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   [5009] FDIC Docket No. 80-78b (12-21-81).

   Bank ordered to cease and desist from excluding the cost of credit life insurance from the finance charge while failing to make proper disclosures of such credit life insurance costs, in connection with consumer and agricultural loans.

   [.1] Regulation Z—FDIC Authority
   The FDIC has the authority under the Truth in Lending Act to require such remedial action as it deems equitable.

   [.2] Cease and Desist Orders—Remedies—Disclosure
   A bank that did not require customers to buy credit life insurance as a condition to obtaining consumer or agricultural credit, but affected customers could reasonably have believed that credit life insurance might be required by the bank may be ordered to cease and desist from leading customers to believe that such insurance might be required.

In the Matter of: * * * (INSURED
STATE NONMEMBER BANK) and
* * * in their capacities as the Board of
Directors of the Bank.




DECISION AND ORDER
80-78b

   Pursuant to its Authority under Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)), the Federal Deposit Insurance Corporation on December 22, 1980, issued a notice of charges against the above-named parties alleging violations of the Truth in Lending Act and Regulation Z issued thereunder by virtue of improper disclosure of the cost of credit life insurance. The Bank filed an Answer to these charges and, on February 3, 1981, Martin J. Linsky was designated as the Administrative Law Judge for this case. Several prehearing motions were made and ruled upon, and on April 7, 1981, the hearing in the matter was held in * * *. Thereafter, the parties filed proposed findings of fact, proposed conclusions of law, proposed orders, briefs, and reply briefs. The Administrative Law Judge filed his Recommended Decision and Order on August 31, 1981.

   [.1] The Board of Directors, having considered the matter, concludes that the Bank violated the Truth in Lending Act and Regulation Z in a number of cases by failing to make any cost disclosure with respect to credit life insurance or by making inaccurate disclosure of the cost thereof and by failing to obtain a credit insurance authorization form at the time each loan was made to a particular customer. In view of these proven violations, the Board expressly finds it unnecessary to decide whether or not monthly rate disclosures of the cost of credit life insurance (as opposed to a total dollar cost disclosure) constituted violations of the Truth in Lending Act and Regulation Z in this case. In view of its authority under Section 108(e)(2)(A) of the Truth in Lending Act to require such remedial action as it deems equitable, the Board also expressly finds it unnecessary under the facts of this case to determine whether the Bank engaged in "clear and consistent pattern or practice of violations," or whether "immediately preceding examination" in Section 108(e)(3)(C)(i) of the Truth in Lending Act refers to the immediately preceding compliance examinations or also includes reference to safety and soundness examinations.

FINDINGS OF FACT AND
CONCLUSION OF LAW

   Accordingly, the Board of Directors adopts all the findings of fact, as well as those conclusions of law numbered 1 and 2, of the Administrative Law Judge, and the bases therefore, as set forth in his Recommended Decision, which are hereby incorporated by reference as part of this decision. As noted above, the Board of Directors expressly reserves decision on the question of whether monthly rate disclosures of credit life insurance cost constituted violations of the Truth in Lending Act and Regu- {{4-1-90 p.A-114}}lation Z in this case and also reserves decision on the existence in this case of a "clear and consistent pattern or practice of violations" and on the meaning of "immediately preceding examination" for purposes of determining the restitution period. The Administrative Law Judge's reasoning and conclusions on these issues are not hereby adopted by the Board.

ORDER

   The Board also hereby adopts in full the proposed order of the Administrative Law Judge as contained in his Recommended Decision, which is incorporated herein by reference, as its Final Order. This Order shall become effective at the expiration of thirty days after the service of the Order upon the Respondents.
   By Order of the Board of Directors, dated December 21, 1981.
/s/ Alan J. Kaplan
Assistant Executive Secretary

FDIC-80-78b
RECOMMENDED DECISION

Statement of the Case
   On December 22, 1980, the Federal Deposit Insurance Corporation (hereinafter "FDIC") filed a Notice of Charges And Of Hearing alleging that the * * * (hereinafter "Bank") and * * *, in their capacities as the Board of Directors of the Bank, violated the Truth in Lending Act, as amended (15 U.S.C. § 1601 et seq.), and Regulation Z (12 C.F.R. Part 226) thereunder by improperly disclosing the cost of credit insurance. The Bank filed an Answer to these charges.
   On February 3, 1981, I was designated as the Administrative Law Judge for this case. Several prehearing motions were made and ruled upon, and on April 7, 1981, a hearing in the matter was held in * * *. Thereafter, the parties filed proposed findings of fact, proposed conclusions of law, proposed orders, briefs, and reply briefs.

