James R. v. Associates Financial Services Co.

No. 03-808

IN THE SUPREME COURT OF THE STATE OF MONTANA

2004 MT 397

JAMES R. AND ELIZABETH ANN WOMBOLD,

Plaintiffs, Respondents, and Cross-Appellants,

v.

ASSOCIATES FINANCIAL SERVICES COMPANY
OF MONTANA, INC., WILLIAM NOLAN,

Defendants, Appellants and Cross-Respondents.

APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade, Cause No. BDV 2000-888,
The Honorable Julie Macek, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Neil Ugrin (argued), Mark Higgins and Cathy Lewis, Ugrin, Alexander,
Zadick and Higgins, Great Falls, Montana

Jan Chilton, John Sullivan, Severson & Werson, San Francisco, California

For Respondents:

Thomas E. Boland (argued), Attorney at Law, Great Falls, Montana
Jeremiah C. Lynch (argued), Attorney at Law, Great Falls, Montana

For Amicus Curiae AARP:

Mary Helen McNeal, Attorney at Law, Missoula, Montana

For Amicus Curiae Montana Consumer Finance Association:

Jerome T. Loendorf, Attorney at Law, Helena, Montana
 For Amicus Curiae Attorney General:

Hon. Mike McGrath, Attorney General; Candace F. West,
Assistant Attorney General, Helena, Montana

For Amicus Curiae American Financial Services:

Joseph Mazurek and Michael Green, Crowley Haughey Hanson Toole &
Dietrich, Helena, Montana

Mary Scrim Dyre, Crowley Haughey Hanson Toole & Dietrich, Billings,
Montana

Orally Argued: July 28, 2004
Submitted: August 31, 2004
Decided: December 30, 2004

Filed:

__________________________________________
Clerk

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Justice John Warner delivered the Opinion of the Court.

¶1 Respondents James R. and Elizabeth Ann Wombold (“Wombolds”) initiated this

action against Appellant Associates Financial Services Company of Montana, Inc.,

(“Associates”) alleging Associates, a licensed lender under the Montana Consumer Loan Act

(“CLA”), utilized illegal lending practices in violation of the CLA in its real estate- secured

loans to Wombolds. This suit has now been certified as a class action. A subclass was also

certified; this appeal concerns Wombolds and other plaintiffs who are a part of the subclass.

¶2 The District Court granted Wombolds’ motion for partial summary judgment to the

effect that there is a private right of action under the CLA and points charged by Associates

violated the act. Associates now appeal. Wombolds cross-appeal from the District Court’s

denial of that part of their motion whereby they sought to have the loans in question declared

void.

¶3 We restate the issues on appeal as follows:

¶4 1. Does the CLA confer a private right of action on borrowers?

¶5 2. Does the CLA prohibit licensees from charging a “prepaid finance charge/loan

fee/discount points” on the origination of real estate-secured loans?

¶6 3. In the alternative, does the CLA require a licensee to refund a portion of the

“prepaid finance charge/loan fee/discount points” when a real estate-secured loan is paid in

full before its maturity date?

¶7 4. Did the District Court err in not declaring the loans void under the CLA after it

found that Associates had violated the act?

¶8 We affirm.

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 STATEMENT OF FACTS AND PROCEDURAL HISTORY

¶9 The parties agreed to a Statement of Uncontroverted Facts essentially as follows.

From January 1, 1995, through November 8, 1999, Associates operated within the State of

Montana through Associates Financial Services Company of Montana, Inc., a Montana

corporation, that operated a consumer loan business subject to the requirements of the

Montana Consumer Loan Act (Title 32, Chap. 5, MCA). From November 8, 1999, through

December 31, 2000, the successor in merger to the Montana entity, Associates Financial

Services Company, Inc., operated a consumer loan business within the State of Montana

subject to the requirements of the Montana Consumer Loan Act.

¶10 From January 1, 1995, through December 31, 2000, Associates made 3,833 real

estate-secured loans in Montana. Of these loans, 1,111 were second mortgage loans. The

remaining 2,722 real estate-secured loans were first mortgage loans.

¶11 Associates at times imposed a charge on the Montana real estate-secured loans from

January 1, 1995, through December 31, 2000, which could be characterized as prepaid

finance charges, loan fees, or points. Hereafter these prepaid finance charges/loan

fees/points will simply be called “points.”

