4 Disclosure Rules 4 Disclosure Rules
4.1 Walker v. Wallace Auto Sales, Inc. 4.1 Walker v. Wallace Auto Sales, Inc.
Carl A. WALKER, Margaret A. Walker, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. WALLACE AUTO SALES, INCORPORATED, Guardian National Acceptance Corporation, and John Does, One-Ten, Defendants-Appellees.
No. 97-3824.
United States Court of Appeals, Seventh Circuit.
Argued April 9, 1998.
Decided Sept. 18, 1998.
*928Daniel A. Edelman (argued), Edelman & Combs, Chicago, IL, for Carl A. Walker and Margaret M. Walker.
Michael Kreloff (argued), Northfield, IL, for Wallace Auto Sales, Inc.
Arthur L. Klein (argued), Eugene J. Kelley, Jr., John L. Ropiequet, Christopher S. Navaja, Arnstein & Lehr, Chicago, IL, Brian G. Shannon, R. Christopher Cataldo, Jaffe, Snider, Raitt & Heuer, Detroit, MI, for Guardian National Acceptance Corp.
Before CUMMINGS, CUDAHY and RIPPLE, Circuit Judges.
Carl and Margaret Walker (“the Walkers”) brought this lawsuit against Wallace Auto Sales (“Wallace”) and Guardian National Acceptance Corporation (“Guardian”) on behalf of themselves and all others similarly situated. In their nine-count amended complaint, the Walkers alleged that the defendants systematically imposed hidden finance charges on automobile purchases in violation of the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601-1693r, the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 *929U.S.C. §§ 1961-1968, the Illinois Consumer Fraud Act, 815 ILCS 505/2, and the Illinois Sales Finance Agency Act, 205 ILCS 660/8.5. The district court dismissed the Walkers’ TILA claim because the conduct alleged by the Walkers did not constitute a violation of that Act. In addition, the court dismissed the Walkers’ remaining claims because, in its view, those claims could not survive in the absence of the TILA violation. For the reasons set forth in the following opinion, we reverse the district court’s dismissal of the Walkers’ TILA claim against Wallace, affirm its dismissal of the TILA claim against Guardian and remand the Walkers’ remaining claims to the district court for further consideration.
I
BACKGROUND
A. Facts1
On August 31,1995, the Walkers agreed to purchase a used 1989 Lincoln Continental from Wallace. In order to finance this purchase, the Walkers entered into a retail installment contract (“the contract”) with Wallace. The contract listed the cash price of the automobile as $14,040.2 In addition to that amount, the Walkers agreed to pay $699 for an extended warranty and $61 for license, title and taxes. The Walkers made a down payment of $1,500, leaving $13,300 as the amount to be financed on the sales contract. The Walkers agreed to finance this balance at an annual percentage rate of 25% over a period of four years (48 monthly installments of $441 each). Under these terms, the Walkers were to pay $7,868 in interest over the course of those four years, giving the sales contract a total value of $21,168. All of this information was clearly delineated on the face of the contract.
After the sale was complete, Wallace promptly assigned the contract to Guardian, “a specialized indirect consumer finance company engaged primarily in financing the purchase. of automobiles through the acquisition of retail installment contracts from automobile dealers.” R.21 ¶ 7. Guardian purchased the contract at a discount of $7,182 from the total value.
B. Proceedings in the District Court
As noted above, the Walkers filed a nine-count amended complaint against Wallace and Guardian in the district court alleging violations of TILA RICO and two state law consumer protection statutes. The gravamen of the Walkers’ complaint is that Wallace artificially inflated the cost of the vehicle to cover the discount at which Guardian purchased the Walkers’ sales contract and therefore imposed a “hidden finance charge” on them in violation of TILA, 15 U.S.C. § 1638(a)(3).3 This same allegation serves as the basis for the Walkers’ RICO and state law-based claims.
Wallace and Guardian filed a motion to dismiss the Walkers’ amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The district court first examined the Walkers’ TILA claim. The court began its analysis of that claim by noting that the regulations interpreting TILA’s disclosure requirements exempt specific charges from those requirements. Specifically, the Official Staff Commentary to the regulations provides that:
Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash *930price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition.
12 C.F.R. Pt. 226, Supp. I at 308-09. The commentary further states that “[a] discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.” Id. In the district court’s view, the “hidden finance charge” alleged by the Walkers was in fact a “cost of doing business” and was therefore exempt from TILA’s disclosure requirements. The court therefore held that the Walkers had not pleaded sufficient facts to state a claim under TILA. In addition, the court dismissed the Walkers’ RICO and state law-based claims because, in its view, those claims could not survive in the absence of a TILA violation.
II
DISCUSSION
We review de novo the district court’s decision to dismiss, taking the Walkers’ factual allegations as true and drawing all reasonable inferences in their favor. See Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 669-70 (7th Cir. 1998). In evaluating the Walkers’ complaint, we read them complaint as a whole, see Black v. Lane, 22 F.3d 1395, 1400 (7th Cir.1994), and shall affirm the district court’s order of dismissal only if “ ‘it appears beyond doubt that [the Walkers] can prove no set of facts in support of [their] claim which would entitle [them] to relief,’ ” Strasburger v. Board of Educ., 143 F.3d 351, 359 (7th Cir.1998) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).4
A. The Walkers’ TILA Claim
In order to assess the sufficiency of the Walkers’ TILA claim against Wallace and Guardian, we must first examine the statutory and regulatory framework under which it arises.