Findings of Fact

   1. The Bank, a corporation existing and doing business under the laws of the State of * * *, is and at all times pertinent hereto has been an insured State nonmember bank subject to Section 8(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)(1)(Supp. III, 1979)), the Rules and Regulations of FDIC (12 C.F.R. Chapter III (1980)), and the laws of the State of * * *. (Bank's Answer to Notice of Charges and of Hearing ("Answer"), paragraph 1.)
   2. At all times pertinent hereto, the persons named in this action have been all of the directors of the Bank. (Answer, paragraph 2.)
   3. The Bank is, and at all times mentioned herein has been, subject to the Truth in Lending Act and Regulation Z. (Answer, paragraph 3.)
   4. On May 27, 1980, the Bank in the ordinary course of business extended "consumer credit," as defined in Section 226.2(p) (12 C.F.R. 226.2(p) (1980)), "other than open end credit," as defined in Section 226.2(x) (12 C.F.R. 226.2(x) (1980)). (Answer, paragraph 4.)
   5. From October 12, 1977 through May 27, 1980, the Bank sold credit life insurance under the group credit life insurance policy (FDIC's Exhibit A-1 (the "Policy")) to certain of its consumer and agricultural credit customers in connection with such customers' consumer and agricultural credit transactions. (Stipulation, FDIC's Exhibit A, page 3, paragraph 2.)
   6. The Bank did not require customers to purchase such credit life insurance as a condition to obtaining consumer or agricultural credit. (Stipulation, FDIC's Exhibit A, page 3, paragraph 2.)
   7. The affected customers* who purchased credit life insurance under the Policy paid premiums to the Bank for such credit life insurance from time to time on their outstanding loan balances. Premiums were assessed monthly to each customer by automatic charge or debit to his or her checking account. The amount of the monthly premium charge was computed by applying the monthly premium rate to his or her outstanding loan balance at the end of each month, up to the customer's prearranged insurance limit. (Stipulation, FDIC's Exhibit A, page 4, paragraph 5.)
   8. The Bank made disclosures to affected customers relating to credit life insurance


* As used in these Findings of Fact, the term "affected customers" means those consumer and agricultural credit customers of the Bank who obtained credit life insurance under the Policy and who received "affected loans" from the Bank. The terms "affected loans" or "affected notes" mean loans or notes for consumer and agricultural purposes in principal amounts of $25,000 or less made from October 12, 1977 (for outstanding loans) and May 27, 1978 (for terminated loans) through May 27, 1980 (for consumer loans) and March 31, 1980 (for agricultural loans).
{{4-1-90 p.A-115}}on the following three documents: (a) the "authorization card;" (b) the "monthly charge slip;" and (c) the "note/Truth in Lending disclosure statement." (Stipulation, FDIC's Exhibit A, page 3, paragraphs 3 and 4; page 4, paragraph 6; page 5, paragraph 7; page 6, paragraph 10.)
   9. The affected customers signed and dated authorization cards at or around the time of consummation of their first loan covered by credit life insurance, thereby authorizing the insurance coverage. (Stipulation, FDIC's Exhibit A, page 3, paragraph 3.)
   10. The form of authorization card used by most affected customers also states: "Where insurance is required by the creditor, the debtor has the option of furnishing existing or new insurance." (Emphasis added.) Affected customers could reasonably have believed that credit life insurance might be required by the Bank and might not be optional. (FDIC's Exhibits A-5 and A-8.)
   11. The authorization cards of the following affected customers (taken from the sample of 20, supra, p. 2) were filled out incorrectly or incompletely:
       (a) The authorization cards for these seven people had no premium cost disclosure whatsoever:

    Name Date
    * * * 11/08/71
    * * * 05/11/74
    * * * 09/13/79
    * * * 04/28/73
    * * * 11/17/71
    * * * 03/10/71
    * * * 04/13/67

       (b) The following authorization cards had a premium cost of disclosure of .098¢ rather than the correct amount of 9.8¢ per $100 per month: * * * (01/14/79 authorization card); * * *; * * *; and * * *. (FDIC's Exhibit A-5).