¶12 The points were calculated as a percentage of the amount financed by the underlying

promissory note and varied from zero percent (0%) to ten percent (10%) of the amount

financed.

¶13 Associates charged points on 2,818 real estate-secured loans it made between January

1, 1995, and December 31, 2000.

¶14 Except in rare instances, the points were not directly related to expenses incurred by

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Associates in relation to services provided to Associates by a third-party, including but not

limited to recording fees, reconveyance fees, and other similar fees. Even in those instances,

where a third-party expense was incurred by Associates, the majority of the funds received

as points constituted gross income to Associates.

¶15 The points were added to and made a part of the principal balance of the loan. As

they were added to the principal balance of the loan, interest was charged on the points at

the agreed rate of interest of the loan.

¶16 With respect to every real estate-secured loan Associates made in Montana from

January 1, 1995, through December 31, 2000, and on which points were collected,

Associates did not refund any portion of these points when the loan was prepaid by a cash

payment derived from a source other than an Associates refinance of the previous loan.

¶17 With respect to every real estate-secured loan Associates made in Montana from

January 1, 1995, through December 31, 2000, and on which points were charged and

collected, Associates did not refund any portion of those points when the loan was prepaid,

or when Associates accelerated the amount due after the debtor had defaulted on the

underlying obligation.

¶18 With respect to every real estate-secured loan Associates made in Montana from

January 1, 1995, through December 31, 2000, on which points were charged, Associates did

not refund any portion of those points when the loan was prepaid from the proceeds of a new

loan made more than one year from the original loan.

¶19 With respect to those loans made from January 1, 1995, through December 31, 2000,

which were refinanced by Associates within one year, a portion of the points was refunded,

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with the refund calculated based on a ratio of the number of unexpired months in the one

year period over 12.

¶20 All second mortgage loans Associates made in Montana from January 1, 1995,

through December 31, 2000, are governed by the Montana Consumer Loan Act.

¶21 Additional facts are stated as necessary.

¶22 In 1997 the Legislature amended the CLA to exclude first mortgage loans from the

CLA’s regulation. This litigation concerns first mortgage loans made by Associates from

January 1, 1995, to October 1, 1997, and second mortgage loans made from January 1, 1995,

through December 31, 2000.

¶23 In June 2001 Wombolds initiated this action against Associates alleging Associates

engaged in illegal lending practices. Associates answered denying Wombolds’ claim.

¶24 In December 2001 Wombolds moved to amend their complaint to seek certification

as a Class Action. The District Court granted the motion and also certified a specific

subclass consisting of those persons whose consumer loans were secured by a mortgage on

real property. This appeal concerns members in this subclass. The subclass members claim

that points charged by Associates on real estate-secured loans violate the CLA. These points,

typically one percent of the amount borrowed for each point, in some cases ran as high as

eight to ten percent of the note amount. The points were added to the principal amount of

the loan at the outset, and interest was charged upon the new principal amount which

included the points.

¶25 The CLA contemplates two types of loans: first, add-on interest loans where the total

interest to be charged on a loan is added to the amount borrowed and the resulting sum is

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divided by the number of months over which payment is to be made, resulting in the required

monthly payment; and second, interest-bearing loans where interest at the agreed rate is

charged on the principal balance remaining after each payment is applied first to interest and

the remainder to principal.

¶26 The loans in question were set up as interest-bearing loans, not add-on interest loans.

Thus, the interest rate and the amount of the loan was agreed on, as well as the points to be

charged. The amount of the loan was advanced to the borrower, and Associates kept the

points. The points were added to the amount owed, and thus the principal balance of the

loan, upon which interest was charged, became the sum of both the points and the amount

advanced, and the borrower paid simple interest on this amount. If the loan was paid early,

or defaulted, there was no refund of the points that had been added up front.

¶27 Both parties moved for partial summary judgment. The District Court granted

Wombolds’ motion. Initially, the District Court entered judgment largely adopted from

Wombolds’ ex parte submission of a proposed order. Associates moved for reconsideration

pursuant to Rule 60(b), M.R.Civ.P., arguing that the District Court’s Order exceeded the

parameters of the parties’ Stipulation. The District Court agreed and vacated its initial Order,

and issued its Revised Findings of Fact, Conclusions of Law and Order. In its revised order

the District Court again granted partial summary judgment to Wombolds. However, in its

second order it declined to declare the loans void, which is a possible remedy under the

CLA. The partial summary judgment was certified as final and ripe for appeal under Rule

54(b), M.R.Civ.P.

