Luella Wright and Charlie Wright, Plaintiffs-appellees-crossappellants,willie Shavers, Plaintiff-appellee, v. Tower Loan of Mississippi, Inc., D/b/a Tower Loan of Canton,defendant-appellant-cross Appellee, 679 F.2d 436 (5th Cir. 1981)

The purpose of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601-1667e (1976 & Supp. IV 1980),¹  is "to assure a meaningful disclosure of credit terms." Id. § 1601(a). This purpose would appear to be best served by a succinct and lucid statement that would at once facilitate both the borrower's understanding and the lender's compliance. However, although TILA has now been in force for over thirteen years, the court decisions, regulations, amended regulations, official staff interpretations, unofficial staff interpretations, and the Act itself still do not resolve all compliance problems. This difficulty arises in part because of the infinite variety of lending transactions, and the efforts of lenders to devise a simple form adequate for all of them.²  Although Congress has tried to resolve these problems by enacting TILSA, supra note 1, its provisions, not being retroactive, do not resolve the problems still arising from loans made before its effective dates, see id.

These cases involve the adequacy of credit insurance disclosures and the effect of erroneously putting superfluous charges on disclosure statements. Taking into consideration the rule that the burden of compliance is on the lender, we affirm the magistrate's judgment holding the lender liable to three borrowers for failing to furnish them proper disclosure, although our reasons differ from the magistrate's.

* This appeal involves two separate suits filed by different borrowers against the same lender, Tower Loan of Mississippi, Inc. ("Tower"), and consolidated for trial before a magistrate.³  On June 6, 1978, the first borrowers, Luella and Charlie Wright, entered into a loan transaction with Tower by which they obligated themselves to pay a total of $550 in installments. The loan was scheduled to be for twenty-five months, and would, therefore, have been paid in full on July 6, 1980. Tower then granted, and charged the Wrights for, a first-payment extension that made the final loan payment due on July 21, 1980, several days beyond twenty-five months from the date on which the Wrights entered into their loan transaction with Tower. The disclosure statement, however, erroneously said that the last payment was due on August 21, 1980.

Tower gave the Wrights an undated disclosure statement. On it, Mrs. Wright signed an election or authorization to buy credit life, health, and accident insurance and credit property insurance. The life, health, and accident insurance was provided in one policy, the property insurance in another. Each policy was issued by a different company. Their disclosure statement recited that the terms of coverage of their insurance policies were stated in the policies. Each policy stated that the term of coverage was twenty-five months, beginning June 6, 1978, and ending July 6, 1980. Thus, according to the information on the policies, each policy expired one month and fifteen days before the disclosure statement recited, erroneously, that the last loan payment was due, and fifteen days before it actually was due, according to the loan agreement.

Tower put the total amount of the charges for insurance premiums in the "Amount Financed" box on the disclosure statement, and did not include them in the finance charge, which was disclosed in a separate box. Regulation Z, 12 C.F.R. pt. 226 (1981),⁴  permits lenders to exclude such insurance premiums from the finance charge. However, "if the term of the insurance is less than the term of the credit obligation," then Regulation Z "requires disclosure of the term of the insurance." Philbeck v. Timmers Chevrolet, Inc., 499 F.2d 971, 978 (5th Cir. 1974).

The Wrights contend that Tower violated Regulation Z by excluding the insurance premiums from the finance charge and failing to disclose on the disclosure statement that the insurance expired before the loan would be paid. The Wrights also contend that Tower violated Regulation Z by failing to include a date with their insurance authorization and by erroneously putting on the disclosure statement a charge of $299.77 in a box marked "Other."

The other borrower was Willie Shavers. Although the facts are different, the alleged violations are similar. His disclosure statement recited that the terms of coverage of his insurance policies were stated in the policies. His final loan payment was due on February 10, 1981, but his credit life, health, and accident insurance policy showed its term of coverage as twenty-five months from December 22, 1978, which meant that it would expire on January 22, 1981, nineteen days before his loan would be paid. Thus, as with the Wrights, the credit life, health, and accident insurance expired before the loan would be paid, and the insurance policy showed an expiration date although the disclosure statement did not. His property insurance policy, however, unlike the Wrights', stated no dates of commencement or expiration. His disclosure statement contained an erroneous charge, for $807.22, in the box marked "Other."