   12. For the following affected customers, there was a time gap of five to 12 years between the signing of the authorization card and the consummation of a current affected note:

Date of Authorization Date of Current
Name Card Note Time Gap
* * * 11/08/71 01/14/80 9 years, 2 months
* * * 05/11/74 12/24/79 5 years, 7 months
* * * 10/23/71 10/15/79 8 years
* * * 10/18/74 12/27/79 5 years, 2 months
* * * 07/03/70 07/03/78 8 years
* * * 03/31/71 01/25/80 8 years, 10 months
* * * 04/28/73 02/14/80 6 years, 9 months
* * * 04/13/67 01/17/80 12 years, 9 months
* * * 11/17/71 01/24/80 8 years, 2 months

(FDIC's Exhibits A-2, A-3, and A-5.)

   13. For each month in which affected customers were charged for premiums for credit life insurance under the Policy, they received with their checking account statement monthly charge slips in the form shown at FDIC's Exhibit A-7. The monthly charge slip showed the amount of the premium charge debited that month to each customer's checking account only for that month. (Stipulation, FDIC's Exhibit A, page 4, paragraph 6.)
   14. Each affected customer signed a note/Truth in Lending disclosure statement at the time of the consummation of each affected loan. (Stipulation, FDIC's Exhibit A, page 5, paragraph 9.)
   15. The Bank did not include the cost of the premiums for credit life insurance under the Policy in its computation of the finance charge, total of payments, or annual percentage rate as disclosed on the affected notes/Truth in Lending disclosure statements for any affected loan. (Stipulation, FDIC's Exhibit A, page 5, paragraph 8.)
   16. The credit life insurance disclosure portion of the note/Truth in Lending disclosure statements used by the Bank was not filled in, signed, dated, or otherwise completed, and no disclosure of premium cost {{4-1-90 p.A-116}}was shown on it. (Stipulation, FDIC's Exhibit A, page 6, paragraph 10; Testimony of * * * Executive Vice President of the Bank, Tr. 96–97, Tr. 98–99, and Tr. 109.)
   17. No affected customer received disclosure of the total dollar cost of the premiums for credit life insurance under the Policy for any consumer or agricultural purpose loan. (Stipulation, FDIC's Exhibit A, page 5, paragraph 7; FDIC's Exhibits A-3, A-5, A-7; Testimony of * * *, Tr. 49; Tr. 93–94.)
   18. The Bank did not make all credit life insurance disclosures at the time of the consummation of the affected loans. (Stipulation, FDIC's Exhibit A, page 3, paragraph 3; page 5, paragraph 7; page 6, paragraph 10.)
   19. The Bank made credit life insurance disclosures in the same manner for all affected customers. (Stipulation, FDIC's Exhibit A, page 5, paragraph 9.)
   20. FDIC conducted an examination of the Bank as of the close of business on May 27, 1980 (the "May 27, 1980 Compliance Report"). (FDIC's Exhibit A-6.)
   21. The May 27, 1980 Compliance Report listed the "apparent violation" involving disclosure of credit life insurance premiums which is the subject of this action. (FDIC's Exhibit A-6.)
   22. The Bank's immediately preceding compliance examination was as of the close of business on October 12, 1977. (Stipulation, FDIC's Exhibit A, page 6, paragraph 11; FDIC's Exhibit A-10; Testimony of * * *, Tr. 77–79.)