¶28 Associates has appealed the District Court’s judgment that it violated the CLA.

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Wombolds cross-appeal the denial of a judgment that the loans in question are void as a

result of the violation of the CLA.

STANDARD OF REVIEW

¶29 We review a district court’s decision to grant or deny a Motion for Summary

Judgment de novo. Associated Press v. Crofts, 2004 MT 120, ¶ 11, 321 Mont. 193, ¶ 11,

89 P.3d 971, ¶ 11. To prevail, the moving party must demonstrate that no genuine issues of

material fact exist. Bruner v. Yellowstone County (1995), 272 Mont. 261, 264, 900 P.2d 901,

903. If the moving party is successful, the burden shifts to the nonmoving party to establish

that genuine issues of material fact exist. Bruner, 272 Mont. at 264, 900 P.2d at 903.

Unsupported, conclusory or speculative statements on the part of the non-moving party, as

to what might have happened, do not constitute issues of fact precluding summary judgment.

Nelson v. Montana Power Co. (1993), 256 Mont. 409, 412, 847 P.2d 284, 286. If no genuine

issues of fact exist the court must then determine whether the moving party is entitled to

judgment as a matter of law. Bruner, 272 Mont. at 264-65, 900 P.2d at 903.

¶30 Associates urge that we hold, as a matter of law, that the District Court erred in its

following conclusions: (1) the CLA confers a private right of action, (2) Associates violated

the CLA by charging points on the real estate-secured loans in question; or alternatively, (3)

Associates violated the CLA by not crediting or refunding a portion of the points charged

when a real estate-secured loan was paid in full prior to the maturity date of the loan. We

review a district court’s conclusions of law de novo. E.g., Rossi v. Pawiroredjo, 2004 MT

39, ¶ 13, 320 Mont. 63, ¶ 13, 85 P.3d 776, ¶ 13. In part, these issues require this Court to

interpret the CLA. Issues of statutory interpretation are reviewed de novo. Redies v. Cosner,

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2002 MT 86, ¶ 24, 309 Mont. 315, ¶ 24, 48 P.3d 697, ¶ 24.

¶31 Following a Motion for Relief from Judgment under Rule 60, M.R.Civ.P., a slight

abuse of discretion need be shown to warrant reversal of a trial court’s refusal to set aside

a judgment. Karlen v. Evans (1996), 276 Mont. 181, 185, 915 P.2d 232, 235. If the trial

court has set aside the judgment and the appellant requests the judgment be reinstated, then

a manifest abuse of discretion must be shown to warrant reversal. Karlen, 276 Mont. at 185,

915 P.2d at 235.

DISCUSSION

ISSUE 1

¶32 Does the CLA confer a private right of action on borrowers?

¶33 Associates argues that the CLA provision providing: “[a]ll powers and duties of

regulation and supervision conferred by this chapter are vested in the department,”

constitutes a prohibition of a private right of action, because, it argues, the Department of

Administration, which issues licenses and oversees compliance of the act, is the sole entity

authorized to seek a remedy for violations of the act in the Courts. Section 32-5-401(1),

MCA. Conversely, Respondents argue that the remedy provisions of the act indicate that

legislative intent is consistent with allowing a private right of action because, necessarily,

the remedy of voiding a loan benefits the borrower.

¶34 The CLA does not expressly authorize a private right of action by a person injured as

a result of a violation. Likewise, the legislative history is void of language indicating an

intent to expressly grant or deny a private right of action. The federal courts have held:

[T]he legislative history of a statute that does not expressly create or deny a

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 private remedy will typically be equally silent or ambiguous on the question.
Therefore, in situations such as the present one “in which it is clear that [ ] law
has granted a class of persons certain rights, it is not necessary to show an
intention to create a private cause of action, although an explicit purpose to
deny such cause of action would be controlling.”

Cannon v. Univ. of Chicago (1979), 441 U.S. 677, 694, 99 S.Ct. 1946, 1956, 60 L.Ed.2d

560.

¶35 The question of whether a statute creates a private cause of action by implication is

a matter of statutory construction.

The development of the case law of Montana with respect to the rules of
statutory construction may be summarized by the following analysis: (1) Is the
interpretation consistent with the statute as a whole? (2) Does the
interpretation reflect the intent of the legislature considering the plain language
of the statute? (3) Is the interpretation reasonable so as to avoid absurd
results? and (4) Has the agency charged with the administration of the statute
placed a construction on the Statute?

