances of the enactment of particular legislation may be particularly relevant to this inquiry." Id.
The particular evil which Congress sought to remedy with the enactment of the usury preemption provision of DIDMCA is apparent from one passage of the Senate Report which accompanied the bill.
The committee finds that where state usury laws require mortgage rates below market levels of interest, mortgage funds in those states will not be readily available and those funds will flow to other states where market yields are available. This artificial disruption of funds availability not only is harmful to potential homebuyers in states with such usury laws, it also frustrates national housing policies and programs.
S.Rep. No. 368, 96th Cong. 2nd Sess. 19 (1980), reprinted in, 1980 U.S. Code Cong. & Ad. News 236, 254.
Furthermore, as Judge Selya has noted:
Remarking on the need for a "stable home financing system" and on a determination that "the severity of the mortgage credit crunches of recent years" must be eased, the senators concluded:
The committee believes that this limited modification in state usury laws will enhance the stability and viability of our Nation's financial system and is needed to facilitate a national housing policy and the functioning of a national secondary market in mortgage lending.
In addition to the adverse effects of usury ceilings on credit availability, mortgage rate ceilings must be removed if savings and loan institutions, as directed by other provisions of [the Act], are to begin to pay market rates of interest on savings deposits. Without enhancing the ability of institutions to achieve market rates on both sides of their balance sheets, the stability and continued viability of our nation's financial system would not be assured. Thus, Federal preemption of State usury ceilings would not only promote national home financing objectives but would provide the resources with which savers could be paid more interest on their savings accounts.
Bank of New York v. Hoyt, 617 F. Supp. 1304, 1310 (D.R.I. 1985) (citing, S.Rep. No. 368 at 19, reprinted in. 1980 U.S. Code Cong. Ad. News at 254).
Indeed, the House and Senate floor debates are replete with comments from members regarding the negative consequence the housing industry was suffering due to the combination of high market interest rates and state usury ceilings. One anecdote will suffice to appreciate the tenor of the debates. Senator Bumpers of Arkansas, who stated that he did not believe it "particularly healthy to be overriding State law," nonetheless conceded that "these are very unique, difficult and unprecedented times in the money markets of this country." 125 Cong. Rec. S30656 (daily ed. November 1. 1979). He went on to comment:
My state is in an economic stalemate. No houses are being built in my state except those subsidized by government bonds.
For example, the front page of the Arkansas Gazette has a story saying that Falcon Jet Corp. . . . cannot recruit [new employees] . . . because there is no place for them to live in Little Rock and no houses are being built there.
This is one example I am using to dramatize and focus on my problems, I know many other Senators have the same problem in their States.
Thus, "DIDMCA is hardly a congressional expression of distaste with state usury laws generally, but a compromise with the ideals of such laws -- that there should be limits upon rates of interest that lenders can legally charge -- in a time of crisis." In re Russell, 72 Bankr. 855, 967 (Bankr. E.D. Pa. 1987). Instead, Congress can be said to have had two aims in mind: "(i) to promote the stability and viability of financial institutions by allowing them to charge and collect realistic market interest on mortgage loans, and (ii) to promote the national housing policy and the American dream of home ownership by legislatively opening a spigot which would insure an increased and evenly-spread flow of available mortgage money." Bank of New York v. Hoyt, 617 F. Supp. at 1310-11.
Viewed with the congressional aims in mind, Congress cannot be said to have intended to preempt state usury laws where a creditor is able to obtain a first priority mortgage against a debtor's house in a transaction in which the debtor is seeking financing to purchase a used car, but is required by the lender to refinance all previous and prior liens against his or her residence.*fn11 In the instant case, Fidelity wrote loans with disclosed annual percentage rates ranging from approximately 31% to 41%. At a time when market interest rates hover at 10-12%, the congressional purpose of promoting the stability and viability of financial institutions, by allowing them to charge realistic interest market interest rates, cannot be said to be furthered.