Conclusion of Law

   1. FDIC has jurisdiction of the Bank and the subject matter of this proceeding.

   [.2] 2. As of May 27, 1980, the Bank violated Section 226.8(d)(3) of Regulation Z (12 C.F.R. 226.8(d)(3) (1980)) by excluding the cost of credit life insurance from the finance charge while failing to make proper disclosures of such credit life insurance costs, in connection with consumer and agricultural purpose loans.
   3. The Bank handled its credit life insurance disclosures for all of its affected customers in the same erroneous manner, thereby engaging in a "clear and consistent pattern or practice of violations" within the meaning of Section 108(e) of the Truth in Lending Act (15 U.S.C. § 1607(e) (Supp. 1981)).
   4. For purposes of computing the correct restitution period under Section 108(e) of the Truth in Lending Act (15 U.S.C. § 1607(e) (Supp. 1981)), FDIC's May 27, 1980 Compliance Examination is the "current examination" and FDIC's October 12, 1977 Compliance Examination is the "immediately preceding examination" under such statute.

Discussion

   Under Section 8(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)(1) (Supp. III, 1979))* the FDIC is authorized to issue and serve upon the Bank and its directors an Order to Cease and Desist from any violation of law or regulation established at an administrative hearing. The Order to Cease and Desist may require the Bank and its directors to take affirmative action to correct the conditions resulting from the violation of law or regulation. This Section 8(b)(1) authority, which is identical in every significant respect to that of the other federal financial regulatory agencies, grants the FDIC the power to take expeditions administrative action to correct specific violations of law, rule, or regulation, or any unsafe or unsound practice.
   This action is also brought pursuant to FDIC's administrative enforcement authority to order restitution under Section 108 of the Truth in Lending Act (15 U.S.C. §1607 (Supp. 1981)).** The use of Section 8(b)(1)


*Section 8(b)(1) of the Federal Deposit Insurance Act provides, in pertinent part:
   [I]f...the agency shall find that any violation...specified in the notice of charges has been established, the agency may issue and serve upon the bank or the director, officer, employee, agent, or other person participating in the conduct of the affairs of such bank, an order to cease and desist from any such violation.... Such order may, by provisions which may be mandatory or otherwise, require the bank or its directors, officers, employees, agents, and other persons participating in the conduct of the affairs of such bank to cease and desist from the same, and, further, to take affirmative action to correct the condition resulting from any such violation or practice. (Emphasis added). 12 U.S.C. 1818(b)(1) (Supp. III, 1979).

** Section 108 of the Truth in Lending Act provides, in pertinent part:
Section 108. Administrative Enforcement.
    (a) Compliance with the requirements imposed under this title [the Truth in Lending Act] shall be enforced under:
    (1) Section 8 of the Federal Deposit Insurance Act, in the case of:
    (c) Banks insured by the Federal Deposit Insurance Corporation (other than members of the Federal Reserve System) by the Board of Directors of the Federal Deposit Insurance Corporation....
(Continued)

{{4-1-90 p.A-117}}is the procedure contemplated under Section 108 of the Truth in Lending Act to remedy violations of the Truth in Lending Act and Regulation Z.
   The Truth in Lending Act (15 U.S.C. 1601, et seq. (1976)) is designed to protect consumers against misleading and deceptive disclosure of credit terms in consumer and agricultural credit transactions. The law accomplishes this by requiring creditors to follow specific rules in disclosing credit terms, particularly in disclosing the finance charge and annual percentage rate, which is the cost of the credit. The Truth in Lending Act imposes the standard of meaningful disclosure on creditors, 15 U.S.C. § 1601(a) (1976), and demands strict compliance with its specific provisions, because of its remedial nature.
   Under this statutory scheme, the Truth in Lending Act contains the general disclosure principles while Regulation Z of the Federal Reserve Board (12 C.F.R. Part 226 (1980)) implements the Truth in Lending Act, providing more specific disclosure rules. In addition, the Federal Reserve Board clarifies the disclosure requirements of Regulation Z by issuing official Board interpretations and staff interpretations, both official and unofficial. Unofficial staff interpretations are sometimes called "public information letters."
   The Truth in Lending Act and Regulation Z have the force of law. Federal Reserve Board interpretations, while not of equal force, are to be given great weight where there is an absence of an express statutory mandate and where interpretation of the Truth in Lending Act and Regulation Z is needed. As the United States Supreme Court wrote in Ford Motor Company v. Milhollin, 444 U.S. 555 (1980);