Montana Power Co. v. Cremer (1979), 182 Mont. 277, 280-81, 596 P.2d 483, 484.

¶36 In statutory construction, we also consider the nature of the legislation; here,

regulation of consumer lenders and the protection of borrowers. Generally, “[l]egislation

enacted for such a beneficent purpose is to be liberally construed.” State ex rel. Dreher v.

Fuller (1993), 257 Mont. 445, 448, 849 P.2d 1045, 1047; see also § 1-2-103, MCA,

(providing statutory “provisions and all proceedings under them are to be liberally construed

with a view to effect their objects and to promote justice”).

¶37 The CLA serves to regulate the consumer loan industry and protect borrowers from

predatory lending practices. This legislation grants borrowers certain rights regarding the

structure of their loans.

[W]e can assume that the legislature is aware of the doctrine of implied

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 statutory causes of action and also assume that the legislature would not enact
a remedial statute granting rights to an identifiable class without enabling
members of that class to enforce those rights. Without an implicit creation of
a remedy, the statute is meaningless.

Bennett v. Hardy (Wash. 1990), 784 P.2d 1258, 1261.

¶38 Although we encourage the legislature to be more precise in its language, in

considering the CLA we cannot conclude that failing to expressly provide for, or to disallow,

a private right of action forecloses such right. When considering remedial legislation, we

agree with the approach of the United States Supreme Court:

When Congress intends private litigants to have a cause of action to support
their statutory rights, the far better course is for it to specify as much when it
creates those rights. But the Court has long recognized that under certain
limited circumstances the failure of Congress to do so is not inconsistent with
an intent on its part to have such a remedy available to the persons benefitted
by its legislation.

Cannon, 441 U.S. at 717, 99 S.Ct. at 1968.

¶39 The act’s remedial measures, are indicative of legislative intent to protect borrowers

and are not inconsistent with allowing an implied private right of action under the CLA.

Section 32-5-103(4), MCA, provides:

Any act by a licensee in the making of a contract or in the collection of a loan
made under the contract that violates the provisions of this chapter is void.
The licensee has no right to collect, receive, or retain any principal, interest,
or charges.

In addition, § 32-5-301(6), MCA, provides:

If any amount in excess of the charges permitted by this chapter is charged,
contracted for, and received, except as the result of an accidental and bona fide
error of computation, the licensee may not collect or receive any charges.

¶40 In Transamerica Mortgage Advisors, Inc. v. Lewis (“Lewis”), the United States

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Supreme Court addressed the question of whether the Investment Advisors Act of 1940

(codified at 15 U.S.C. § 80b-15 et seq.) created a private right of action for damages or other

relief in favor of persons harmed by violations of the act. Lewis (1979), 444 U.S. 11, 12-13,

100 S.Ct. 242, 243, 62 L.Ed.2d 146. There, the Court noted that the act did not expressly

provide for a private cause of action and the only provision expressly allowing any suit to

enforce the act authorized the Securities and Exchange Commission to bring suit in a federal

district court to enjoin violations of the act. Lewis, 444 U.S. at 14, 100 S.Ct. at 244.

Undeterred, a shareholder of Mortgage Trust of America brought suit on behalf of the Trust

and the Trust’s shareholders, arguing that clients of the investment advisers were the

intended beneficiaries of the act and courts should therefore imply a private cause of action

in their favor. Lewis, 444 U.S. at 15, 100 S.Ct. at 244-45. The United States Supreme Court

held under § 215 of the act (15 U.S.C., § 80b-15) an aggrieved individual could maintain a

limited private action for a violation of the act under a section rendering certain contracts

void. The Court reasoned that clients of investment advisers were the intended beneficiaries

of the act and that by declaring certain contracts void the section by its terms contemplated

that the issue of voidness would be litigated somewhere. Lewis, 444 U.S. at 17-18, 100 S.Ct.

at 246. “[W]hen Congress declared in §§ 215 that certain contracts are void, it intended that

the customary legal incidents of voidness would follow, including the availability of a suit

for recission or for an injunction against continued operation of the contract, and for

restitution.” Lewis, 444 U.S. at 19, 100 S.Ct. at 247.