More importantly, the omnipresent congressional goal of assisting homebuyers to secure homes is frustrated rather than implemented by applying DIDMCA to the instant case. Application of DIDMCA to used car financing, such as in the instant case, encourages lenders to obtain first priority security for their loans against the borrower's homes in order to avoid state usury restrictions. Thus, lenders are encouraged not only to take a mortgage against a borrower's residence but also to lend and require that the debtor borrow, sufficient funds to satisfy all the debtor's prior obligations against their home. The end result: a car buyer's home is at a significantly higher risk of foreclosure because the size of the lien against it is increased by the value of the car and the finance charges associated with its purchase, and the refinanced prior debt is at a rate not subject to usury limitations. Moreover, the lender is able to foreclose on the borrower's home for a default, rather than repossess the car for which the loan was sought. Indeed this is preferable for the lender. Witness the Young/Manor transaction. Uncontradicted deposition testimony reveals that when Manor was unable to continue making loan payments he suggested that Fidelity take the car, at which time a Fidelity representative responded: "we don't want your car; we want your aunt's house." Deposition of Tito Manor, App. at 241.
We cannot believe that this anomalous result was within the congressional intent when it enacted DIDMCA. It seems absurd to find that Congress intended lenders to be able to short circuit state usury limitations and increase the risk of foreclosure in order to enable the borrower to purchase a used car. It must be remembered that Congress intended DIDMCA to be only a limited incursion on a state's historic power to control the rates of interest charged within its their borders. As this Court, quoting venerable authority, had occasion to declare:
All laws should receive a sensible construction. General terms should be so limited in their application as not to lead to injustice, oppression, or an absurd consequence. It will always, therefore, be presumed that the legislature intended exceptions to its language, which would avoid results of this character. The reason of law in such cases should prevail over its letter.
Government of the Virgin Islands v. Berry, 604 F.2d 221, 225 (3d Cir. 1979), quoting, United States v. Kirby, 74 U.S. 482, 486, 19 L. Ed. 278 (1868). See also United States v. Whitridge, 197 U.S. 135, 143, 49 L. Ed. 696, 25 S. Ct. 406 (1935) (Holmes, J.) ("The general purpose is a more important aid to the meaning than any rule which grammar or formal logic may lay down.").
Accordingly, we hold that DIDMCA does not preempt state usury ceilings where, as here, a creditor takes a first lien against a borrower's residence in a transaction in which the borrower only sought a loan to purchase a used car.
Fidelity directs our attention to portions of the legislative history as well as a regulation and interpretation of DIDMCA by the Federal Home Loan Bank Board (the "FHLBB") to support its position that the state usury law was preempted here. Fidelity correctly notes that the original version of 501(a)(1)(A) enacted by Congress provided for a usury exemption for a loan which is:
secured by a first lien on residential real property, by a first lien on stock in a residential cooperative housing corporation where the loan, mortgage or advance is used to finance the acquisition of such stock, or by a first lien on a residential manufactured home.
DIDMCA, Pub. L. No. 96-221, 501(a)(1)(A), 94 Stat. 132, 161. DIDMCA was later amended to remove the language restricting usury preemption in the cooperative housing context to cases where the loan is used to finance the acquisition of the cooperative housing stock. Fidelity contends that the inclusion of a purchase money limitation in the cooperative housing context with no similar limitation in the residential real property context, indicates that Congress did not intend to restrict the applicability of DIDMCA in the residential real property context to purchase money loans.
Fidelity's analysis is flawed. Even if one were to agree with Fidelity that Congress did not intend to restrict the usury preemption in the residential real property context to purchase money mortgages, our ruling would be unaffected. Today's decision does not limit the scope of DIDMCA to purchase money mortgages. We hold that whatever the full scope of DIDMCA, the preemption provision of DIDMCA cannot be said to embrace situations such as the present where the creditor requires a borrower, seeking funds to purchase a used car, to borrow sufficient monies from the creditor to allow the creditor to place his or her mortgage against the borrower's residence in first priority. Simply stated, our conclusion is based on our understanding of congressional intent.
Fidelity also directs this Court's attention to an interpretive rule of the FKLBB as well as an interpretation from the FHLBB. Under authority granted it under DIDMCA, 12 U.S.C. 1735f-7(g) note, the FHLBB has promulgated the following rule:
(a) Loans mean any loans, mortgages, credit sales, or advances
(c) "Loans which are secured by first liens on real estate" means loans on the security of any instrument . . . which makes the interest in real estate . . . specific security for the payment of the obligation secured by the instrument: Provided: That the instrument is of such a nature that, in the event of default, the real estate described in the instrument could be subject to the satisfaction of the obligation with the same priority as a first mortgage . . . where the real estate is located.
