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United States District Court, Southern District of California

April 29, 2003


The opinion of the court was delivered by: Jeffrey T. Miller, United States District Judge


Plaintiffs Malinee and Ritnarone Virachack have filed this class action on behalf of themselves and others similarly situated alleging violations of the Federal Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., by the defendant automobile dealer Bob Baker Ford. The parties have filed cross-motions for summary judgment.*fn1 The dispositive issue before the court is whether a car dealership must disclose to the consumer a withheld manufacturer's rebate which is available to cash and credit purchasers but unavailable to consumers who receive a promotional annual percentage rate of interest ("APR"). Pursuant to Local Rule 7.1(d)(1), the court finds these motions appropriate for decision without oral argument.


The essential relevant facts are undisputed.*fn2 In November 2001, plaintiffs*fn3 entered into a Retail Installment Sales Contract and purchased a new Ford Explorer for a stated price of roughly $20,000 (excluding tax, license, dock fees, etc.) at a stated APR of 0.9%. Under this stated APR, defendant disclosed to plaintiffs that they incurred a total finance charge of approximately $417.

In order to receive the 0.9% APR, plaintiffs were required to agree to the assignment of the contract to Ford Motor Credit Company ("FMCC"). At the time of the execution of the contract, both plaintiffs and defendant intended that the contract be assigned to FMCC, and it is undisputed defendant did not inform plaintiffs that they would have received a $2,000 rebate from Ford Motor Company ("Ford") had they paid cash for the Explorer. Plaintiffs could not receive both the rebate and the 0.9% APR. Plaintiffs, however, could have received the manufacturer's $2,000 rebate and independently financed the purchase of the vehicle had they not received the promotional 0.9% APR.

In summary, defendant made the following TILA disclosures:

(1) APR — 0.9%

(2) FINANCE CHARGE — $417.47

(3) AMOUNT FINANCED — $22,615.53

(4) TOTAL OF PAYMENTS — $23,032.80

(5) TOTAL SALE PRICE — $27,335.94 (includes down payment of approximately $4,000)

A court may grant summary judgment when there are no genuine issues of material fact and the party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Arpin v. Santa Clara Valley Transp. Agengy, 261 F.3d 912, 919 (9th Cir. 2001). Additionally, summary adjudication is appropriate on discrete claims where no genuine issues of material fact exist as to that claim. Fed.R.Civ.P. 56(a). Neither party raises any genuine issue of material fact making summary judgment on the claimed violation of TILA appropriate in this case. Congress enacted TILA based on the findings that free-market competition and the economy would be strengthened through the informed use of credit which, in turn, "results from an awareness of the cost thereof by consumers." 15 U.S.C. § 1601(a). Congress explicitly set forth the purpose of TILA in the Act:

It is the purpose of this subchapter 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 credit billing and credit card practices.
Id.; see also Mourning v. Family Pubs. Service, Inc., 411 U.S. 356, 364-65 (1973) (TILA intended to prevent creditors from obscuring the cost of credit to consumers). As the Supreme Court has explained, "[m]eaningful disclosure does not mean more disclosure. Rather, it describes a balance between `competing considerations of complete disclosure and the need to avoid information overload.'" Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980) (quoting S.Rep. 96-73, p. 3 (1979)) (emphasis in original). In other words, the evaluation of a credit transaction should focus on "the economic substance of the transaction." Williams v. Chartwell Financial Services, Inc., 204 F.3d 748, 753 (7th Cir. 2000). Furthermore, due to the inherent complexity in striking a meaningful balance, Congress granted the Federal Reserve Board ("FRB") "expansive authority . . . to elaborate and expand the legal framework governing commerce in credit." Ford Motor Credit Co., 444 U.S. at 560. Consequently, "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." Id. at 566 (citations omitted) (holding courts must defer to Federal Reserve Board staff opinions construing TILA or the underlying regulations unless such opinions are "demonstrably irrational").