¶41 Similarly, in Transamerica Financial Corp. v. Superior Court (“Transamerica”), the

Arizona Supreme Court concluded that a private right of action was implied, in part,

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“[b]ecause the determination of voidness under [the Arizona statute] only inures to the

benefit of an individual borrower, a private right of action was contemplated by the

legislature for enforcement of this individual right, even though other sections of the act

provide for administrative action for enforcement of its regulatory scheme.” Transamerica

(Ariz. 1988), 761 P.2d 1019, 1021 (there the court also noted that a private right of action

had been allowed judicially under a predecessor to the present Arizona statute and the

legislature had not, despite amendments and modifications to the statute, disallowed the

implied private right of action).

¶42 Also revealing as to legislative intent is the CLA’s attorney fees provision. In 1981,

the Legislature amended the act, in part, by providing for attorney fees in legal actions.

Section 32-5-407(1), MCA, states:

If the contract so provides, reasonable attorney fees may be awarded to the
party in whose favor final judgment is rendered in any action on a contract
entered into pursuant to the provisions of this chapter.

Under the logic advanced by Associates, only the Department of Administration could take

action to enforce the CLA. If such were the case, there would be no need to provide in § 32-

5-407(1), MCA, that a party could be awarded its fees in an action on a contract entered into

pursuant to the act. At best, it could be anticipated that the Department would only bring

some type of regulatory action; it would not bring an action on a contract to which it was not

a party. The inclusion of the attorney fee provision is proof of a legislative intent to

recognize a private right of action under the CLA.

¶43 Other courts have found an attorney fee provision indicative of legislative intent to

allow for a private right of action. See Cannon, 441 U.S. 677, 99 S.Ct. 1946, 60 L.Ed.2d 560

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(concluding legislative intent to provide for a private right of action under Title IX based, in

part, upon amendment allowing attorney’s fees to the prevailing party); see also California

Paralyzed Veterans Ass'n v. F.C.C. (Cal., 1980), 496 F.Supp. 125, 129 (concluding the

passage of an attorney fee provision, along with other evidence, was persuasive evidence of

Congress' original intent to provide for a private right of action under

section 503 of the Rehabilitation Act of 1973).

¶44 Here, the express language allowing the prevailing party to recover attorney fees “in

any action on a contract entered into pursuant to the provisions of th[e] [CLA]” so long as

such award is provided for in the parties’ contract, is in accord with the District Court’s

conclusion that an implied private right of action is consistent with the legislative purpose

in enacting the act. Section 32-5-407(1), MCA.

¶45 Implying a private right of action in the CLA would not lead to an absurd result. The

act itself is for the protection of borrowers, and its enforcement by those it protects is in

complete accord with its provisions.

¶46 The Montana Department of Administration has not appeared herein directly.

However, the Montana Attorney General, presenting himself as the Chief Legal Officer of

the State, has appeared by personally signing an amicus brief wherein he argues that there

is a private right of action under the CLA and states: “If Associated [sic] Financial were

successful in overturning the Eighth Judicial District Court’s decision, Montana citizens

would find themselves without redress provided for under the Montana Constitution and

would be denied the very protection from predatory lending that the act was intended to

prevent.” While the Attorney General’s formally stated position is not exactly the same as

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an interpretation by the Department of Administration, it does weigh in favor of a

determination that there is an implied private right of action.

¶47 If the legislature had intended to prohibit a private cause of action under the CLA, it

could have easily done so. We conclude the District Court was correct in holding the CLA

does provide a limited private right of action for individuals to bring suit. For the reason

pointed out below, we do not address the extent of that right.

ISSUE 2

¶48 Does the CLA prohibit licensees from charging points on origination of real estate-

secured loans?

¶49 The CLA prohibits a licensee, such as Associates, from charging a borrower any cost

not specifically authorized. Section 32-5-103(1), MCA, provides:

[A] person may not engage in the business of making consumer loans in any
amount and contract for, charge, or receive directly or indirectly on or in
connection with any loan any charges, whether for interest, compensation,
consideration, or expense, except as provided in and authorized by this
chapter.

¶50 Section 32-5-301(1), MCA, provides: “[a] licensee or holder of a supplementary

license under this part may contract for and receive on any loan of money interest charges

as provided under 31-1-112.” Section 31-1-112(1), MCA, provides “[a] regulated lender

is exempt from all limitations on the rate of interest that it may charge and is exempt from

the operation and effect of all usury statutes.” Thus, a regulated lender, Associates in this

instance, is authorized to charge any rate of interest the market will bear.

