The opinion of the court was delivered by: GASCH
This matter came before the Court upon cross-motions for partial summary judgment. This hearing, in effect, is to determine the first substantive issue in this cause of action: was the method by which defendant District of Columbia National Bank (the Bank) computed interest on the personal, unsecured installment loans of plaintiffs David and Carla Cohen and Susan Davis usurious due to the Bank's failure to take the declining balance of principal into consideration?
As will be seen, this question has broad ramifications, particularly since the named plaintiffs represent a certified class of borrowers from the District of Columbia National Bank. Therefore, while this opinion relies upon the specific instances of three loans -- one by the Cohens and two by Susan Davis -- the broader question also being decided is whether or not the Bank extracted usurious interest from any borrower of similar loans from the time such loans were first made by the Bank to the filing of this lawsuit July 28, 1969.
At the same time, this opinion is limited to the question of whether the practice complained of was usurious. No question concerning damages is under consideration.
The specific issue raised here appears to be one of first impression in the District of Columbia and the federal system. This may be accounted for by a unique factual pattern: it has apparently been the long-standing practice of District of Columbia banks to make personal unsecured loans under a different system of computation than secured loans, such as mortgages. Because this long-standing difference exists and forms the backbone of the Bank's defense, the Court will attempt to identify the various decisions discussed as involving either secured or unsecured loans. It will become apparent, however, that courts in other jurisdictions have not had occasion to make this distinction, perhaps due to the absence of a similar factual situation.
After a discussion of the factual background and the issues in general, the Court will review related District of Columbia case law, then discuss general principles of law, including many state cases more closely in point than the District of Columbia cases. The Court will then turn to the Bank's arguments as to the impact of long-standing custom and usage on the practice at issue.
Previous hearings in this cause have centered around procedural matters. On June 30, 1971, a Memorandum-Order was entered which dismissed the two organizational plaintiffs, thus leaving only individual plaintiffs, and granted plaintiffs' motion for separate trials on the usury and antitrust counts of the complaint, giving priority to the former. Questions as to the propriety of class action and joinder of certain other parties were continued. On October 18, 1972, a second Memorandum-Order was entered, in reference to the usury issue only, which, after careful consideration of Fed.R.Civ.P. 23(a) and relevant cases, certified a class composed of "all members who, because of the computational method used and the various charges imposed, have been allegedly required to pay money in excess of the . . . limit of 8 percent per annum on the loans which they have transacted with a particular bank."
Because loan policies differ from bank to bank, this was the only manner in which a class of borrowers could properly meet the "commonality" test of Fed.R.Civ.P. 23(a)(2). At the same time, defendants' motion to have separate trials as to the usury claims asserted against them was granted, plaintiffs' motion to add eleven additional defendant banks was denied as improper under Fed.R.Civ.P. 18(a) and 20(a), and a ruling on plaintiffs' motion to join additional plaintiffs and two additional banks was deferred. At that time, the Court indicated the first trial would be as to the first-named defendant, the District of Columbia National Bank. Finally, a third Memorandum-Order was issued August 2, 1973, holding in abeyance plaintiffs' motion for approval of a proposed notice to be sent to all members of the class certified as to the Bank. Because the Bank fully realized and agreed to the possible consequences of proceeding to trial without notice to the class, and because all parties were aware of the potential for saving a great deal of time and expense, the Court ordered the parties to proceed to the merits.
1. David and Carla Cohen executed a loan October 4, 1968, receiving $747.72. They were obligated to repay $804.00 in twelve equal monthly installments of $67.00. The Bank designated $48.24 as interest for the loan; the remaining $8.04 is accounted for by a $4.83 fee for credit investigation and processing, and a $3.21 premium for credit life insurance.
2. Susan Davis, with plaintiff Jane Hardin as an endorser, executed a loan June 19, 1968, receiving $591.48. She was obligated to repay $636.00 in twelve equal monthly installments of $53.00. The Bank designated $38.16 as interest; the remaining $6.36 is accounted for by a $3.82 fee for credit investigation, and a $2.54 premium for credit life insurance.
3. Susan Davis executed another loan July 3, 1969, receiving $600.00. She was obligated to repay $652.08 in twelve equal monthly installments of $54.34. The Bank designated $45.56 as interest for the loan; the remaining $6.52 is accounted for by a premium for credit life insurance in that amount.
Briefly, plaintiffs' position is that under District of Columbia statute and case law, the interest charged these borrowers (and all other members of the certified class with regard to their loans) was in excess of eight percent per annum, because the interest was charged without regard to what is called the "declining balance" of the principal.
