Jump v. ACP Enterprises, Inc.
2002 WL 31204826, 2002 U.S. Dist. LEXIS 18523, 224 F. Supp. 2d 1216 (2002)
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Rule of Law:
A post-dated check required by a lender in a payday loan transaction constitutes a security interest under the Truth in Lending Act (TILA), which must be disclosed to the consumer. Furthermore, disclosing a finance charge and Annual Percentage Rate (APR) that are illegal under state law can constitute a TILA violation for being misleading.
Facts:
- ACP Enterprises, Inc., operating as Cash Now ('ACP'), was in the business of making high-interest 'payday loans'.
- Customers, including Aimee Jump, Angela Wehrle, and Irene Rothgeb, borrowed small amounts of money, typically between $100 and $200, for short terms, usually two weeks.
- To receive a loan, customers paid a high finance charge, resulting in Annual Percentage Rates (APRs) that greatly exceeded the maximum allowed by Indiana state law.
- As a condition of receiving the loan, ACP required each customer to provide a post-dated check for the full amount of the loan plus the finance charge.
- This post-dated check was intended to give ACP additional security for repayment of the loan.
- If a customer did not repay the loan on the due date, ACP had the option of cashing the post-dated check, which gave it access to additional legal remedies under Indiana's bad check statute.
Procedural Posture:
- Aimee Jump, Angela Wehrle and Irene Rothgeb (plaintiffs) sued ACP Enterprises, Inc. (defendant) in the U.S. District Court for the Northern District of Indiana.
- The plaintiffs alleged violations of the federal Truth in Lending Act (TILA) as well as supplemental state law claims.
- ACP filed a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that its actions did not violate TILA.
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Issue:
Does a payday lender's requirement that a borrower provide a post-dated check create a security interest that must be disclosed to the consumer under the Truth in Lending Act (TILA)?
Opinions:
Majority - Sharp, J.
Yes, a post-dated check required as part of a loan transaction creates a security interest that must be disclosed under TILA. The Act and its implementing Regulation Z require creditors to disclose any security interest taken in a consumer credit transaction. A security interest is defined as an interest in property that secures performance of an obligation and is recognized by state law. Here, the post-dated check satisfies the requirements for a security interest under Indiana law because the creditor (ACP) gave value, the debtor (the customer) had rights in the collateral (the check), and the creditor took possession of it. The check provides value to the lender beyond the borrower's mere promise to pay because it grants the lender additional legal rights and remedies under state bad check laws, thereby increasing the likelihood of collection. Because it is a security interest under state law, it must be disclosed under TILA. The court also held that disclosing an APR that is illegal under state usury laws is misleading and can form the basis for a separate TILA violation, as it falsely suggests the finance charge is lawful.
Analysis:
This decision reinforces the application of TILA's strict disclosure requirements to the payday lending industry, preventing lenders from circumventing the rules through creative collateral arrangements. It establishes that a 'security interest' under TILA is a broad concept determined by state law and is not limited to traditional forms of collateral like mortgages or car titles. The case clarifies that if an instrument, like a post-dated check, provides a lender with additional legal rights or remedies beyond the underlying debt obligation, it likely constitutes a disclosable security interest. This precedent strengthens consumer protections by ensuring borrowers are fully aware of all the rights they are giving to a lender in a high-interest loan transaction.