       The Truth in Lending Act has the broad purpose of promoting "the informed use of credit" by assuring "meaningful disclosure of credit terms" to consumers. 15 U.S.C. 1601. Because of their complexity and variety, however, credit transactions defy exhaustive regulation by a single statute. Congress therefore delegated expansive authority to the Federal Reserve Board to elaborate and expand the legal framework governing commerce in credit. [Citations omitted.] The Board executed its responsibility by promulgating Regulation Z, 12 C.F.R. Part 226, which at least partly fills the statutory gaps. Even Regulation Z, however, cannot speak explicitly to every credit disclosure issue. At the threshold, therefore, interpretation of TILA and Regulation Z demands an examination of their express language; absent a clear expression, it becomes necessary to consider the implicit character of the statutory scheme. For the reasons following, we conclude that...it is appropriate to defer to the Federal Reserve Board and staff in determining what resolution of that issue is implied by the truth in lending enactments. 444 U.S. at 559-60.
       At the very least, that caution requires attentiveness to the views of the administrative entity appointed to apply and enforce a statute. And deference is especially appropriate in the process of interpreting the Truth in Lending Act and Regulation Z. Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dipositive for several reasons. 444 U.S. at 565.
   The Milhollin case does not address whether Federal Reserve official staff interpretations and unofficial staff interpretations (public information letters) are to be given equal deference. However, the case reveals that both types of Federal Reserve Staff interpretations were considered by the Court and both result from the same agency expertise. In an even more recent Supreme Court decision, the Court again emphasized the deference due the Federal Reserve Board in the Truth in Lending Act's statutory scheme. Anderson Bros. Ford v. Valencia, U.S. (1981); 101 S. Ct. 2266 (1981).