¶51 If the points in question are interest, charging them to the borrower may not violate

the act. If they are not interest, the points are costs not specifically authorized by § 32-5-

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301(5), MCA, and are unlawful. Or, if by adding these points to the principal of the loan at

the beginning, the loan is converted from an interest-bearing loan to an add-on interest loan,

§ 32-5-301(3), MCA, was violated because there was no refund of a part of such charges.

The question then becomes whether the points in question are interest.

¶52 Although not defined under the CLA, interest is generally defined as “a charge made

for the use, forbearance, or detention of money . . . .” Brummer v. TMG Life Ins. Co., Inc.

(D. Mont. 1992), 147 B.R. 552, 557.

¶53 Wombolds assert, in a somewhat confusing fashion, that by charging the points in

question Associates has violated the CLA’s prohibitions as they are unauthorized fees or, in

the alternative, if these points are interest, such must be refunded upon prepayment, as

required by § 32-5-301(3), MCA. During the course of this litigation, Associates changed

its position on whether the points in question constitute interest. However, “a label placed

upon a charge by the parties will not control the determination of whether that charge is

interest . . . .” Brummer, 147 B.R. at 558.

¶54 Here, the parties have entered into a written stipulation in which they agreed that the

issues on appeal include: (1) Does the CLA confer a private right of action, (2) Whether

Associates violated the CLA by imposing prepaid finance charges/loan fees/discount points

upon real estate-secured loans, and/or (3) Whether Associates violated the CLA by not

crediting or refunding a portion of the prepaid finance charges/loan fees/discount points

when a real estate-secured loan was paid in full prior to the maturity date of the loan through

direct payment, re-financing or acceleration? By this stipulation the parties did not agree on

whether the points in question are interest.

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¶55 At oral argument counsel for Wombolds stated he did not disagree with Associates

new position that the points were indeed interest. However, this Court must, in order to

correctly interpret the CLA, determine whether the points at issue, under the circumstances

shown in the record, were charged, collected or not refunded in violation of the CLA. Thus,

notwithstanding the position of a party hereto, this Court must now make a determination of

whether the points in question constituted interest authorized by § 32-5-301(1), MCA.

¶56 Associates argues that the Department of Administration, by its conduct over the years

in not taking action to prohibit the charging of points, has interpreted the CLA to permit

them. It further argues that both the Department and the Attorney General as its counsel, by

entering into a consent order in a different case, wherein a lender was allowed to charge

points, have interpreted the CLA to mean that points are allowed. It is true that interpretation

of a law by an agency charged with its enforcement is entitled to deference. Montana Power

Co. v. Cremer, 182 Mont. at 280, 596 P.2d at 485. However, in this case there is no actual

interpretation of the CLA by the Department. And, it is at least questionable whether,

because of the questions asked and the answers given, the Department was aware of how

points were charged and collected. Further, the consent order referred to was a true

compromise. We are advised by the parties that under the terms of such consent order, the

lender in that case could charge points, and in return the points were limited to 5% of the

loan and could not be charged on a re-financed loan. This compromise does not constitute

an interpretation of the CLA by the Department of Administration and the Attorney General

that points, as defined under the facts of this case, are interest and thus allowed.

¶57 Associates admit, in its brief and in the testimony of its expert, that the points charged

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are, at least in part, to compensate the lender for various costs or services, that is, preparation

of loan documents, obtaining and reviewing the borrower’s credit report, helping the

borrower complete a credit application, reviewing that application, title insurance, property

appraisal, and preparing and recording a trust deed. Associates’ expert states that such a fee

“serves a different purpose from [ ] ‘interest’ in that it does not compensate the lender for the

use of its money over time rather it serves to compensate the lender for the up-front service

costs incurred in providing the loan.”

¶58 The record establishes that Associates, in disclosure forms mandated by the federal

Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1605, 1606, 12 C.F.R. §§ 226.4, 226.22

advised its borrowers that the interest rate of the loan was one rate, and then after the

addition of the points, which was called a “loan fee,” the effective rate of interest was

increased. These disclosures may have satisfied the requirements of the TILA, however, they

also reveal that points are disclosed independently of interest before being combined in the

Annual Percentage Rate and Finance Charge. Regardless, whether Associates complied with

TILA is not an issue in this suit; rather this Court has before it the issue of whether

Associates complied with Montana’s CLA.