Congress enacted TILA “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 and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair billing and credit card practices.” 15 U.S.C. § 1601(a); see also Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283, 285 (7th Cir.1997) (stating that TILA’s purpose is “to protect consumers from being misled about the cost of credit”); Brown v. Marquette Sav. & Loan Ass’n, 686 F.2d 608, 612 (7th Cir.1982) (stating that Congress enacted TILA to “provide information to facilitate comparative credit shopping and thereby the informed use of credit by consumers”). In order to effectuate this purpose, TILA requires creditors to disclose clearly and accurately to consumers any finance charge that the consumer will bear under the credit transaction. See 15 U.S.C. § 1638(a)(3). These stringent disclosure requirements are designed to prevent creditors from circumventing TILA’s objectives by burying the cost of credit in the price of the goods sold. See Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 364, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973); see also Gibson, 112 F.3d at 287 (stating that, under TILA, if merchant charges credit customers a higher “cash” price for an item than cash customers, then that extra charge is a finance charge and must be disclosed as such).
*931TILA defines a “finance charge” 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.” 15 U.S.C. § 1605(a). In addition, the regulations implementing TILA (known collectively as “Regulation Z”) provide that:
The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.
12 C.F.R. § 226.4(a). Regulation Z further provides that the term “finance charge” includes “[c]harges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation, if the consumer is required to pay in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation.” Id. § 226.4(b)(6).
These provisions, however, are qualified by the Federal Reserve Board’s Official Staff Commentary to Regulation Z5 which exempts specific charges from TILA’s disclosure requirements:
Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example:
A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.
12 C.F.R. Pt. 226, Supp. I at 308-09.
In this case, the Walkers allege that the defendants violated TILA by artificially inflating the “cash price” of the vehicle purchased by the Walkers to cover the cost of the discount at which Guardian purchased the Walkers’ sales contract. The Walkers contend that, by passing on the cost of Guardian’s discount to the Walkers, the defendants imposed a “hidden finance charge” on them in violation of TILA, 15 U.S.C. § 1638(a)(3). The defendants, however, contend that the Walkers’ TILA claim must be dismissed because the “hidden finance charge” alleged by the Walkers was in fact a “cost of doing business” and was therefore exempt from TILA’s disclosure requirements. See 12 C.F.R. Pt. 226, Supp. I at 308-09.
As an initial matter, we note that, under TILA, Guardian may only be charged as an assignee, not a creditor. See 15 U.S.C. § 1602(f); 12 C.F.R. Pt. 226, Supp. I at 300. Accordingly, the Walkers must properly allege a cause of action against Wallace (the creditor) before it "can assert a claim against Guardian (the assignee). We therefore turn first to the issue of whether the Walkers’ amended complaint states a valid TILA claim against Wallace.
1. Wallace’s Liability
In paragraph 27 of the Walkers’ amended complaint, they allege that:
It is the standard policy of Wallace and other dealers who receive financing from Guardian to charge hidden finance charges on vehicles sold on time. The purported cash price of vehicles sold in this manner substantially exceeds the value of the vehicle, and the price at which comparable vehicles are sold for cash, and includes part of the finance charge.
R.21 ¶ 27. In the next paragraph, the Walkers further allege that this “hidden finance charge resulted from the need of [Wallace] to pass on to the consumer the discount imposed by Guardian.” Id, ¶ 28. It is our task to discern whether these allegations are sufficient to state a claim against Wallace under TILA.
*932As we noted above, TILA requires creditors to disclose clearly and accurately any finance charge that the consumer will bear in a particular credit transaction. As the definitions set forth above indicate, this means that a creditor-merchant must disclose to a consumer buying on credit exactly how much he will pay for that credit. See 12 C.F.R. § 226.4(a) (defining finance charge as “the cost of consumer credit as a dollar amount”). In this case, the Walkers allege that Wallace is charging higher prices to customers who are buying cars on credit than to customer who are paying cash. In other words, credit customers, such as the Walkers, are paying higher “cash” prices only because they are buying on credit. The higher cash price paid by these customers is therefore part of the cost of buying on credit. Under TILA, such a cost is a finance charge and must be disclosed to the consumer as such. Accordingly, wte conclude that the Walkers have alleged sufficient facts to state a cause of action against Wallace under TILA.
Our conclusion that the Walkers allege sufficient facts to state a cause of action under TILA is supported by the Supreme Court’s exposition of the concept and effect of a “hidden finance charge” in Mourning. In that case, the Court noted that “[o]ne means of circumventing the objectives of the Truth in Lending Act, as passed by Congress, was that of ‘burying’ the cost of credit in the price of goods sold.” Id. at 366, 93 5.Ct. 1652. The Court explained further that, in many credit transactions, creditors sought to evade TILA’s mandate by claiming that no finance charge had been charged and assuming “the cost of extending of credit as an expense of doing business, to be recouped as part of the price charged in the transaction.” Id. To illustrate this concept, the Court provided the following example:
[T]wo merchants might buy watches at wholesale for $20 which normally sell at retail for $40. Both might sell immediately to a consumer who agreed to pay $1 per week for 52 weeks. In one case, the merchant might claim that the price of the watch was $40 and that the remaining $12 constituted a charge for extending credit to the consumer. From the consumer’s point of view, the credit charge represents the cost which he must pay for the privilege of deferring payment of the debt he has incurred. From the creditor’s point of view, much simplified, the charge may represent the return which he might have earned had he been able to invest the proceeds from the sale of the watch from the date of the sale until the date of payment. The second merchant might claim that the price of the watch was $52 and that credit was free. The second merchant, like the first, has forgone the profits which he might have achieved by investing the sale proceeds from the day of the sale on. The second merchant may be said to have ‘buried’ this cost in the price of the item sold. By whatever name, the $12 differential between the total payments and the price at which the merchandise could have been acquired is the cost of deferring payment.