Defendant counters with the proposition that computation without regard to the declining balance is and has always been a fully and widely accepted practice in the District of Columbia and enjoys executive and Congressional acquiescence. As such, defendant contends, this established custom and usage must be given great weight, leading to the conclusion that there was no usury here.
Before examining the pertinent case law, it will be helpful to note the various types of loans that will be discussed later so as to avoid confusion.
Similar to such installment loans are personal, secured loans, such as automobile loans and mortgages. Most cases have dealt with the mortgage situation, and that case law is uniformly to the effect that interest can be computed only with regard to the principal outstanding as payment upon the mortgage continues. This may be referred to as computing interest on the "declining balance of principal" or simply "declining balance."
Another type of loan is a discount loan, where the interest on the loaned principal sum of money is deducted, or discounted, at the time the loan is made. Thus, a loan for $1,000 for one year at eight percent has interest due in the amount of $80. This $80 is discounted immediately, and the lender tenders $920 to the borrower; at the end of the year, the borrower must repay $1,000. A narrow exception to the usury statutes has been carved out in the case of certain discount loans.
As is readily apparent, the loans just discussed have two distinctive features: one type has periodic payments, or installments, required (declining balance loans) and the other has certain lump sum payments required (discount loans). The distinction will become important in applying analogous case law to the situation at bar.
Unfortunately, matters can be further confused by the fact that it is possible both to discount a loan and to require it to be paid back in monthly installments. Thus, for example, on a loan of $1,000 for one year at eight percent, the lender could discount it and tender $920, then require monthly payments of $76.66 for the remainder of the term.
In the present case, plaintiffs have not alleged what sum of money was the original principal involved in their loans, and from the sum tendered, it is not clear whether or not the Bank discounted these loans. However, the Bank has stated that it "had always employed the 'discount' method in making its installment loans, calculating interest with reference to the amount borrowed and the duration of the loan without regard to the declining principal balance and deducting such interest from the sum the borrower actually received."
The thrust of the plaintiffs' claim is that the Bank ignored the declining balance of their loans when computing interest, the result of which was to extract a usurious rate of interest with respect to the amount of loaned money actually within the control and at the disposal of plaintiffs. Thus, it is alleged that the borrowers were in possession of less principal as each periodic repayment is made. The principal balance steadily declined, and the borrowers used and controlled a steadily decreasing amount of money. Interest being essentially the charge for the use of money, plaintiffs argue that the Bank could not legally charge interest on money which the borrowers did not possess and could not use or control. Accordingly, plaintiffs allege that the interest collectible on these installment loans should have accounted for the continuously diminishing unpaid principal balance. It is clear, no matter which mathematical formula is employed,
that the Bank did not compute interest according to the declining balance, as the Bank frankly and readily admits. Plaintiffs allege that, by not so doing, the Bank exacted windfall payments of unjustified and unearned interest.
The Bank does not deny that the loans were made in the manner and amounts alleged by plaintiffs. It does, however, contend that the long-standing practice by and among District of Columbia banks has been to make personal, unsecured loans on an installment basis, charging interest against the entire principal for the full term, and that this custom and usage has gained such wide acceptance that the practice cannot now be considered usury. Further, the Bank places great reliance upon certain inaction of Congress, when confronted with questions relating to these loans, to show that there has been acquiescence and thereby implicit approval of this banking practice.
III. District of Columbia Law.
At the root of the question, of course, lies the District of Columbia usury statute:
The parties to an instrument in writing for the payment of money at a future time may contract therein for the payment of interest on the principal amount thereof at any rate not exceeding 8 percent per annum.
As was noted earlier, there is no District of Columbia case directly on the point of unsecured installment loans. Cooper v. United Security Life Ins. & Trust Co.,
however, provides a starting point. In that case, plaintiff obtained a loan of $4,600 evidenced by a bond and secured by a deed of trust on certain real estate. The bond enumerated the amount of monthly remittances to be made by plaintiff over a period of twenty years, which would extinguish the debt; however, no rate of interest was recited. Plaintiff made the payments faithfully for 15 years and five months, remitting $7,334.19. Plaintiff thereupon sought to be released from the bond, claiming that defendant could not obligate her to pay more than six percent interest, and that she had long since repaid the $4,600 at that rate.
The obligation named in the bond was not the principal sum of $4,600, but the various monthly payments extending for a period of twenty years. The auditor found that the total of these payments embraced the principal sum with interest at 9 per cent per annum, computed on the basis of the length of time each instalment had to run. In other words, by the method adopted, the result was the same as if the contract had specifically provided for the payment of $4,600 in monthly payments extending through a period of ...