The only witness at the consolidated trial was Tower's general supervisor, who testified, over objection, that Tower has an oral agreement with each of the insurance companies with which it does business that the terms of their insurance policies will be coextensive with Tower's loans. No other evidence of this agreement was introduced. The supervisor also testified that Tower tells each borrower that the loans and insurance policies are coextensive. Tower urges that this oral representation to its borrowers obligates it to provide such insurance coverage and that its oral agreement with its insurers in turn requires the insurers to provide such coverage. If this testimony were in fact correct, then the effect of showing the expiration dates on the policies would be nullified, for the true expiration dates would be different from those shown.

The magistrate rejected Tower's attempt to contradict the insurance policies and the disclosure statements' recitals that the terms of the insurance policies were shown on the policies. He found that the loans and insurance policies were not in fact coextensive, but that in each transaction the policies would have expired substantial periods of time before the loans would have been paid. He held that Tower violated TILA by failing to disclose on the disclosure statements the terms of the insurance policies. He also held that Tower violated TILA by putting the erroneous "Other" charges on the disclosure statements.

The magistrate awarded each of the Wrights $495.46, which equals the statutory penalty of twice the "actual" finance charge. 15 U.S.C. § 1640(a) (2). He derived the actual finance charge by taking the finance charge given in the Wrights' disclosure statement and adding the insurance premiums to it;⁵  because he concluded that Tower had violated the procedures a lender must follow before it can exclude insurance premiums from the finance charge, these premiums should have been included in the finance charge stated on the disclosure form. Using the same approach, he calculated Shavers's actual finance charge to be $590.28.⁶  He awarded Shavers the maximum statutory recovery of $1000, however, because twice Shavers' actual finance charge exceeded that maximum. He also awarded costs and attorney's fees to both Shavers and the Wrights.

Tower counterclaimed against Shavers for the unpaid balance of his loan. The magistrate allowed this counterclaim, plus attorney's fees, but refused to offset these amounts against Shavers' award of costs and attorney's fees.II

Neither TILA nor Regulation Z explicitly requires disclosure of the term of credit life, health, accident, or property insurance. Only the "cost" of insurance that is written for the sale or loan must be disclosed.⁷  Neither the statute nor the regulation, as originally adopted, distinguished between the cost paid for insurance purchased when the loan is made and the total cost of the insurance for the full term of the loan if the term of the insurance is shorter than the term of the loan. "To clarify the delphic, the (Federal Reserve Board) promulgated 12 C.F.R. § 226.402...." Reneau v. Mossy Motors, 622 F.2d 192, 194 (5th Cir. 1980) (per curiam).⁸ 

Subsection (b) of 12 C.F.R. § 226.402 provides that a creditor may exclude an insurance premium from the finance charge if the creditor discloses the premium for the initial term of the insurance policy. Subsection (b) also provides that, if the creditor does exclude the premium from the finance charge, the creditor must then disclose the term of the insurance policy if it is shorter than the term of the loan. Without disclosure of the term of a policy that is shorter than the term of a loan, "the creditor has not effectively disclosed the cost of the insurance." Reneau v. Mossy Motors, 622 F.2d at 195. "The consumer who desired insurance for the full term of the transaction would find it necessary either to renew the policy initially acquired or to take out an additional policy or policies, thus resulting in additional cost to the consumer. The (Federal Reserve) Board was concerned with making the consumer aware of this possible additional cost." Philbeck v. Timmers Chevrolet, Inc., 499 F.2d at 979.

When a creditor must disclose the term of an insurance policy, it may do so in the disclosure statement, the document in which the other credit disclosures are made; but disclosure in that document is not essential. The creditor may elect to disclose the term in a separate document, such as the insurance policy. Lyles v. Commercial Credit Plan, 660 F.2d 129, 131-32 (5th Cir. 1981); see Burton v. G. A. C. Fin. Co., 525 F.2d 961, 964 (5th Cir. 1976) ("The borrower's written election to obtain optional credit insurance ... is not a lender disclosure within the meaning of 12 C.F.R. § 226.8(a).");⁹  Mullen v. North Pac. Bank, 25 Wash. App. 864, 869-72, 610 P.2d 949, 953-54 (1980). As one commentator has noted, the insurance disclosure section of Regulation Z "contains no requirements as to the location of the disclosure it mandates as a condition to excluding the amount of certain insurance premiums from the finance charge." 1 R. Clontz, Truth-in-Lending Manual P 2.04(4) (d), at 2-34 (4th ed. 1976) (emphasis in original).¹⁰ 

