The Second Circuit has affirmed the Federal Rule 12(b)(6) dismissal of a Truth in Lending Act (TILA) claim in Poulin v. Balise Auto Sales, Inc., holding that the plaintiffs failed to allege facts suggesting that their purchases of cars with subprime installment loans included undisclosed finance charges, even though the plaintiffs purportedly paid substantially more than book value and alleged that purchasers with good credit did not.
In Poulin, the putative class of subprime borrowers alleged that the defendant auto seller and defendant assignee of the seller's retail installment contracts buried hidden finance charges in the price the class paid for the cars they purchased. The class alleged that the auto seller advertised newer, more valuable cars at market prices set in the NADA Official Used Car Guide, but sold older, less valuable cars to subprime credit customers for prices significantly higher than the market prices listed in the same guide.
The thrust of the plaintiffs' TILA claim was that the defendants buried the cost of credit to subprime borrowers in prices higher than those suggested by the NADA guide. Stated differently, the plaintiffs' argued that any purchase price in excess of the value set forth in the NADA guide was a hidden finance charge designed to compensate for higher credit risks, and not part of the cost of car itself.
Creditors are, of course, required to disclose any finance charge imposed on a customer. 15 U.S.C. § 1638(a)(3). In determining whether the alleged hidden finance charge was actually a finance charge for purposes of TILA, the Second Circuit looked to three sources. First, TILA itself defines a "finance charge" as:
"[T]he 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. The finance charge does not include charges of a type payable in a comparable cash transaction."
15 U.S.C. § 1605(a).
Second, Regulation Z defines a finance charge as:
"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).
Finally, the Federal Reserve Board's official staff interpretation of "finance charge" is that:
"Charges imposed uniformly in cash and credit transactions are not finance charges. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question with a similar cash transaction."
12 C.F.R. Pt. 226 Supp. I, § 226.4.
Relying on this authority, and similar cases out of the Sixth and Seventh Circuit, the Court found that a creditor is obligated under TILA to disclose as a finance charge any costs associated with buying on credit but not associated with buying with cash. Analogously, the Court determined that the plaintiffs in Poulin failed to allege that subprime credit customers pay higher prices than non-subprime credit customer for similar cars, and alleged nothing about the cash price charged to the purchasers of cars similar to those as the plaintiffs:
"If the book values in the NADA Guide are a fair proxy for the purchased cars' market values, plaintiffs have alleged a bad bargain. But the complaint provides no facts from which to infer that that bad bargain stemmed from an undisclosed finance charge."
The Court thus affirmed the district court's dismissal for failure to state a claim and further held that, because the plaintiffs failed to seek leave to amend from the district court and gave the appellate court no reason to believe plaintiffs could cure their deficiency, the Court rejected the plaintiffs request for leave to amend.