Id. at 366 n. 26, 93 S.Ct. 1652. The facts in this case are substantially similar to those in the Court’s hypothetical. Indeed, the Walkers allege that Wallace, like the second merchant, buried part of the cost of credit in the “cash” price.6 As the Court noted, this extra charge above the amount paid by a cash customer is “the cost of deferring payment.” Id. Under TILA, that cost must be disclosed as a finance charge.
Moreover, our conclusion is further strengthened by this court’s recent decision in Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir.1997). In that case, we consolidated three appeals from district court decisions dismissing claims that car dealers violated TILA by charging higher prices for warranties in credit transactions than in cash transactions. Specifically, the plaintiffs alleged that the difference between the price of the warranty in credit transactions and the *933price of the warranty in cash transactions constituted a finance charge that must be disclosed under TILA. In assessing the plaintiffs’ allegations, we concluded that the dealers’ alleged concealment of credit costs in the warranty price circumvented the objectives of TILA by preventing consumers from accurately gauging the cost of credit.7 Indeed, in reversing the district courts’ dismissals of plaintiffs’ lawsuits, we stressed that the dealers’ alleged conduct constituted the “type of fraud that goes to the heart of the concerns that actuate the Truth in Lending Act.” Id. The same can be said of Wallace’s alleged practices in this case. Instead of hiding the additional finance charges in the price of warranties, Wallace allegedly hid a portion of the finance charge in the “cash” price of the cars sold to credit customers. This fraud is no different from that alleged in Gibson—in both cases, the dealers allegedly misled the consumers about the true cost of buying on credit.
Wallace, however, contends that, even if we characterize the cost allegedly imposed on the Walkers and other credit customers as a finance charge, the particular type of charge involved here, “a discount imposed on a credit obligation when it is assigned by a seller-creditor to another party,” see 12 C.F.R. Pt. 226, Supp. I at 308-09, is exempt from TILA’s disclosure requirements. As we noted earlier, the Official Staff Commentary to Regulation Z exempts certain charges from TILA’s disclosure requirements:
Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or services sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example:
A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.
Id. This regulation makes clear that mer-chantcreditors are not necessarily required to disclose to consumers that they plan on selling the retail installment contract at a discount. However, if a creditor-merchant “separately imposes” the cost of the discount on the particular credit consumer, then that cost does not fit within the “cost of doing business” exemption, but rather is a finance charge and must be disclosed to the consumer as such. Therefore, the critical issue in this case is the meaning of the term “separately imposed” and whether Wallace's alleged conduct constitutes such a separate imposition.
In this case, the district court concluded that the Walkers failed to allege that Wallace “separately imposed” the cost of the discount on them. In the district court’s view, even if Wallace artificially inflated the “cash price” of the automobile sold to the Walkers to cover the cost of the discount imposed by Guardian, the discount was not “separately imposed” on the Walkers because those charges were included in the cash price of the car. We cannot accept the district court’s interpretation of the term “separately imposed.” Indeed, under the district court’s interpretation, a creditor would be allowed to impose a cost on consumers buying on credit without disclosing to those customers that they are paying more only because they are buying on credit.8 Ac-*934eeptance of this view would therefore eviscerate TILA’s’ stated purpose to “assure a meaningful disclosure of the credit terms so that the consumer will be able to compare more readily various credit terms available to him and avoid the uninformed use of credit.” 15 U.S.C. § 1601. By contrast, we believe that the term “separately imposed” must be interpreted in a manner consistent with TILA’s purpose of ensuring that consumers are informed fully of the costs of buying on credit. Accordingly, we hold that a charge should be considered “separately imposed” on a credit consumer when it is imposed in credit transactions but not in cash transactions.9
In their amended complaint, the Walkers allege that Wallace passed on the cost of the discount imposed by Guardian, that this cost was passed on in credit transactions only and that Wallace failed to disclose it as a finance charge. At this early stage in the proceedings, these allegations are sufficient to prevent the dismissal of the Walkers’ TILA claim against Wallace. In order to prevail in the end, however, the Walkers will have to prove their allegation that Wallace separately imposed the cost of Guardian’s discount on them. As we noted above, the commentary to Regulation Z makes it clear that it is permissible for a ear dealer to assign retail installment contracts to a finance company at a discount, without disclosing the discount to customers. See 12 C.F.R. Pt. 226, Supp. I at 30809. Moreover, the commentary specifically provides that a “charge directly or indirectly imposed by a creditor” is not considered to be a finance charge if the charge “is imposed uniformly in both cash and credit transactions.” 12 C.F.R. § 226.4(a) & Pt. 226, Supp. I at 308. Accordingly, Wallace need not disclose the cost of the discount as a finance charge if it attempts to recoup that cost by charging all customers higher prices. Under that scenario, the discounts would not be “separately imposed” on credit consumers like the Walkers, but, like any other overhead item, would be taken into account in the price of all vehicles sold.
Finally, in arriving at the holding we reach today, we stress that nothing in the law prevents a merchant-creditor from passing on the full cost of a discount imposed by an assignee to a credit purchaser. However, if the merchant-creditor chooses this route, TILA requires that it disclose that amount to the purchaser as a finance charge.