In this case, the parties dispute whether TILA requires a car dealership to disclose a manufacturer's rebate that is unavailable to credit consumers buying at a promotional APR but available to cash consumers and credit consumers who receive an APR other than the promotional rate. More specifically, the issue is whether the forgone rebate is a "finance charge" under TILA, i.e., a charge imposed incident to the extension of credit, due to the fact that the rebate is withheld from credit consumers who receive the promotional APR. Initially, the court notes that neither party presents any statute, regulation, or official comment directly on point.*fn4

As in any case of statutory and regulatory construction, the court begins its analysis with the text of the relevant statutes and regulations at issue. Under 15 U.S.C. § 1632(a), a creditor is required to disclose the amount of any "finance charge" clearly and conspicuously to the consumer. 15 U.S.C. § 1632(a). In turn, § 1605(a), broadly defines what constitutes a finance charge subject to disclosure:

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.
15 U.S.C. § 1605(a). In keeping with the text of § 1605(a), the FRB, in Regulation Z (12 C.F.R. § 226.4(a)), also defines what constitutes the finance charge:

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.
C.F.R. § 226.4(a). In addition, 12 C.F.R. § 226.4 list specific examples of finance charges including "[d]iscounts [made] for the purpose of inducing payment by a means other than the use of credit." 12 C.F.R. § 226.4(a)(9). However, the official comments to this section state that discounts which are offered to both cash and credit purchasers are not included as part of a finance charge. 12 C.F.R. Pt. 226.4, Supp. I, Comment 4(a)(1)(i)(B).

With this statutory scheme in mind we turn to the contentions of the parties. In order to prevail, plaintiffs must establish that the rebate in question meets the four elements that prove a finance charge under 15 U.S.C. § 1605(a). This means that the rebate must be (1) a charge, (2) directly or indirectly payable by the consumer, (3) imposed directly or indirectly by the creditor, and (4) as an incident or condition of the extension of credit. 15 U.S.C. § 1605(a); see also 12 C.F.R. § 226.4(a). While the parties contest the applicability of various portions of the definition to the rebate withheld in this case, the court finds that the forgone rebate was not withheld incident to or as a condition of the extension of credit to plaintiffs and is therefore dispositive. Accordingly, the court does not reach the other portions of the definition addressed by the parties.

At the threshold, plaintiffs argue the undisclosed rebate constitutes a finance charge. Plaintiffs' premise is that the cost of credit to them is greater than the 0.9% APR disclosed since it fails to account for the $2,000 rebate that they must forgo in order to purchase at that specific rate. Plaintiffs maintain that the forgone $2,000 rebate was imposed as a condition of the extension of credit at the 0.9% rate and is thus hidden within the price of the vehicle either by defendant directly or indirectly based on the required assignment of the loan to Ford Motor Credit Company. Instead of receiving a 0.9% APR, plaintiffs argue that the hidden cost of the forgone $2,000 rebate would, if revealed, demonstrate that their credit purchase was made at a substantially higher APR (in this case 4.6%). Because the purpose of TILA is to inform purchasers of the actual cost of credit, plaintiffs urge the court to view the forgone rebate as a "hidden" finance charge buried in the price of the vehicle. In support, plaintiffs argue that this case is essentially indistinguishable from the decision in Walker v. Wallace Auto Sales, Inc., 155 F.3d 927 (7th Cir. 1998), since plaintiffs, like those in Walker, are required to pay a higher "cash" price to purchase on credit.

In Walker, the plaintiffs purchased a Lincoln Continental at a listed cash price of $14,040 from the defendant auto dealer. Walker v. Wallace Auto Sales, Inc., 155 F.3d 927, 929 (7th Cir. 1998). According to the "Blue Book" used car guide, the car had a retail value of $8,300. The plaintiffs paid $1,500 as a down payment leaving $13,300 to be financed at a 25% APR over four years. As a result, the plaintiffs were to pay $7,868 in interest causing the total sale price to be $21,168. After the sale was complete, the defendant sold the contract to Guardian, a named defendant, who specialized in purchasing retail sales contracts from auto dealers. Guardian purchased plaintiffs' contract at a $7,182 discount from the sale price paid by plaintiffs to the auto dealership. Id.