In general, a creditor may comply with Regulation Z by making insurance disclosures in "a format which would insure that the customer is aware of the cost (of insurance) before signing the (insurance) authorization." FRB Public Information Letter No. 408, supra note 10. Although as a practical matter insurance disclosures made by cross-references to other documents are more likely to cause problems for a lender "(f)rom an enforcement standpoint," id., such disclosures nevertheless comply with Regulation Z if they are written and arranged properly. See FRB Public Information Letter No. 1234, supra note 10; cf. Jones v. Fitch, 665 F.2d 586, 589-90 (5th Cir. 1982) (rescission action) (identification of property securing loan); Lamar v. American Fin. Sys., Inc., 577 F.2d 953, 954 (5th Cir. 1978) (disclosure of security interest).¹¹ 

We conclude, therefore, that we must reverse the magistrate's holding that Tower violated TILA by failing to disclose the terms of the Wrights' insurance policies, and the term of Shavers's life, health, and accident insurance policy, on the disclosure statements. The disclosure statements said that the terms of the insurance policies could be found on the insurance policies. Tower disclosed the terms of these policies on the policies themselves. This disclosure satisfies the requirements of TILA.

For different reasons, we conclude that we must reverse the magistrate's holding that Tower violated TILA because of the disclosures it made, or failed to make, concerning Shavers's property insurance. As noted above, neither Shavers's disclosure statement nor his property insurance policy disclosed the term of his property insurance. Both Shavers and the magistrate treated Shavers's property insurance policy in the same way they treated the other three insurance policies. In doing so, however, they apparently assumed that the term of Shavers's property insurance policy, like the terms of the other three insurance policies, was less than the term of his loan.

This assumption is erroneous. Shavers never adduced¹² , and the magistrate never cited, any evidence that the term of Shavers's property insurance was less than the term of his loan. Such evidence is essential to a finding that the disclosure for Shavers's property insurance violated TILA. Because we cannot assume the existence of such evidence, and because Shavers has suggested none to us, we hold that the term of Shavers's property insurance must be assumed to have been coextensive with the term of his loan. See, e.g., Dzadovsky v. Lyons Ford Sales, 593 F.2d 538, 539 (3d Cir. 1979) (per curiam) ("proven violations of the disclosure requirements") (emphasis added); cf. Teel v. Thorp Credit Inc., 609 F.2d 1268, 1270 (7th Cir. 1979) (creditor's affirmative defense to proved violation of TILA). Tower thus had no duty to disclose the term of Shavers's property insurance anywhere. Philbeck v. Timmers Chevrolet, Inc., 499 F.2d at 978-81.¹³ 

III

We now turn to the magistrate's holding that Tower violated TILA when it erroneously put charges in the boxes marked "Other" on both Shavers's and the Wrights' disclosure statements. The magistrate noted in his opinion that these were "charges for which there were no explanations." Moreover, at trial, Tower's attorney acknowledged that these charges had been "insert(ed) ... for no reason," and that "(t)hey have no significance whatsoever." When the magistrate asked Tower's attorney why Tower put these charges on the disclosure statements, the attorney replied: "That's a mystery to us and to the court, (one that) will probably remain forever." Shavers and the Wrights argue that, because these "Other" disclosures are meaningless, misleading, and confusing, they violate Regulation Z, 12 C.F.R. §§ 226.1(a) (2), .6(c).¹⁴  We agree.

Tower concedes, and we have repeatedly held, that lenders must comply strictly with TILA and Regulation Z. Williams v. Western Pac. Fin. Corp., 643 F.2d 331, 339 (5th Cir. 1981) (per curiam).¹⁵  "(O)nce the court finds a violation (of TILA), no matter how technical, it has no discretion with respect to the imposition of liability." Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976).

Whether a lender has violated TILA or Regulation Z by making an additional, nonrequired disclosure depends on the facts of each case. The lender, however, bears the burden of proving compliance. "The determination of what may or may not mislead, confuse, or detract attention is a judgmental factor, and a creditor providing additional information with the required disclosures should be prepared to justify his contention that the disclosures meet the § 226.6(c) requirements ... to the courts." FRB Public Information Letter No. 832 (1974-1977 Transfer Binder) Consumer Cred. Guide-Special Releases (CCH) P 31,154 (Aug. 27, 1974). We conclude that Tower has failed to carry its burden of justifying its putting the "Other" charges on Shavers's and the Wrights' disclosure statements.