2. Guardian’s Liability
Because we have concluded that the Walkers have stated a claim against Wallace under TILA, we must consider whether they have stated a claim against Guardian.10 As we noted earlier, under TILA, Guardian may only be charged as an assignee, not a creditor. Section 131 of TILA, 15 U.S.C. § 1641, limits the liability of subsequent assignees to those situations in which the violation of TILA is “apparent on the face of the disclosure statement.” That section provides in pertinent part:
Liability of assignees
(a) Prerequisites
Except as otherwise specifically provided in this subchapter, any civil action for a violation of this subchapter or proceeding under section 1607 of this title which may be brought against a creditor may be *935maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. For the purpose of this section, a violation apparent on the face of the disclosure statement includes, but is not limited to (1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure which does not use the terms required to be used by this subchapter.
The Walkers advance two arguments as to why their amended complaint sufficiently states a TILA claim for assignee liability against Guardian. First, the Walkers contend that the limitations on assignee liability in § 131(a) are inapplicable in this case because Guardian is bound by the terms of the retail installment contract it purchased from Wallace. That contract repeats the language of the FTC’s Holder Notice (as 16 C.F.R. § 433.2 requires) which provides:
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTORS-HALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.
Id. In the Walkers’ view, this provision subjects the holder (Guardian) to “all claims” which the consumer (the Walkers) has against the seller (Wallace), including violations of TILA. In the alternative, the Walkers assert that Guardian is liable under § 131 because Wallace’s violation of TILA is apparent on the face of the sales contract. Specifically, in their amended complaint, the Walkers allege that “Guardian is conscious of the fact that the dealer has a strong incentive to pass the discount onto the customer.” R.21 ¶ 9. The Walkers contend that this allegation, combined with their allegation that the purported “cash price” of the vehicle was substantially in excess of its true value, is sufficient to state a TILA claim for assignee liability against Guardian. In short, they maintain that, given Guardian’s knowledge of Wallace’s incentive to pass the cost of the discount on to its credit customers, Guardian could discern from the exorbitant “cash price” appearing on the face of the sales contract that Wallace had concealed a portion of the finance charge in the cash price.
We turn first to the Walkers’ contention that they may maintain a TILA action against Guardian due to the inclusion of the FTC’s Holder Notice in their contract with Wallace. In essence, the Walkers assert that, when Guardian accepted the assignment, it voluntarily waived any right to rely on the statutory defense provided by § 131(a). This court recently addressed this very issue in Taylor v. Quality Hyundai, Inc., 150 F.3d 689, 693 (7th Cir.1998). In that case, the court held that the inclusion of the FTC’s Holder Notice in a retail installment contract did not trump the clear command of § 131 that subsequent assignees can be held liable under TILA only when the violation is apparent on the face of the disclosure statement. See id. (citing Robbins v. Bentsen, 41 F.3d 1195, 1198 (7th Cir.1994) (“Regulations cannot trump the plain language of statutes.... ”)).
Given our conclusion that the inclusion of the FTC’s Holder Notice in the Walkers’ sale contract does not override the limitations on assignee liability in § 131, we turn to the Walkers’ contention that Guardian may nonetheless be held liable under § 131 because, given Guardian’s “knowledge” of Wallace’s practices, Wallace’s failure to disclose a portion of the finance charge was apparent on the face of the Walkers’ retail installment contract. Again, this contention is answered by Taylor. In that case, the plaintiffs argued “that the apparentness (or lack thereof) of a violation should be ascertained in light of the knowledge that a reasonable assignee similarly situated to the defendants should have.” Id. at 694. In the Taylor plaintiffs’ view, the assignees, “as active participants in the financing market,” know that creditors often hide finance charges in other items (in that case, the price of an extended warranty, in this case, the “cash price” of the automobile) and therefore *936must have known that the contracts issued to the plaintiffs contained hidden finance charges. The court rejected the plaintiffs’ argument and held that, under the plain wording of the statute, an assignee can be held Hable only if the violation is apparent on the face of the documents assigned. See id.
In addition to the argument based on Guardian’s knowledge of industry practices, the Walkers assert that the TILA violation was apparent on the face of the disclosure statement due to the fact that the “cash price” of the vehicle purchased by the Walkers was substantially in excess of the vehicle’s actual value. This argument is also without merit. One cannot assume that Guardian could tell from the face of the sales contract that the auto was overpriced; more importantly, even if Guardian did know that the vehicle was overpriced, such knowledge cannot be equated with knowledge that Wallace was burying a portion of the finance charge in the price of the vehicle.11
Finally, even if the Walkers’ amended complaint could be construed to allege that Guardian had actual knowledge of Wallace’s practice of disguising finance charges, such allegations are not sufficient, under the plain wording of the statute, to state a TILA claim for assignee liability against Guardian. Instead, the Walkers must allege that the violation was “apparent on the face” of the assigned documents. The Walkers do not, and cannot, make such an allegation. Accordingly, we hold that the Walkers have failed to state a TILA claim against Guardian.12
B. The Walkers’ RICO and State Law Based Claims
In addition to their TILA claim against Wallace and Guardian, the Walkers’ amended complaint contains eight other counts alleging that Wallace, Guardian and certain unnamed officers of those companies (“John Does 1-10”) violated RICO and two Illinois consumer protection statutes. As we noted earlier, these remaining counts are based on the same factual predicate as the Walkers’ TILA claim. Once the district court determined that the Walkers had failed to state a claim under TILA, it dismissed the remaining claims because, in its view, those claims could not survive in the absence of a TILA violation. The court did not independently assess the sufficiency of the Walkers’ allegations in the remaining counts.