Fidelity contends that nothing in this regulation requires a "first lien" to be a purchase money mortgage in order to qualify for federal preemption under 501(a)(1).
Fidelity's contention, while correct, does not assist it because our holding does not rest upon the proposition that the usury preemption included only purchase money mortgages. Moreover, nothing in the regulation can be said to aid Fidelity. To the extent it is relevant, the regulation does little more than parrot the language of 501(a)(1) of the statute. Thus, absent any interpretative guidance from the FHLBB, this Court is bound to interpret the regulation in a manner consistent with the statute from which it derives. See Messer v. Virgin Islands Urban Renewal Board, 623 F.2d 303, 307 n.7 (3d Cir. 1980). Having concluded that Congress did not intend to extend DIDMCA to this case, we similarly construe the regulation promulgated by the FHLBB as not reaching the instant situation.
Finally, Fidelity directs this Court's attention to an official interpretation*fn12 issued by the FHLBB which provides:
Finally, an agreement during the preemption period to refinance an existing first lien mortgage also would be considered the making of a loan for the purposes of section 105(a)(1)(B) of Pub. L. 96-161. Under this type of agreement, the present obligor pays off the prior first lien with proceeds from a new loan secured by a first lien on residential real property at a higher rate of interest.
While the official interpretation quoted above indicates that the FHLBB considered refinancing of existing first lien mortgage loans to be within the purview of DIDMCA, it is of no force on the instant facts. The instant debtors were not seeking to re finance their homes but were seeking to purchase used cars.*fn13 We cannot know exactly what the FHLBB intended when it issued the above interpretation, however, given its limited application to the refinancing of first lien mortgages, it cannot be said to provide sanctuary for the type of financing arrangements here involved.
Accordingly, we hold that on the facts of this case DIDMCA does not preempt state usury laws. In consequence, plaintiffs' RICO and Unfair Trade Practice claims must be reinstated.
The district court's order, insofar as it granted summary judgment to plaintiffs on their TILA claims will be affirmed except as to Smith's claim for rescissory relief and the Coplins' claim for rescissory relief and statutory damages, which will be reversed and remanded for further proceedings consistent with this opinion. The district court's order, insofar as it grants summary judgment in favor of Fidelity, Silver and Gorson on the plaintiffs' usury, RICO and Unfair Trade Practice claims, will be reversed and remanded for further proceedings consistent with this opinion.
Costs in Appeal No. 88-1406 shall be taxed against Fidelity. Costs in Appeal No. 88-1444 shall be taxed as follows: 60% of the costs shall be borne by Fidelity, Silver and Gorson, 20% shall be borne by Smith, and 20% shall be borne by Charles and Margaret Coplin.
STAPLETON, Circuit Judge, Concurring and Dissenting:
I join all of the court's opinion except Sections IIA2a and IIB.
With respect to Section IIA2a, I concur in the result reached by the court but for a materially different reason. As the court correctly notes, 15 U.S.C. 1635 bestows a right of rescission on the debtor in certain transactions in which the creditor takes a security interest in the principal dwelling of the debtor. Since purchase money mortgage transactions are expressly excluded, the most common transactions covered by this section are home equity loans and home improvement financing. R. Rohner, The Law of Truth In Lending, 8.01 (1984).
Section 226.23(c) of the Regulations implements 1635. It prohibits three actions during the three-day period the debtor is given to reconsider the transaction: (1) disbursement of the loan proceeds other than in escrow, (2) performance of services for the consumer, and (3) delivery of materials to the consumer. As I read 226.23(c) in light of the legislative history and the Official Staff Interpretation, the prohibitions against the performance of services and the delivery of materials apply to transactions in which a party has contracted to sell goods or services to the consumer on credit and has obtained a lien on the consumer's principal dwelling to secure that credit. While I think this is the most reasonable reading of the current text of 226.23(c), the meaning of these last two prohibitions was perhaps more readily apparent in the original version of this regulation:
(c) Delay of performance. Except [in cases of waiver of the right to rescission] the creditor in any transaction subject to this section . . . shall not perform, or cause to permit the performance of, any of the following actions until after the rescission period has expired and he has reasonably satisfied himself that the customer has not exercised his right of rescission:
(1) Disburse any money other than in escrow;
(2) Make any physical changes in the property of the customer;
(3) Perform any work or service for the customer; or
(4) Make any deliveries to the residence of the customer if the creditor has retained or will acquire a security interest other than one arising by operation of law.