The disclosure of the "Other" charges "had the capacity to mislead or confuse a potential borrower." Weaver v. General Fin. Corp., 528 F.2d 589, 590 (5th Cir. 1976) (per curiam). It provided information that was worse than meaningless: it said that the plaintiffs were subject to additional charges that in fact did not exist. See Gresham v. Termplan Inc. W. End, 648 F.2d 312, 314 (5th Cir. 1981); Gennuso v. Commercial Bank & Trust Co., 566 F.2d 437, 443 (3d Cir. 1977) (per curiam) ("reference in bold print on the Note and Security agreement to a non-existent warranty of attorney to confess judgment"); Ives v. W. T. Grant Co., 522 F.2d 749, 761 n.29 (2d Cir. 1975) ("Describing a security interest when there is none ... would constitute additional but misleading information."). The charges, moreover, appear in the section of the disclosure statement where most of the required disclosures appear. Their location thus makes them more likely to "obscure, contradict, or detract attention from the required disclosures." FRB Public Information Letter No. 1322, 5 Consumer Cred. Guide (CCH) P 31,825 (Oct. 31, 1978); accord, Gresham v. Termplan Inc. W. End, 648 F.2d at 314 ("Rather than disclosing meaningful additional information (it) confuses the borrower and detracts information from the required federal disclosure.").¹⁶ 

TILA neither requires nor encourages borrowers to guess or to assume that a disclosure has a particular meaning, or that it in fact has no meaning. Pennino v. Morris Kirschman & Co., 526 F.2d 367, 372 (5th Cir. 1976) ("This court ... is bound by the intent of Congress to eliminate the necessity of assumptions on the part of the consumer."); Barber v. Kimbrell's, Inc., 424 F. Supp. 42, 48 (W.D.N.C. 1976), aff'd in pertinent part, 577 F.2d 216, 221-22 (4th Cir.), cert. denied, 439 U.S. 934, 99 S. Ct. 329, 58 L. Ed. 2d 330 (1978). Nor does TILA permit lenders to add meaningless information to disclosure statements, for to do so would encourage borrowers to ignore or to avoid reading these statements, and would thereby frustrate the purpose of the statute. "The entire thrust of contemporary credit legislation is to make credit contract terms comprehensible. Decisions which in effect encourage debtors not to take these terms seriously ... undermine the purpose of the legislation." Williams v. Blazer Fin. Servs., 598 F.2d 1371, 1374 (5th Cir. 1979); accord, Anthony v. Community Loan & Inv. Corp., 559 F.2d 1363, 1370 (5th Cir. 1977).¹⁷ 

Tower's arguments do nothing to impeach this reasoning or its ineluctable conclusion. Tower first argues that TILA does not forbid Tower to provide the boxes marked "Other" on the disclosure statements. The issue in this case, however, is not that the word "Other" inadequately described the information contained in the boxes,¹⁸  but that the information in the boxes was itself meaningless and confusing. Thus Tower's additional argument, that it often uses the boxes "to list disbursements for which a space is not otherwise provided on the statement," also misses the mark. Merely because the boxes might be convenient for presenting useful information does not excuse Tower for using them to present meaningless and useless information.

Tower then argues that the "Other" charges "did not mislead, confuse or in any way hinder the borrowers." This argument, however, is specious, for we have often, and explicitly, held that a plaintiff need not prove that he was actually deceived to recover under TILA.¹⁹ 

Tower also argues that it gave Shavers and the Wrights all the information they needed to purchase credit intelligently. Again, Tower misstates the issue. We are dealing here with misleading disclosure, not nondisclosure; a lender may be found liable under TILA for either. "A misleading disclosure is as much a violation of TILA as a failure to disclose at all." Smith v. Chapman, 614 F.2d 968, 977 (5th Cir. 1980); see Williams v. Public Fin. Corp., 598 F.2d 349, 355 (5th Cir. 1979).