Because the district court did not reach the issue of whether the plaintiffs’ remaining claims are viable and the parties have not briefed that issue on appeal, we remand that issue to the district court for its consideration in the first instance.13 In returning these counts to the district court, we also leave for that court’s consideration in the first instance the issue of whether, despite the fact that Guardian cannot be held liable as an assignee under TILA, the Walkers may still be able to allege that Guardian had a level of knowledge compatible with liability under RICO (Count II), the Ilhnois Consumer Fraud Act (Counts VII & VIII) and the Illinois Sales Finance Agency Act (Count IX).
*937Conclusion
We reverse the district court’s judgment dismissing the Walkers’ TILA claim (Count I) against Wallace, but affirm the dismissal of the TILA claim against Guardian. We also remand the remaining counts (Counts II through IX) to the district court for further consideration consistent with this opinion.
Affirmed in Part;
REVERSED AND REMANDED IN PART.
4.2. Regulation Z
4.3. California Cleaning Product Disclosure Law
4.4. More Than You Wanted To Know: Chapter 3
4.5 Anne Fleming, The Long History of Truth in Lending 4.5 Anne Fleming, The Long History of Truth in Lending
This excerpt illustrates the multiple purposes disclosure rules can serve, depending on how they fit in with other regulations. Whereas today, loan disclosure rules are generally discussed as ways of "facilitating rational and informed consumer choice"--and thus as substitutes for substantive credit regulation, they were originally understood primarily as complements to state-level usury caps.
In 1960, Senator Paul Douglas (D-Ill.) introduced a short, four-page proposal
for consumer protection legislation that would require lenders to disclose the
cost of credit to borrowers in terms of “simple annual interest.” He surely had
no idea that the bill would prompt eight years of public and legislative debate,
generate tens of thousands of dollars in printing and travel costs, and ultimately
outlive its author’s term in office. At the time, Douglas viewed his
“Consumer Credit Labeling Bill” as a commonsense measure.1 There were
already a number of other federal laws that endorsed disclosure as a means
of protecting consumers, such as the Wool Products Labeling Act, the Fur
Labeling Act, and the Textile Fiber Products Identification Act.2 Meanwhile,
state-level usury laws set upper limits on the price of credit. Douglas described
his bill’s “objective” as removing “the disguises and camouflage which frequently
hide or distort the true price of credit.” In other words, the bill would
vindicate borrowers’ right to “the truth.”3
Douglas later rebranded the bill the “Truth in Lending Act,” or TILA,
and renamed the disclosure metric the “annual percentage rate,” or APR.4
Eight years after its initial adoption, when Congress finally enacted a revised
version of the measure, the bill’s stated objectives had also changed. The original
1960 preamble to the bill emphasized the goals of avoiding consumer
deception and dampening demand for credit by warning of its high cost. It
stated that the “excessive use of credit results frequently from a lack of awareness
of the cost thereof to the user” and the “purpose” of the law was to
“assure a full disclosure of such cost.”5 But thereafter, the bill’s “declaration of
purpose” shifted, slowly pivoting away from Douglas’s original objectives.
Douglas himself amended the bill in 1963, in response to a statement from the
President’s Council of Economic Advisors, to clarify that the problem was not
“excessive” credit but rather the “untimely use of credit.”6 Four years later,
after Douglas was voted out of office and Senator William Proxmire (D-Wisc.)
took over the campaign for Truth in Lending in 1967, the stated “purposes”
changed again, to strengthening “competition among the various financial
institutions and other firms engaged in lending.”7 In this iteration of the bill,
increasing consumer awareness of the cost of credit was not its own objective,
but rather a means to increase price competition. Douglas’s 1969 statements
in favor of model state credit legislation and his memoir, published in 1972,
belatedly embraced this revised understanding of the primary purpose
behind the bill.8
Nearly all studies of mandatory disclosure rules start here, with the congressional
debate over and passage of the federal Truth in Lending Act.9 But
disclosure rules for the cost of credit have a much longer history. In the states,
contests over mandatory disclosure began six decades before TILA’s 1968
enactment. When placed within the context of this longer history, TILA’s
shifting preamble captures a moment of transition—from one way of thinking
about disclosure to another. The long history of “truth in lending” also challenges
existing narratives about the history and purpose of mandatory disclosure
rules in at least two respects.
First, this history undercuts the claim that federally mandated disclosure
was the first step in a “revolution” to abandon “substantive regulation.”10
Although the lack of scholarly consensus on the purpose behind TILA invites
researchers to ascribe modern motives to legislators in the past and to construct
a narrative that links TILA with the deregulation that followed a decade
later, TILA was not understood at the time of its enactment as the first step
toward dismantling substantive credit regulation.11 This interpretation is a
product of hindsight. In 1968, supporters of disclosure did not understand
TILA in these terms and saw no inherent conflict between mandating disclosure
and retaining existing price ceilings. The 1960s did witness a major shift
in thinking about the primary purpose of disclosure and its place in the
regulatory regime for consumer credit. Yet even policymakers who embraced
the competition rationale for TILA stopped short of promoting disclosure as
a means to obviate the need for direct controls on the price of credit, which
had coexisted with disclosure rules at the state level for decades. In fact,
disclosure and substantive credit regulation drifted apart quite late in the
century, after traveling hand-in-hand for decades, and their separation came
about largely by coincidence, rather than through lawmakers’ careful calculation.