12 C.F.R. 266.9(c) (1978). As explained contemporaneously by the Board of Governors, the amendment creating the current text of 226.23(c) was intended by way of simplication rather than by way of substantive change. See 46 Fed. Reg. 20,884 (April 7, 1981).
It follows that the prohibitions against the performance of services and the delivery of materials do not apply to transactions such as the ones involved in this case in which the only relationship between the consumer and the creditor is that of debtor and creditor. In transactions where the only performance due from the creditor to the consumer is delivery of the loan proceeds, the first prohibition of 226.23(c) applies and forecloses the payment of money to the consumer until the rescission period has expired and the creditor, with good reason, is satisfied that there has been no rescission. Accordingly, the issue presented, as I see it, is whether the proceeds of the loan are "disbursed other than in escrow" when a creditor provides to the consumer a postdated check for the proceeds, has the consumer endorse that check, and then retains the check for delivery to a car dealer from whom the consumer wishes to purchase a used car.
I conclude that the purpose of 226.23(c) is to prevent the consumer from becoming any more psychologically or otherwise committed to the transaction during the rescission period than he or she is at the time of the signing of the credit agreement. It is for this reason that the Official Staff Interpretation limits "permissible activity" with respect to a loan proceeds check to preparation of the check document. Accordingly, I would hold that Fidelity's insistence that a check not only be drawn but also endorsed and returned resulted in a "disbursement other than in escrow" for purposes of 226.23(c).*fn1
With respect to Section IIB of the court's opinion, I dissent. Section 501 of DIDMCA provides that state usury laws shall not apply to "any loan . . . secured by a first lien on residential real property." The court today declares that this provision reflects a congressional intent that state usury laws shall apply to "any loan . . . secured by a first lien on residential real property" if the proceeds of the loan are to be used to purchase a used car. It is understandable that the court looks with disfavor on the interest rates charged by Fidelity and on its collection practices. As Lord Campbell admonished in 1849, however, "it is the duty of all courts of justice to take care, for the general good of the community, that hard cases do not make bad law." East India Company v. Paul, 7 Moo. P.C.C. 111. Unfortunately, one can confidently predict that the "bad law" made today will create uncertainty that will ill serve "the general good of the community."
With commendable candor, the court acknowledges that the transactions before us come within the literal scope of 501's preemption of state usury laws. It further acknowledges that the legislative history of DIDMCA demonstrates that Congress sought to stimulate "our nation's financial system" as well as the residential construction industry. Based on that history and the interpretation of DIDMCA by the Federal Home Loan Bank Board (FHLBB), the court also rejects the only argument advanced by the plaintiffs in favor of their position - the argument that Congress intended to preempt the application of state usury laws to purchase money mortgages only. Finally, the court concedes that the FHLBB considers the "refinancing of existing first lien mortgage loans to be within the purview of DIDMCA." Typescript at 43.*fn2
After declining to narrow 501's preemption by including only purchase money mortgages or by excluding transactions involving refinancing, the court inexplicably concludes that Congress could not have intended to preempt the application of state usury laws to transactions involving a first lien on residential real estate if the consumer intends to apply the proceeds towards the purchase of a used car. This purportedly narrow exception to 501 is unsupported by anything in the text of DIDMCA, its legislative history, or the interpretive rulings of the FHLBB. More important, this recognition of an unexpressed exception and the failure to support it by reasoned elaboration leaves our financial markets without a basis for confidently predicting the scope of 501 and, accordingly, without the ability to conform conduct in those markets to the requirements of law. Just as the legislative history fails expressly to reflect an intent to include used car loans like those before us, it also fails to mention home equity loans taken out for the purpose of paying college tuition. Based on the court's decision today, will state usury laws hereafter be held applicable to such loans despite the fact that they come within the literal scope of 501? Will those laws be held applicable if the home equity loan will be used not only for tuition but also for the purchase of a used car to permit the student to live at home and commute?
Congress intended to preempt the application of state usury laws to "any loan . . . secured by a first lien on residential real property." This is the only interpretation of Congressional intent that is consistent with the text of DIDMCA, its legislative history, and its interpretation by FHLBB. Accordingly, I would affirm the summary judgment entered by the district court on plaintiffs' usury, Unfair Trade Practice and RICO claims.