Today's Trends in Credit Regulation

Hidden Finance Charge Theory Loses at Federal Appeals Court
By Catherine M. Brennan

As consumers continue to ride out the effects of the recent economic recession, a wave of consumer litigation wends its way through the courts of the nation. These lawsuits allege every theory imaginable to try to get a consumer out from under what can be crushing debt. In one recent case, a federal appellate court affirmed the dismissal of a class action lawsuit grounded in an older theory of liability under the federal Truth in Lending Act that has resurfaced in recent years – the “hidden finance charge.”

On appeal from the U.S. District Court for the District of Connecticut, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit brought on behalf of a class of customers with poor credit who bought used motor vehicles from Balise Auto Sales, Inc., under retail installment contracts subsequently sold to Auto Credit Express, Inc. Both Balise and ACE – owned by the same individuals – cater to customers with poor credit.

The lawsuit claimed that the defendants violated TILA by burying hidden finance charges in the prices that Balise imposed for these vehicles. The complaint alleged that Balise advertised the newer, more valuable used cars in its inventory at market prices, as measured by a particular used car buying guide, but sold the older, less valuable used cars to subprime credit customers for prices substantially higher than the market prices listed in the same guide. The difference between the book value of the vehicle and what the consumer paid for it, the consumers alleged, constituted a finance charge that TILA required the defendants to disclose.

Specifically, Sharron Frazier bought a 1998 Chevrolet Venture from the dealership for $7,995. The NADA Guide lists the market value of this model as $4,000. Latisha Poulin bought a 1998 Saturn SL2 from Balise for $8,440. The NADA Guide lists the market value of this model as $3,900. Both Frazier and Poulin executed retail installment contracts that ACE subsequently bought.

After realizing the inflated values of their vehicles, Frazier and Poulin sued, arguing that TILA requires a creditor to disclose any finance charge it imposes on a consumer. Although the complaint did not state the finance charges actually disclosed, it asserted that Balise and ACE deceptively buried the cost of credit within the purchase prices of the cars that Balise sold to Frazier, Poulin, and all customers with poor credit. The customers argued that, for each of these cars, the portion of the purchase price in excess of the model’s NADA Guide value is not actually part of the cost of the car itself, but rather a hidden finance charge intended to compensate for the increased risk of lending to customers with poor credit.

A creditor can hide the finance charge by increasing the price of an item or service while stating that there is no finance charge. TILA defines a finance charge as the cost of consumer credit as a dollar amount, including 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. A charge is a finance charge if it is of a type not payable in a comparable cash transaction. Consumers have raised the “hidden finance charge” issue in numerous cases, but such cases are difficult for consumers to win.

This lawsuit turned out to be no exception. The complaint did not allege that Balise priced its older cars differently for customers with good credit or customers paying in cash or even whether such customers bought cars from Balise’s older inventory at all – a defect that proved fatal to the lawsuit. The customers never alleged that subprime credit customers paid higher purchase prices than non-subprime credit customers for comparable merchandise. “If the book values in the NADA Guide are a fair proxy for the purchased cars’ market values, plaintiffs have alleged a bad bargain,” the court concluded. “But the complaint provides no facts from which to infer that that bad bargain stemmed from an undisclosed finance charge.”

Accordingly, the appellate court affirmed dismissal, but allowed time for the customers to provide information about the prices charged to cash purchasers of motor vehicles of the same vintage as those bought by the plaintiffs.

Even if a consumer raises a “hidden finance charge” claim against an originating creditor and prevails, the consumer could not assert this claim against subsequent voluntary assignees. Except as otherwise specifically provided in TILA, any civil action for a violation of TILA that a consumer may file against a creditor may be maintained against any voluntary assignee of that creditor “only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.”

A violation apparent on the face of the disclosure statement includes, but is not limited to: (1) a disclosure that can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned; or (2) a disclosure that does not use the terms required to be used by TILA. This limitation on liability has been very strictly interpreted to require the violation to be determinable from the “four corners” of the document. Any extraneous knowledge that the assignee might have is not considered in making this determination. Thus, voluntary assignees, such as ACE, would not have any liability under TILA for the potential violation.

Poulin v. Balise Auto Sales Inc., 2011 U.S. App. LEXIS 15001 (2d Cir. (D. Conn.) July 22, 2011).

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at

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