When this split occurred, with the erosion of direct price controls in the
late 1970s and ‘80s, it caused disclosure to assume a much greater role in the
overall regulatory scheme for consumer credit than the TILA drafters had
ever imagined. Thus, it was only after TILA’s enactment that policymakers
came to embrace disclosure as an alternative to more direct forms of cost
regulation, affecting a substitution that TILA’s original proponents did not
intend.12
Second, the long history of “truth in lending” also shows that, in the six
decades leading up to TILA, lenders and policymakers did not perceive
disclosure as a value-neutral form of regulation, as some do today.13 They
recognized that designing disclosures entailed making decisions about what
knowledge borrowers required and valued, selecting among the many
“truths” in lending. Accordingly, lenders and policymakers fiercely argued
over the design of state-level cost disclosure mandates for decades, with each
segment of the lending industry advocating for the form that best served its
interests. It has only been since 1968, when the form of cost disclosure became
fixed and wide-ranging political debates over the design of these rules were
silenced, that the policy choices embedded in disclosure rules have become
less visible. Since then, disclosure has become even more deeply entrenched
as a pillar of our consumer protection regime, while the value judgments that
underlie these seemingly-neutral rules are ignored. Yet, as the following narrative
shows, the meaning of “truth in lending” and the relationship of “truth”
to substantive regulation were far from settled for most of the twentieth
century. The battle to define truth was long and started early in the century,
with the advent of the organized small-sum cash-lending business and the
creation of the first mandatory disclosure rules for consumer credit.
***
The history of mandatory disclosure rules, and debates over the design of
those rules, begins in the 1910s, when small-dollar loans were essentially outlawed
in most states by rigid usury laws that limited the rate of interest that
lenders could charge on all types of loans. Most states set the maximum rates
at 6 percent or 7 percent per year—too low for lenders to profitably lend small
sums of money given their fixed administrative costs. So, in 1916, a group of
small-sum lenders formed a national trade association, the American Association
of Small Loan Brokers, to professionalize and legitimize their business
through the creation of better lending laws.14 The lenders’ association
appointed a delegation to meet with a group of reformers from the recently
established Russell Sage Foundation, to put the business under a new scheme
of regulation that would allow it to operate openly and profitably.
***
The lenders preferred a method of calculating their charges and disclosing
their rates that both tracked their current business practices and
made their charges sound “better” than the alternatives.16 At the time, most
lenders calculated and stated their charges in terms of a “discount” rate plus
an origination or investigation fee.17 This method made the rate of charge
seem smaller than if the lender disclosed the cost of the loan as a single,
all-inclusive rate.18 As one lender explained, “2% and fees of $1 or $2 sounds
better than 3-1/2% or 4% per month, though it may actually yield a greater
revenue.”19 They predicted that “the legislature is more likely to permit
[interest plus fees] than to permit a flat rate of interest yielding an equivalent
revenue.”20 In addition, separating out fee charges also would allow lenders to
split a loan into multiple smaller loans so as to “gain a larger revenue through
repetition of the fee charge.”21
The Sage Foundation rejected this method, however. Instead, it demanded
that lenders calculate and disclose their charges as a single, all-inclusive
monthly rate to be applied to the declining loan balance. This method of disclosure
served two purposes. First, it offered lenders a means to “overcome
the stigma which has long been attached to the small loan business.”22 By
using a different method of cost disclosure, lenders licensed under the law
could distance themselves from their “loan shark” precursors in the eyes of
borrowers and, more important, investors. Indeed, transparent cost disclosure
was one of several features of the law that lenders later advertised to
potential investors, along with minimum capital requirements and state
supervision. The law also required lenders to disclose both the borrower’s
interest rate and the legal maximum rate, to further police against deception
and overcharging.23
Second, in addition to burnishing the lending industry’s tarnished reputation,
***
Arguments soon broke out within the lending industry over which group of
lenders provided the most “truthful” form of cost disclosure. As a wider array
of lenders began offering small loans, licensed lenders and the Russell Sage
Foundation launched a campaign to convert other lenders to the Uniform
Law method of disclosure. In support of this effort, they emphasized the original
rationale behind their chosen form of disclosure: avoidance of deception,
and the advancement of “truth” and transparency. On occasion, they also
mentioned that disclosure would aid competition, but never proposed that
better, more truthful disclosures could substitute for direct price controls.
Rather, the question at the heart of these debates was the meaning of “truth”
and its inverse, deception.
The fight that ensued over the Morris Plan bank method of disclosure
captures the arguments on both sides. Almost as soon as Morris Plan banks
began operating, the Sage Foundation and the lenders licensed under the
Uniform Law came out strongly against the banks’ method of disclosure.
The Foundation doubted the “truth” of the Morris Plan banks’ “discount plus
fees” rate disclosure. “The fee is one of the bulwarks of the loan shark,” a Sage
Foundation official warned in 1916.44 The following year, the official wrote to
one of the early investors in the Morris Plan scheme, outlining his concerns
about the banks. The problem was neither the absence of disclosure nor the
high rate of charge, which was actually less than licensed lenders demanded.
Rather, the foundation official objected to the Morris Plan method of disclosure.
He argued that the rate on the Morris Plan loans was “considerably more
than 6 per cent”—“the real interest rate is over 19 per cent.”45 Furthermore, he
added, “any company doing a loan business, especially when it is dealing with
persons who have not had much business experience and training, should
be required to state in the clearest possible way what the real charge to the
borrower is.”46 Calculating and stating charges in terms of a discount and fees
was likely to mislead borrowers, the foundation contended.