Finally, Tower argues that TILSA, supra note 1, provides "further evidence" that Tower's "Other" charges did not contravene TILA.²⁰  But Tower fails to cite any support in TILSA for its argument,²¹  and we have found none. Furthermore, neither TILSA nor the revised Regulation Z promulgated pursuant to it, supra note 4, suggests that lenders have been given license to make misleading disclosures. See TILSA § 611, 15 U.S.C. § 1631(d) (Supp. IV 1980) ("to prevent ... misleading disclosures").²²  We must, therefore, reject Tower's argument that TILSA suggests that Tower's "Other" disclosures did not violate TILA.

Tower's reliance on 15 U.S.C. § 1640, as amended by TILSA § 615, is misplaced. There is no showing that Tower's violation was rectified in a timely manner or that Tower's violation "was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error,"²³  and no evidence that Tower acted "in good faith in conformity with" any agency rule, regulation, or interpretation.

Nor is there any showing that, as Tower argues, its violation resulted from an "interpretation of technical disclosure requirements without clear foundation in either statutory language or policy." Barbieri v. Commercial Credit Loans, Inc., 596 F.2d 660, 662 (5th Cir. 1979). Tower's violation resulted instead from Tower's ignoring the clear mandates of both Regulation Z and the cases interpreting it.

IV

At trial, the Wrights contended that Tower violated TILA by failing to obtain a dated insurance authorization from them. Although the magistrate found it unnecessary to address this contention, the Wrights raise it again in this appeal.²⁴  We now address this contention because, given our conclusion regarding the disclosure of the terms of the insurance policies, p. 12 supra, a violation of the insurance authorization requirements would give the Wrights a recovery greater than they otherwise would obtain under our disposition of this case.

We conclude that the Wrights have established a violation of the insurance authorization requirements. Regulation Z, 12 C.F.R. § 226.4(a) (5), requires that a lender obtain a "dated" authorization from a borrower if the lender wishes to exclude from the finance charge the premiums for credit life, health, or accident insurance. The Wrights' insurance authorization, and the disclosure statement on which it appears, are both undated. We hold that Tower thereby violated TILA. See Hayslip v. Dunlap Chevrolet Co., 560 F.2d 192, 193-94 (5th Cir. 1977); Meehan v. Nelsonville Mobile Home Sales (In re Warren), 387 F. Supp. 1395, 1403-04 (S.D. Ohio 1975); Porter v. Household Fin. Corp., 385 F. Supp. 336, 338, 345 (S.D. Ohio 1974). In calculating the Wrights' recovery, therefore, the premiums for their life, health, and accident insurance must be added to the stated finance charge.

V

In Plant v. Blazer Fin. Servs., Inc., 598 F.2d 1357, 1358 (5th Cir. 1979), we held that "a successful plaintiff in a truth-in-lending suit is entitled to have her attorneys paid from the award for attorney's fees and not have those fees setoff against a counterclaim judgment on the debt in favor of the defendant against the plaintiff creditor." For no reason other than the recital that Plant deals with attorney's fees but not court costs, Tower contends that Plant is inapplicable to court costs, and therefore seeks to offset its counterclaim against Shavers's award of costs. Such a distinction would lack reason even more than it misses rhyme.

In Plant, we stated our reasons for concluding that attorney's fees should not be offset. The recovery of attorney's fees is a "critical and integral part" of the sanctions for enforcement of TILA. Id. at 1365. The allowance of such fees in a successful action "makes legal representation available in a manner analogous to the contingent fee system." Id. at 1366.

"Were the attorney's fee award subject to setoff," we continued, "the expectation of fees from a successful action might well be limited to the resources of the debtor in any case where the outstanding debt, being in default and subject to counterclaim, exceeded the recovery. To allow a setoff would in effect relieve the creditors in violation of the Act of the attorney's fee expense in the case of an insolvent debtor. Such a result would thwart the statute's individual enforcement scheme and its remedial objectives." Id. The same considerations dictate denial of setoff for court costs.

VI

For these reasons, the judgment is REVERSED in part and AFFIRMED in part. The case is REMANDED for the fixing of reasonable attorney's fees both for the trial and for this appeal, see Memphis Sheraton Corp. v. Kirkley, 614 F.2d 131, 133 (6th Cir. 1980); Hidell v. International Diversified Invs., 520 F.2d 529, 532 & n.4, 539 (7th Cir. 1975),²⁵  and for the setting of the recoveries due both Shavers and the Wrights in the light of this opinion.