The plaintiffs filed suit alleging that the auto dealer had "artificially inflated the cost of the vehicle to cover the discount at which Guardian purchased the [plaintiffs'] sales contract and therefore imposed a `hidden finance charge' on them in violation of TILA, 15 U.S.C. § 1638(a)(3)." Walker, 155 F.3d at 929. The district court dismissed the complaint relying upon the Official Staff Commentary which provided 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. at 930 (quoting 12 C.F.R. Pt. 226, Supp. I, Comment 4(a)(2)). The Seventh Circuit reversed. The court explained that TILA required a creditor to disclose the cost of credit for the purchase of a good. It reasoned that the discount given to Guardian, as alleged in the complaint, and imposed on a purchaser buying on credit was a finance charge under TILA:

credit customers, such as [plaintiffs], 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.
Walker, 155 F.3d at 932. The court also rejected the district court's reasoning that the discount was not "separately imposed" simply because the discount given to Guardian was included in the price of the car. To endorse such a definition would, the court reasoned, eviscerate TILA since a creditor could impose finance charges by simply including them in the "cash" price of the car when, in fact, cash purchasers paid less for the car. Consequently the court held that "a charge should be considered `separately imposed' on a credit consumer when it is imposed in credit transactions but not in cash transactions." Id. at 934.

In contrast, defendants argue, inter alia, that Walker is distinguishable because plaintiffs do not forgo the rebate, i.e., incur additional costs, due solely to their decision to finance the purchase of their car. This brings us to the core issue of this case. Is the forgone rebate a mandatory condition of the extension of credit? Plaintiffs argue that the answer is a definitive "yes," while acknowledging they could have purchased on credit, albeit at a different rate, and received the rebate at issue. Plaintiffs maintain, however, that the forgone rebate must be considered a finance charge because it was a condition of the extension of credit at the 0.9% promotional rate.

Contrary to plaintiffs' assertions, no "hidden" finance charge is being imposed upon plaintiffs simply because they were not informed of the cash rebate.*fn5 Simply put, a consumer may obtain the rebate and still purchase on independently obtained credit. Forgoing the rebate, then, is not a condition of the extension of credit but, instead, is merely a condition of receiving the promotional rate. Therefore, unlike Walker, no higher "cash" price was imposed on plaintiffs solely because plaintiffs purchased on credit or to mask a portion of the credit. Rather, plaintiffs simply had to forgo the rebate in order to take advantage of the promotional rate.*fn6 Moreover, presumably there would have been no bar to plaintiffs attempting to negotiate a lower purchase price through further negotiations for dealer discounting.

The reality of plaintiffs' transaction is that they were given a "discount" on the market interest rate in order to induce them to purchase their vehicle. Indeed, plaintiffs' own separate statement of facts posits that the promotional rate is below the market interest rate. The cash rebate is not a cost of credit imposed upon plaintiffs. Rather, the rebate is an option made available to both cash and credit purchasers in order to induce the purchase of Ford vehicles at a price that would otherwise be unavailable to those consumers. in essence, the promotional interest rate is simply a different form of the cash rebate in that both the rebate and the interest rate are forms of subsidizing the market price of the vehicle offered to consumers in order to generate sales. Thus, the rebate is a "discount" made available to consumers who wish to receive the promotional interest rate but in the form of the reduced APR rather than in cash. Therefore, plaintiffs have received the "discount" made available to cash and other credit purchasers illustrating that the forgone rebate is not a condition of the extension of credit. See 12 C.F.R. Pt. 226, Supp. I, Comment 4(a)(i)(B) (discount available to both cash and credit consumers not a finance charge). Consequently, the record does not support plaintiffs' argument that the forgone rebate is imposed as a condition of the extension of credit or that the rebate is being offered to induce purchases by means other than credit. Therefore, the court concludes that the cash rebate is not part of plaintiffs' cost of credit and need not be disclosed.


In summary, the plaintiffs were not required to forgo the cash rebate as an incident to or a condition of the extension of credit. Therefore, the cash rebate does not fall within the definition of a finance charge, and need not be disclosed under TILA.

For the foregoing reasons, the court grants defendant's motion for summary judgment and denies plaintiffs' motion for partial summary judgment. The clerk is instructed to close the file.


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