** Continued: (b) For the purpose of the exercise by any agency referred to in Subsection (a) of its powers under any Act referred to imposed under this title shall be deemed to be a violation of a requirement imposed under that Act. In addition to its powers under any provision of laws specifically referred to in Subsection (a), each of the agencies referred to in that Subsection may exercise, for the purpose of enforcing compliance with any requirement imposed under this title, any other authority conferred on it by law...
   (e)(4)(A) Notwithstanding any other provision of this Section, an adjustment under this Subsection may be required by an agency referred to in Subsection (a)...only by an order issued in accordance with cease and desist procedures provided by the provision of law referred to in such Subsections. 15 U.S.C. 1607(a)—(b) (1976); 15 U.S.C.S. 1607(e)(4)(A) (Supp. 1981).
{{4-1-90 p.A-118}}
   The general rule of the Truth in Lending Act and Regulation Z for the disclosure of credit life insurance charges or premiums is that such charges or premiums must be included in the finance charge. 15 U.S.C. 1605(a) (1976); 12 C.F.R. 226.4(a)(5) (1980).
   However, under the Truth in Lending Act and Regulation Z, charges or premiums for credit life insurance may be excluded from the finance charge when:
       a. the insurance is in fact optional;
       b. the optional nature is clearly disclosed in writing to the customer;
       c. the cost of the insurance is disclosed in writing to the customer; and
       d. the customer separately signs a specifically dated affirmative written indication of desire for the insurance after the cost disclosure. 15 U.S.C. § 1605(b) (1976); 12 C.F.R. 226.4(a)(5) (1980).
   To meet the conditions for excluding the cost of credit life insurance from the finance charge, the charges or premiums must be disclosed as the total dollar cost of the insurance over the term of the loan. A disclosure of the "unit cost" or "cost as a rate" does not satisfy the Truth in Lending Act or Regulation Z.
   Authority for this "total dollar cost" disclosure requirement is found in several Federal Reserve Board interpretations, and the rationale behind the requirement is simple. The essence of making meaningful truth in lending disclosures is giving the customer a comprehensible "Bottom line" figure in dollars and cents which represents the actual cost of the transaction. Armed with the dollars and cents figures from different lenders, the customer then can compare costs of credit and can engage in effective credit shopping. The law puts the obligation on the creditor to provide the customer with the required dollars and cents figure.
   The Federal Reserve Board staff has issued interpretations (or public information letters) excerpted here:
       1. No. 940. Disclosure of Method of Computing Premiums for Optional Credit Life Insurance Rather than Actual Dollar Cost Does Not Comply with § 226.4(a)(5) Requirements for Closed End Installment Contracts—Sec. 226.4(a)(5) (November 5, 1975).
       "Your client wishes to offer optional credit life insurance in connection with its installment sales of waterfront lots. The premiums for this insurance will be computed on the unpaid balance of the contract at the rate of one dollar per thousand dollars of outstanding balance each month. The creditor apparently proposes to disclose the method of computing the premiums (e.g., `$1 per $1,000 of unpaid balance per month"), rather than the actual total dollar cost of the insurance, in its disclosure of cost pursuant to § 226.4(a)(5)(ii) of Regulation Z. You indicate that it would be impossible to disclose the actual dollar amount at the time the credit contract is signed.
       "In Staff's opinion, this disclosure would not comply with § 226.4(a)(5), which permits exclusion of credit life insurance premiums from the finance charge only when, among other things, the cost of the insurance is disclosed. Since the transaction here apparently involves a closed end contract calling for specified periodic repayments over a particular length of time, the creditor presumably has all the information necessary to compute the total dollar amount of the premiums at the time of sale and to disclose that figure to the customer. Under these circumstances, we believe that this total dollar cost, computed on the assumption that the contract will be repaid according to its original terms, must be disclosed, in order to comply with § 226.4(a)(5)(ii)...." (Emphasis added.) CCH Consumer Credit Guide, para. 31,279.
       See also Public Information Letter No. 735: "Optional Credit Life Insurance with Premium Based upon Loan Unpaid Balance—Sec. 226.4(a)" (December 6, 1973), CCH Consumer Credit Guide, para. 31,054 (rescinded on other grounds, Official Staff Interpretation FC-0157), "Premium Amounts for Cancellable Credit Insurance" (December 14, 1978), CCH Consumer Credit Guide, para. 31,817); and Public Information Letter No. 850: "Credit Life Insurance Premium Need Not Be Included in Amount Financed if Insurance is Voluntary and Terminable at Will by Customer —Sec. 226.4(a)" (October 17, 1974), CCH Consumer Credit Guide, para. 31,172 (rescinded on other grounds, Official Staff Interpretation FC-0157, supra).
       2. No. 1306. Cost of Optional Credit Life Insurance Not Financed May be {{4-1-90 p.A-119}}
    Disclosed on a "Cost Per Unit" Basis Where Closed End Credit Extension Exceeds Coverage Limit Under Insurance Plan Covering Borrower's Entire Indebtedness to Creditor. Explanation of How Cost of Insurance Will Increase Over Loan Term Must Be Disclosed—Sec. 226.4(a)(5) (July 10, 1978).