Morris Plan officials responded that their methods were truthful and
more accurate than those employed by the licensed lenders. One Morris Plan
banker seemed puzzled by the Sage Foundation’s objections to the lending
scheme. As he put it, the foundation did “not criticize the cost of loans under
the Morris Plan System, but only the mode of stating it.”47 While acknowledging
the logic of the Sage Foundation’s total rate calculation, the banker
insisted that the assumptions on which it relied were faulty. The rate that
Morris Plan banks disclosed was correct because the loan and the sale of the
stock certificates were “separate and distinct” transactions, he claimed.48
Furthermore, he argued that the “interest cost” should not include the
investigation fee, which is “an expense to the borrower” but not part of the
“interest” on the loan.49
The Sage Foundation engaged in a slightly different version of the same
debate with commercial banks after the foundation drafted a model bill in the
early 1940s that followed its preferred disclosure method. In response, the
American Bankers Association (ABA) drafted its own competing bill, which
permitted rates to be stated on the discount and fee basis.50 As with the Morris
Plan banks, both sides claimed the mantle of the defenders of “truth” in
lending.51
The Sage Foundation presented its proposal for bank disclosures in terms
of the consumer’s interest in transparency, raising many of the same arguments
deployed against the Morris Plan banks. A foundation official accused
the bankers of refusing “to tell the truth about their interest rates.”52 The
president of Household Finance Corporation wrote an open letter to the
ABA, extolling the benefits of the “Simple Interest Method.”53 The “Discount-Plus
Method” “conceals the rate,” he explained.54 Furthermore, its use would drive
other lenders to state their charges in the same disguised manner, to remain
competitive for borrowers’ business. The banks would set off a race to the
bottom, with all lenders “dragged toward the level of the worst.”55 Academic
William Trufant Foster backed the licensed lenders’ position, arguing that
other methods provided “easy possibilities of clouding or evading the simple
truth.”56
Advocates also occasionally referenced the link between “truth” in
labeling and effective competition, as a secondary rationale for uniformity.
Household Finance claimed that “honest weights and measures and honest
labeling” were necessary to make “competition effective.”57 A Sage Foundation
official likewise compared its proposal to laws mandating the labeling of
goods for sale: “It requires those who make loans to consumers to use the
same scales in weighing out and pricing their wares.”58
The American Bankers Association also claimed to represent the best
interests of borrowers, however. According to the ABA, the discount and fees
method was “the only method whereby the exact cost of a loan can be clearly
understood and computed in advance” by the borrower.59 They deemed the
foundation’s all-inclusive method “deceptive” and “confusing” because “it
does not and cannot tell the borrower how many dollars the loan will cost
him.”60 Stating the rate in terms of dollars discounted fulfilled the banks’
responsibility to “tell the public the truth.”61 In contrast, the licensed lenders’
method “does not tell the whole truth,” a state banking trade association
explained.62 Another banker argued that the licensed lenders were the ones
guilty of deception because “the public believed 3 per cent a month mean[s]
3 per cent a year.”6
Writing the rules for sales finance disclosures proved equally contentious.
The push for greater regulation of sales finance charges began in the
1930s among consumer advocates working within the National Recovery
Administration, or NRA, the New Deal agency charged with writing codes of
conduct for various industries. The agency included a Consumers’ Advisory
Board, which urged inclusion of cost of credit disclosure rules in the retail
trade codes. Among the Consumer Advisory Board members who backed
this proposal was Paul Douglas, then-economist and future author of the
federal Truth in Lending Act.64 The board’s proposed rules would have
required retailers and finance companies to adopt the Uniform Small Loan
Law method of rate disclosure, expressing their charges for credit as “a given
percentage on the current unpaid monthly balance.”65 The proposal failed,
however. Industry dominated the code-making process and the Consumer
Advisory Board had little influence within the NRA.66 The NRA “retail trade”
code included only a brief mention of disclosure, requiring that sellers not
“misrepresent” their “credit terms” in advertisements; the finance company
industry did not approve a code before the NRA was disbanded in 1935.67
A handful of state legislatures did adopt some form of credit sales regulation
in the 1930s. These laws included ceilings on credit charges, but did not
specify a particular form of price disclosure.68
The Federal Trade Commission introduced some of the earliest restraints
on sales finance rate disclosures in 1939, after the FTC investigated the ratedisclosure
practices of several major American car manufacturers and their
affiliated finance companies. It was common practice for car dealers to state
their finance charges in terms of a “discount rate,” much like commercial
banks used.69 The FTC concluded that advertisements for buying a car on the
“six percent plan” were likely to deceive consumers, since many buyers would
not understand that the rate was a discount rate. (Advertising the discount
rate made the cost of credit appear to be lower than if the rate were stated as
an “equivalent annual rate,” a metric invented by the FTC.)70 The FTC had no
authority to require that car dealers use a particular form of rate disclosure
and could not regulate their charges directly. It did, however, demand that
dealers stop using the discount rate in their ads beginning in 1939.71
A year later, in 1940, the Sage Foundation drafted a model state law that
would have required sales finance charges to be disclosed using the Uniform
Law method.72 The law met with stiff resistance from the sales finance industry,
however, and failed to garner legislative support.73 After World War II,
perhaps to quiet demands for its adoption of the Uniform Law method of
disclosure, the sales finance industry supported a requirement for mandatory
disclosure of its credit charges, but stated in terms of the dollar amount of the
charge.74 More broadly, lenders and retailers continued to employ a multitude
of methods for disclosing their rates of charge and evidenced little willingness
to jump on the Uniform Law bandwagon.
***
Although Douglas’s interest in disclosure dated back to his work in the
National Recovery Administration in the 1930s, new calls for disclosure
in other areas of consumer law likely inspired him to put forth his credit
“labeling” bill in 1960, nearly a decade after he had joined the U.S. Senate.87
Only two years prior, in 1958, Congress enacted the Automobile Information
Disclosure Act, which required that all new cars display a window sticker that
provided certain price and cost disclosures, nicknamed “Monroney stickers”
after the senator who authored the bill.88 The 1960 Douglas “Consumer Credit
Labeling Bill” similarly would have granted consumers the right to receive
certain information prior to completing a transaction.89 It required lenders to
disclose to borrowers two pieces of information: the total finance charge in
dollars, and the relation of that charge to the unpaid loan balance “expressed
in terms of simple annual interest.”90 The second requirement was novel and
ultimately proved to be the most controversial; no jurisdiction, including the
District of Columbia, required price disclosure in this form.
