Derrick D. Smith and Valerie D. Smith v. Check-N-Go of Illinois, Inc., Sandra Brown and Deborah Jackson v. Check-N-Go of Illinois, Inc.
Docket: 99-2666 & 99-2667
Court: Court of Appeals for the Seventh Circuit; December 23, 1999; Federal Appellate Court
Derrick D. Smith and Valerie D. Smith, along with Sandra Brown and Deborah Jackson, appealed against Check-N-Go of Illinois, Inc. in the United States Court of Appeals for the Seventh Circuit. The cases, consolidated for consideration, address issues related to payday loans, characterized by high interest rates (approximately 500% annually) and minimal paperwork, with borrowers providing post-dated checks. The court previously ruled in Smith v. Cash Store Management, Inc. that referring to a post-dated check as 'security' does not violate the Truth in Lending Act. However, it raised concerns regarding the clarity of disclosures, noting that the receipt attached to the loan agreement could obscure important terms, violating the requirement for disclosures to be 'clear and conspicuous.'
The appeals also examine whether a hand-drawn circle around the due date of the loan violates regulatory requirements stipulating that finance charges and annual percentage rates must be more conspicuous than other disclosures. Specifically, Section 226.17(a) mandates that required disclosures must be clearly presented and distinct from other information. The court noted that the layout of the loan agreement, including thicker borders and bold text for the annual percentage rate and finance charge, aims to satisfy the requirement for conspicuity, asserting that these terms need only be the most conspicuous among disclosures, not the most prominent overall.
Key elements of the document highlight the complexities surrounding the disclosures required in consumer loan agreements. The plaintiffs argue that the due date on the agreement is a necessary disclosure, claiming that its hand-drawn circle makes it more conspicuous than the finance charge and annual percentage rate, which are presented in boldface. The district judge dismissed the complaint under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal for failure to state a claim.
However, it is asserted that an allegation regarding the conspicuousness of a disclosure can indeed state a valid claim. The document references prior cases, such as Walker v. National Recovery, which indicate that the assessment of conspicuousness is a legal issue rather than a factual one. It emphasizes that the clarity of disclosures is a matter of fact, influenced by individual borrower perceptions, yet under the Truth in Lending Act, the standard is an objective "reasonable person" standard.
The document further clarifies that Section 226.17(a)(2) focuses on the content of the form itself, rather than borrowers' comprehension. It suggests that the determination of what is "more conspicuous" is a legal matter, as supported by case law. The complexity of visual perception is noted, illustrating that different borrowers might find various aspects of the document—such as handwritten notes or different typefaces—more or less conspicuous. Ultimately, this raises questions about the consistency of compliance across different loan agreements, given the subjective nature of visual focus among borrowers.
The legal text argues that the assessment of conspicuousness in financial disclosure forms must be objective, adhering to a standardized compliance framework rather than subjective perceptions of individual recipients. Variations in the presentation of information—such as color, typeface, and placement—should not affect the validity of forms under the Truth in Lending Act (TILA). Treating conspicuousness as a factual issue would create uncertainty for lenders, potentially leading to inconsistent outcomes in litigation and higher costs for borrowers due to increased interest rates. The Federal Reserve provides model forms, which, even with minor modifications like hand-drawn markings, do not compromise the conspicuousness of essential disclosures. Specifically, Section 226.17(a)(2) mandates that lenders emphasize certain financial terms, and minor embellishments do not negate this requirement. Thus, using model forms with added markings, such as circles, does not inherently create legal liability under TILA, as long as the principal disclosures remain clearly visible.
Two cases, Smith v. Cash Store Management, Inc. and Smith v. Fast Cash Advance, Inc., have been decided by the court, while eight additional cases are currently pending. The pending cases include several lawsuits against payday loan companies, all filed by a single law firm representing multiple clients, many of whom are involved in more than one suit. Notably, the Northern District of Illinois has not consolidated these cases for consideration by a single judge, despite significant overlap in issues and parties. To enhance efficiency, the court will now manage all appeals related to payday loans under a specific panel and will seek the parties' opinions on whether these appeals can be resolved summarily based on the precedent set by Smith v. Cash Store Management and the current opinion.
