The Assignment and Discounting of Consumer Installment Contracts: Transactions Within the Periphery of the Truth-in-Lending Act and Regulation Z

SMU Law Review Volume 29 | Issue 2 Article 6 1975 The Assignment and Discounting of Consumer Installment Contracts: Transactions Within the Periphery of the Truth-in-Lending Act and Regulation Z E. John Justema Follow this and additional works at: https://scholar.smu.edu/smulr Recommended Citation E. John Justema, The Assignment and Discounting of Consumer Installment Contracts: Transactions Within the Periphery of the Truth-inLending Act and Regulation Z, 29 Sw L.J. 622 (1975) https://scholar.smu.edu/smulr/vol29/iss2/6 This Case Note is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. NOTES The Assignment and Discounting of Consumer Installment Contracts: Transactions Within the Periphery of the Truth-in-Lending Act and Regulation Z Plaintiff Glaire purchased a health club membership from defendant LaLanne-Paris Health Spa, Inc. Defendant's practice was to offer unitary price contracts, i.e., contracts in which the price is the same whether the customer pays cash or in installments. Plaintiff chose to pay in installments, as did most of defendant's customers. LaLanne then assigned the membership contract to defendant Universal Guardian Acceptance Corporation, an interlocking corporation with common ownership and control.' Universal bought the contract at a discount of 37.5 percent, and plaintiff then became obligated to pay Universal the full contract price in installments over two years. These transactions represented the regular course of business between LaLanne and Universal. Plaintiff sued LaLanne and Universal in the Superior Court, Los Angeles County, contending that both defendants violated portions of the Truth-in-Lending Act,2 which is part of the Consumer Credit Protection Act,8 by failing to disclose a finance charge. 4 The Superior Court sustained defendants' general demurrers and plaintiff appealed to the Supreme Court of California. Held, reversed: The amount of the standard discount is a finance charge payable by the consumer, and it must be disclosed as such. Furthermore, where the merchant and finance company have a close and continuing relationship involving the discounting of consumer installment contracts, both parties must make the disclosures required by the Act. Glaire v. LaLanne-Paris Health Spa, Inc., 12 Cal. 3d 915, 528 P.2d 357, 117 Cal. Rptr. 541 (1974). I. THE TRUTH-IN-LENDING ACT The Truth-in-Lending Act is a disclosure statute which does not regulate the cost of credit or interest rates. 5 By its own terms, the purpose 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 and avoid the uninformed use of credit."' 6 Thus, the Act covers transactions involving the extension of credit to consumers. 7 This statute has been acknowledged by the United States Supreme Court as being reflective of "a transition in 1. Universal prepared the form contracts for LaLanne, provided most of the cash receipts of each LaLanne gym, and bought each membership contract from LaLanne shortly after the sale. 2. 15 U.S.C. §§ 1601-13, 1631-44, 1661-65 (1970). 3. Id. §§ 1601-13, 1631-44, 1661-65, 1671-77, 1681. 4. Id. § 1638(a). 5. Id. § 1610(b). See Smyer, A Review of Significant Legislation and Case Law Concerning Consumer Credit, 6 ST. MARY'S L.J. 37, 46 (1974). 6. 15 U.S.C. § 1601 (1970). 7. Id. § 1631(a). NOTES 1975] congressional policy from a philosophy of 'Let the buyer beware' to one of 'Let the seller disclose.' "8 A. Regulation Z and the "FourInstallment Rule" The Truth-in-Lending Act requires all merchants who regularly extend credit to disclose certain information so that their customers may understand the cost of buying on credit.9 Facts which a merchant must disclose include the cash price, the total amount of deferred payments, the finance charge and other charges, and the annual percentage rate of interest.' 0 Failure to make these disclosures subjects the lender to civil liability to the consumer for twice the amount of the finance charge, with a minimum of $100 and a maximum of $1000, plus costs of litigation including reasonable attorney's fees.' 1 Protected by the Act are natural persons obtaining credit for personal, family, household, or agricultural purposes.' 2 Organizations, persons obtaining credit for business purposes, and the business of buying and selling commercial paper are not protected by the Act.'8 Transactions in excess of $25,000 are excluded except for real property transactions,' 4 but consumer credit advertising is covered. 15 On its face, the Truth-in-Lending Act covers only transactions for which a finance charge is required.'" As a result, many businesses attempted to circumvent the Act by "burying" the finance charge in the price of goods when they knew that most people would buy on credit. To deter this practice, the Federal Reserve Board issued the "Four Installment Rule"' 7 as part of regulation Z.18 This rule extends the coverage of the Act to all credit transactions "for which either a finance charge is or may be imposed or which pursuant to an agreement, is or may be payable in more than four installments."' 9 The rule does not create a conclusive presumption that all credit payments made in more than four installments include a finance charge; instead, it imposes a disclosure requirement on these creditors so that 20 consumers will have all facts necessary for the informed use of credit. 8. Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 377 (1973). 9. 15 U.S.C. §§ 1602(f), 1631(a) (1970). 10. Id. § 1638(a). 11. Id.§ 1640(a). 12. Id. § 1602(h). 13. id.§ 1603(1). 14. Id.§ 1603(3). 15. Id.§§ 1661-65. The purpose of this requirement is to prevent "bait advertising." See Jordan v. Montgomery Ward & Co., 442 F.2d 78, 81 (8th Cir.), cert. denied, 404 U.S. 870 (1971); Garza v. Chicago Health Clubs, Inc., 329 F. Supp. 936, 941 (N.D. Ill. 1971). 16. 15 U.S.C. § 1602(f) (1970). 17. 12 C.F.R. § 226.2(k) (1975). 18. Id. § 226. Congress gave the Federal Reserve Board the power to prescribe regulations to carry out the Truth-in-Lending Act and to apply it to the everyday world. 15 U.S.C. § 1604 (1970). See Strompolos v. Premium Readers Serv., 326 F. Supp. 1100 (N.D. Ill. 1971). Regulation Z was issued pursuant to this authority. 19. 12 C.F.R. § 226.2(k) (1975). One court noted that merely because the so-called "cash" price is the same as for an installment payment plan does not mean that the "cash" price does not include what are essentially finance charges. Strompolos v. Premium Readers Serv., 326 F. Supp. 1100, 1103 (N.D. 111. 1971). 20. Mourning v. Family Publications Serv., Inc., 411 U.S. 356, 377 (1973). Facts which must be disclosed include the number, dates, and amounts of payments, insurance (...truncated)