¶59 We conclude that the points charged on the loans in question are not interest; that is,

they are not charged for the use, forbearance, or detention of money. Under the

circumstances of this case and the provisions of the CLA, the imposition of a flat fee,

computed as a percentage of the loan, bearing no direct relation to actual costs of specific

services performed, front-loaded into the loan, which did not constitute a charge for the use

of the lender’s money over time, is not interest. These points are a fee charged by Associates

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for making the loan. By the express language of the CLA, Associates was prohibited from

charging fees not explicitly authorized under the act, § 32-5-103(1), MCA; § 32-5-301(5),

MCA. Charging the fee described, which we have called points, violates the CLA despite

Associates’ clever attempt to disguise such charge as interest.

¶60 The Court is cognizant of the fact that the fees, called points herein, are often treated

as interest in the lending industry, and when a borrower’s home is involved such are

deductible as interest under the United States Internal Revenue Code. However, the very

intent of the CLA is to place strict limits on what charges licensees thereunder may make,

in order to protect borrowers in the secondary lending market. We decline to interpret the

CLA in such a way that it contains a loophole whereby predatory lenders may add points

onto the beginning of an interest-bearing loan and thereby escape the requirement that such

points be at least partially refunded if the loan is prepaid or refinanced.

ISSUE 3

¶61 Does the CLA require a licensee to refund a portion of loan fees or points when a real

estate-secured loan is paid in full before its maturity date?

¶62 Wombolds urge this Court to affirm the District Court’s determination that, even if

interest, Associates’ failure to refund a portion of the points upon prepayment violates the

CLA.

¶63 Refund of a portion of total charges on add-on interest loans is required by § 32-5-

301(3), (7), MCA. Here, the loans in question are indeed interest-bearing loans and not add-

on loans. Therefore, they are exempted from this requirement. Section 32-5-301(7), MCA.

Interest-bearing loans, by their very nature, do not require a refund of interest because, until

19
it is earned, interest is neither charged nor collected. However, having already concluded

in this instance that the points charged were not interest, but were a fee expressly prohibited

by the act, we need not further address this issue.

ISSUE 4

¶64 Because the District Court found that real estate-secured loans made by Associates

to the Wombolds and the other subclass members violated the CLA, should the District Court

have declared the loans void under § 32-5-103(4), MCA?

¶65 Wombolds assert this issue on cross-appeal. Simply put, Wombolds argue that the

District Court erred in granting Associates’ Rule 60(b) motion vacating the August 2002

judgment to the extent that the original judgment imposed the CLA remedy of voidness on

the loans the District Court found to be in violation of the CLA.

¶66 As stated above, following Associates’ motion, the District Court withdrew its

judgment and entered an amended judgment. While not expressly reaching the issue of what

remedies may be available for a violation of the CLA, the District Court’s amended judgment

includes statements that could be interpreted as doing so. As stated above, we express

nothing in this Opinion concerning what remedies may or may not be available for a

violation of the CLA.

¶67 The determination of a remedy is not included in the District Court’s certification of

issues being ripe for appeal under Rule 54(b), M.R.Civ.P. The parties’ stipulation of the

issues on appeal does not reference this issue. Therefore, we decline to reach it.

CONCLUSION

¶68 The judgment of the District Court that Associates violated the CLA in its loans to the

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subclass in which Plaintiffs Wombolds are members, is affirmed. This matter is remanded

to the District Court for further proceedings in conformity with this Opinion and applicable

law.

/S/ JOHN WARNER

We Concur:

/S/ KARLA M. GRAY
/S/ W. WILLIAM LEAPHART
/S/ PATRICIA O. COTTER
/S/ JIM REGNIER
/S/ JAMES C. NELSON

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Justice Jim Rice specially concurring.

¶69 I concur in the ultimate conclusions reached by the Court, and urged by the

Respondents, that the loan practices of the Appellants violated the Montana Consumer Loan

Act, and further, that the Act confers a private right of action to borrowers affected by those

practices. However, I reach the conclusion that the Act was violated under a different

rationale than offered by the Court, one which would require a different holding with regard

to that issue.

¶70 I depart from the Court on the issue of “points,” that is, whether points are interest and

can be lawfully charged under the Act. The Court concludes that “[c]harging the fee . . .

which we have called points, violates the CLA despite Associates’ clever attempt to disguise

such charge as interest.” See ¶ 59. I respectfully disagree.