What goals did Douglas hope to achieve through disclosure? Originally,
Douglas conceived of the benefits of disclosure in then-familiar terms, as
advancing the same objective as the Uniform Small Loan Law: avoiding
deception and warning borrowers of the high cost of credit. Douglas also
briefly mentioned a secondary goal: encouraging “price competition” in the
consumer credit market.92 But Douglas did not originally intend that the
“simple annual rate,” later renamed the “annual percentage rate,” would provide
an exact measure of the cost of credit so as to aid consumers in making
precise cost comparisons. As he wrote to one banker in 1961, “We do not
expect great accuracy in the annual percentage rate.” Rather, Douglas hoped
to impress upon borrowers a more general sense of the high cost of credit,
furthering his primary goal of avoiding deception and preventing excessive
borrowing. “We are concerned with letting the borrower know that the rate is
12 percent rather than 6 percent, or 18 percent rather than 1. percent,” he
explained. He fully agreed that the agency administering the bill should
provide a “little leeway” for creditors, allowing rounding to the nearest whole
number.93 In 1962, he proposed an amendment to the legislation that would
allow “some flexibility or ‘approximation’ of the annual rate.”94
At this time and during the years that the bill was under debate, Douglas
viewed disclosure as a complement to price ceilings and other consumer protection
laws, not a substitute for them.
***
By the time Douglas lost his reelection bid in 1966, he had
managed to get the bill voted out of subcommittee, but the measure failed to
emerge from the full committee over the course of his six-year struggle.126
The breakthrough came after Douglas left office in 1967, when his ally, Senator
William Proxmire, took up the charge, reintroducing a revised version of the
bill
***
Proxmire was willing to compromise with his
opponents on the most contentious issue: the treatment of revolving credit
accounts. Rather than a one-size-fits-all rule, Proxmire agreed to exempt
certain revolving credit plans from the annual rate disclosure requirement,
allowing those lenders to disclose a monthly rate instead.
***
The final bill did not include the Proxmire compromise on revolving
credit, however. Instead, it required all creditors to disclose the cost of credit
as an annual percentage rate, with special calculation instructions for
revolving accounts.133 It also took an exacting approach to disclosure accuracy,
contrary to Douglas’s original idea that lenders should have a “little
leeway” in the APR disclosure, rounding to nearest whole number percentage.134
The final bill specified that the tolerance for error in the APR disclosure was
. of 1 percent for most loans.135 Such precision was unnecessary to meet
Douglas’s original objectives, but this approach better served the new stated
purpose of the bill: strengthening “competition among the various financial
institutions and other firms engaged in the extension of consumer credit.”136
Yet, even as the bill’s stated purpose shifted, lawmakers made no mention
of removing price ceilings for credit charges, which continued to exist at the
state level. Congress expected that the states would continue to regulate other
aspects of consumer lending, just as they had before TILA
***
Meanwhile, in the decade after the passage of the Truth in Lending Act,
the composition of the lending market was changing. The bank-issued credit
card, a form of revolving credit, was a relatively new product at the time that
Congress began debating the Truth in Lending Act in 1960.150 But credit card
usage increased dramatically in the decade between 1967 and 1977, when consumer
use of all varieties of credit cards increased at an average annual rate of
12.2 percent.151 Although the credit card system was a “legal infant” in 1960,
its growth prompted the states to begin regulating this new species of credit,
either interpreting their existing rules on revolving credit to apply to bankissued
cards or drafting new card-specific rules.152 By the mid-1970s, most states
set limits on how much card issuers could charge (1 percent or 1.5 percent per
month).153 The Truth in Lending Act then required issuers to disclose this rate
in terms of an APR.
This regime of state-level substantive interest-rate regulation and federal
disclosure rules soon started to unravel, however. About a decade after passage
of the Truth in Lending Act, judges and lawmakers began to limit the
reach of state-level interest-rate caps. Changes in the American economy and
in ideas about economic regulation set the stage for the rollback of rate caps
in the late 1970s and ‘80s. The prosperity of the 1960s had given way to the
rampant inflation and rising unemployment of the 1970s. Legislators feared
that restrictive state usury laws were hindering consumers’ access to credit,
especially mortgage loans, as market rates soared above state rate ceilings.
Several recent studies by economists validated these concerns, finding that
usury laws were inefficient and burdensome on growth.154 More generally,
Democrats and Republicans both pressed for deregulation in a variety of
markets. Their push was backed by the research of economists like Alfred
Kahn and George Stigler, who documented how poorly designed regulation
could hinder competition and how industry could “acquire” regulation for its
own benefit.155
The system of state-level price controls began to crumble in 1978 with
the Supreme Court’s landmark decision in Marquette National Bank of
Minneapolis v. First of Omaha Service Corporation. Interpreting the National
Bank Act of 1864, the Court held that the law allowed a federally chartered
bank to export the usury law of its home state when lending to residents of
other states.156 This meant that federally chartered banks could escape unfavorable
state interest-rate caps by relocating to states with more permissive
usury laws. Congress further limited the reach of state usury laws in 1980,
with the passage of the Depository Institutions Deregulation and Monetary
Control Act (DIDMCA).