Chance v. Board of Examiners

    MONDAY 

JANUARY 10, 1972 

TRUTH-IN-LENDING IN JEOPARDY, LDF CLAIMS 

SUPREME COURT ASKED TO HEAR CASE 

BACKGROUND 

LEILA MOURNING v. FAMILY PUBLICATIONS SERVICE, INC. 

On December 23, 1971, attorneys for the NAACP Legal Defense and 

Educational Fund, (LDF) Inc. and the National Office for the Rights 

of the Indigent, Inc. (NORI) asked the U.S. Supreme Court to hear a 

suit and reverse a lower court whose ruling in the case of Mourning 

v. Family Publications Service, Inc. has opened a massive loophole 

in the 1968 Consumer Credit Protection Act, better known as the 

Truth-in-Lending Law. 

The effect of the present ruling, handed down by the Fifth 

Circuit Court of Appeals, would permit creditors to bury time payment 

finance charges in the price of goods or services and thus circumvent 

the strict regulations of the Act, which require disclosure of 

annual interest rates, the full price of the goods or services being 

purchased, etc. 

LDF/NORI attorneys are representing Leila Mourning, a 73-year- 

old Dade County, Florida widow who claims that sales personnel of 

the Family Publications Service, Inc. (FPS) contacted her by phone 

and then in person at her home soliciting magazine subscriptions. 

On August 19, 1969, Mrs. Mourning signed a contract with FPS to 

receive four magazines for a period of sixty months. For these 

(More) 

P Legal Defense and Education Fund, Inc. | 10 Columbus Circle | New York, N.Y. 10019 | (212) 586-8397 

Jack Greenberg - Director-Counsel 



BACKGROUND PAGE TwO 

magazines, Mrs. Mourning made an initial paymerit of $3.95 and was to 

make similar monthly payments for a period of 30 months. Nowhere 

on the contract did FPS disclose the total purchase price of the 

magazines -- $122.45, or other information required under the Truth- 

in-Lending Law. 

When Mrs. Mourning realized the large amount of money involved 

and refused to make further payments, FPS began sending dunning 

letters, first demanding resumption of monthly payments and then 

payment of the contract in full. The letters warned Mrs. Mourning 

that she had “a credit account," threatened to put her name on a 

“monthly delinquent report" and further threatened her with "expensive 

and unpleasant" legal action. 

When Mrs. Mourning, with the help of Legal Services Senior 

Citizens Center, sued in federal district court charging violations 

of the Truth-in-Lending Law, FPS used the argument that their contract 

involved no interest charges and they were, therefore, not covered 

by the Act. The court found otherwise. It based its decision on a 

Federal Reserve Board regulation, known as the four installment 

rule, which was designed specifically to prevent wholesale evasion 

of the Act. That rule requires disclosure of all financial terms 

of any contracts payable in four or more installments. Without this 

rule, creditors could hide the price of credit within the selling 

price of goods -- as FPS allegedly did -- and permit consumers to 

make time payments effectively circumventing the disclosure require- 

ments of the Act. 

During the same proceedings it was also noted that the Dade 

County Consumer Protection Division had received over 100 consumer 

complaints about FPS, that FPS had been convicted of misleading 

advertising and was ordered to cease doing business in Florida. 

In the Fifth Circuit Court of Appeals, however, the district 



BACKGROUND PAGE THREE 

court ruling was overturned. The court said that the Federal 

Reserve Board was authorized by Congress only to set regulations 

in cases where, "the deferred payment of debt imposes either 

directly or indirectly a finance charge for such deferred debt." 

They reasoned that since no "finance charge" was proved to be a 

part of the FPS contract, the Federal Reserve Board had no authority 

under the Act to set regulations which would make FPS subject to 

the Act's provisions. They also ruled that the four installment 

rule was unconstitutional -- that it, “establishes a conclusive 

presumption that those who extend credit and allow payment in four 

or more payments have included within the price . . . their cost 

of extending credit, notwithstanding that they purport not to levy 

a finance charge." 

LDF/NORI attorneys are hoping for the opportunity to reverse 

the Fifth Circuit in the Supreme Court. In their petition, they 

claim that the appellate court's findings on the four installment 

rule are a misnomer, since, as a practical matter, any creditor 

who permits customers to defer payment of a debt must in turn borrow 

from a third party or his own capital reserves and incur a finance 

charge or resulting loss of interest. The petition further states 

that the creditor must also maintain, as FPS evidently did, some 

form of collection department, as well as a bad debt reserve. It 

continues that since the sale of magazine subscriptions constitutes 

FPS‘s sole means of income, it is indisputable that FPS's costs must 

inevitably come out of the pockets of its customers, whether or 

not FPS chooses to call its income receipts “interest charges." 

The LDF/NORI petition also maintains that the Truth-in-Lending 

Law as written and passed by Congress, gives extremely broad powers 

to the Board to set regulations for the express purpose of preventing 

“circumvention or evasion" of the Act. 



BACKGROUND. PAGE FOUR 

Without a favorable ruling from the Supreme Court, LDF/NORI 

attorneys allege that the Truth-in-Lending Law, which consumers 

have learned to trust, could become a mean hoax; reputable lending 

institutions might find themselves at a distinct disadvantage, 

unable to escape the disclosure of rules of Truth-in-Lending, while 

less ethical businessmen could return to pre-Truth-in-Lending 

practices of advertising "free" (i.e. included-in-the-price) "credit. 

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