¶71 It should be remembered that this case was submitted to the District Court and to this

Court on stipulated facts. It should also be emphasized that this case involves hundreds of

different loans, which were not identically structured, or, in other words, are based on

differing facts. The Court’s opinion subtly acknowledges the differences in the subject

loans, see ¶ 14 for example, but renders a decision which fails to account for differences in

individual loans which well could affect the law’s application to those particular loans. It

does so, unfortunately, by relying on testimony in the record which is outside of the

stipulated facts and, thus, engages in improper factfinding that should be reserved for

litigation upon remand. In order to reach its conclusion that points are not interest, the Court

looks to, and adopts, the expert testimony offered by one of the parties. See ¶ 57. Again,

such testimony is beyond the stipulation and beyond the District Court’s action herein.

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¶72 The Court correctly notes that the parties’ stipulation does not include an agreement

that points were interest. See ¶ 54. It fails to mention, however, that the District Court

specifically found that points were interest (“[T]he Court finds that the loan fees constituted

‘interest’ as defined in § 31-1-104, MCA,” p. 15, Revised Findings of Fact, Conclusions of

Law and Order on Summary Judgment). Consistent therewith, the parties effectively adopted

this finding as part of their stipulation by agreeing before this Court in oral argument that

points were interest. Nonetheless, the Court rejects, without appropriate justification in my

view, both the District Court’s finding and the parties’ agreement.

¶73 I would affirm the District Court’s finding that points are interest. For purposes of

brevity, I simply summarize my reasons for doing so. The statutory definition of interest in

§ 31-1-104, MCA, is very broad (“Interest is the compensation allowed by law or fixed by

the parties for the use or forebearance or detention of money”). The points charged to the

consumer were calculated as a percentage of the amount financed, and, as acknowledged by

the parties at oral argument and by the Court, see ¶ 59, the points were separately disclosed

to the consumer and then calculated with accruing interest for purposes of interest disclosure

to the consumer under the Truth in Lending Act. Although the parties dispute the effect of

the Department’s actions in regard to this issue, it is undisputed that the Department took no

action and routinely acquiesced in this treatment of points. Finally, treatment of points as

interest has been approved by courts considering the issue. See Layne v. Transamerica Fin.

Services (Ariz. 1985), 707 P.2d 963, 966.

¶74 Thus, points being interest, it was permissible for Appellants to assess the points

pursuant to § 32-5-301(1), MCA. That provision of the Act incorporates § 31-1-112, MCA,

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which also exempts Appellants from the “operation and effect” of all usury laws. This policy

was further clarified by the Legislature’s repeal of the ban on the compounding of interest

in 1985. Therefore, the assessment of interest on the points, i.e., “compounding,” is likewise

permitted. Indeed, this “loophole for predatory lenders” criticized by the Court does exist

and is allowed by the law. See ¶ 60.

¶75 That is not the end of the matter, however, for two reasons. First, as mentioned

above, not all of the subject loans are identically structured. Differing facts could well lead

to a different conclusion about whether points are interest in individual cases. If, for

example, the points were not included in interest disclosure documents, or were not

calculated as a percentage of the amount financed, these facts could lead the trial court to

conclude that the points were not interest, and therefore, prohibited by the Act under the

Court’s reasoning in ¶ 60. On remand, loans which fall outside the facts on which this

opinion is premised would be subject to further litigation.

¶76 Secondly, though the points assessed under the agreed facts are considered interest,

Appellants nonetheless have violated the Act. The Act acknowledges only two kinds of

loans, those being “add-on” and “interest-bearing.” “Add-on” loans are provided some

definition pursuant to § 32-5-301, subsections (2) and (7), as loans which assess interest “at

the time the loan is made” even if “the loan is payable in installments.” “Interest-bearing”

loans are not defined by the Act, although it can be reasonably inferred that “interest-

bearing” loans are those which bear or accrue interest over the life of the loan. What is clear,

however, is that Appellants are charging interest both ways: adding-on interest up front, and

also assessing interest over the life of the loan. Therefore, by charging points (interest) up

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front, Appellants are bound by the provisions of the Act which apply to “add-on” loans,

including the necessity of refunding the appropriate portions of those assessments when the

loan was paid off or otherwise re-financed. There is no other way in which to apply the Act

to a consumer lender which engages in the practice of assessing up-front interest.

¶77 Therefore, I would reach the conclusion under Issue 3 that Appellants violated the Act

by failing to so comply. I, thus, concur in the Court’s conclusions that the Act has been

violated, and that Respondents have a private cause of action to remedy those violations.

/S/ JIM RICE

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