       "Where credit life insurance is required or the insurance premium will be financed, a significant distortion in other required disclosures will result if the total cost of the insurance is not disclosed. Therefore, the staff believes that in those instances the exact cost of the credit life insurance must be disclosed regardless of the difficulty of the computations. If the total cost cannot be determined, then, of course, estimates may be made in accordance with § 226.6(f).
   "However, where, as in your case, the credit life insurance is optional and the premiums are not being financed, the cost of the insurance is disclosed in order to enable the borrower to make an informed decision as to whether such protection is desirable and to substantiate the voluntary nature of the insurance. Therefore, disclosing the total cost of the insurance is less significant. In view of the complexity of the computations, the staff believes that when an extension of credit exceeds, in whole or in part, the limit of credit insurance coverage, § 226.4(a)(5) may be satisfied by disclosing the cost per unit of the insurance and by explaining how insurance coverage for that loan will increase. Any additional information not inconsistent with § 226.6(c) may be provided in giving this explanation.
   "Using the example set forth above, the borrower's first loan of $5,000 and second loan of $3,000 will be insured in full for their duration since their total is below the limit of $10,000. Therefore, the creditor can and must disclose the total cost of insurance coverage for each loan. Only $2,000 of the third loan will be covered initially, however. In connection with this loan (and subsequent loans that exceed the limit of insurance coverage), the creditor may satisfy the cost disclosure requirements of § 226.4(a)(5) by disclosing that the cost of the insurance is 10 cents per $100 per month up to $10,000 and that the premiums for insurance on the loan will increase as other loans are repaid...." (Emphasis added.) CCH Consumer Credit Guide, para. 31,806.
   The new Revised Regulation Z, effective April 1, 1981, 46 Fed. Reg. 20848 (April 7, 1981) (to be codified in 12 C.F.R. Part 226) continues the total dollar cost rule for disclosing credit life insurance.* Revised Regulation Z continues the requirement expressed in Federal Reserve Board Public Information Letters No. 735, No. 940, and No. 1306, supra.
   Disclosure of voluntariness and the total cost of credit life insurance must be made before the insurance is authorized if the premium is to be excluded from the finance charge. The Truth in Lending Act and Regulation Z require all credit life insurance disclosures at the time the transaction is consummated. Section 226.6(a) of Regulation Z provides:
   "The disclosures required to be given by this part shall be made clearly, conspicuously, in meaningful sequence...." 12 C.F.R. 226.6(a).
   The Federal Reserve Board has interpreted "in meaningful sequence" to require "related terms to be presented in an order which will assist the customer in understanding their relationship." FRB Official Staff Interpretation FC-0054, dated March 21, 1977 (effective April 4, 1977). CCH Consumer Credit Guide, para. 31,552.
   At an absolute minimum, "in meaningful sequence" means that all disclosures related to credit life insurance must be made at the time the loan is consummated. The Bank must tell the customer in writing of the optional nature of the insurance and the cost of the insurance and must obtain the customer's affirmative written indication of
*Section 226.4(d)(1) of Revised Regulation Z provides, in pertinent part:    (d) Insurance. (1) Premiums for credit life, accident, health, or loss-of-income insurance may be excluded from the finance charge if the following conditions are met:
   (ii) The premium for the initial term of insurance coverage is disclosed.... The premium may be disclosed on a unit-cost basis only in open-end credit transaction, closed-end credit transactions by mail or telephone under § 226.17(g), and Rcertain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage. (Emphasis added.) 46 Fed. Reg. 20848, at 20895 (April 7, 1981) (to be codified in 12 C.F.R. 226.4(d)(1)).
   See Revised Regulation Z, Supplementary Information, 46 Fed. Reg. 20848, at 20856 (April 7, 1981).
{{4-1-90 p.A-120}}desire at the time the loan is consummated. Underlying this requirement is the Truth in Lending principle that the creditor must give the customer the accurate total dollar cost of the credit transaction (the "finance charge") and of all excludable charges before he or she signs on the dotted line.
   In issuing Public Information Letter No. 722: Disclosure of Cost of Insurance— §226.4(a) (dated October 16, 1973); CCH Consumer Credit Guide, para. 31, 036, the Federal Reserve Board specifically approves a Truth in Lending disclosure statement which contains a credit life insurance cost disclosure and authorization that is identical in substance to that shown on the note forms used by the Bank. (FDIC's Exhibit A-3.) This letter also makes clear that credit life insurance cost disclosure and authorization are made at the time of consummation and in conjunction with all of the other disclosures required under Regulation Z. The letter indicates this approved method of credit life insurance cost disclosure and authorization has been in existence since 1973.

The Bank made credit life insurance disclosures to its customers on three documents: (a) the authorization card, (b) the monthly charge slip, and (c) the note/Truth in Lending disclosure statements. (Stipulation, FDIC's Exhibit A, page 3, paragraph 3, and page 5, paragraph 7; FDIC's Exhibits A-5, A-8, A-7, and A-3.) Nowhere was the dollar cost of the premium over the term of the loan disclosed.

Authorization cards. The authorization cards did not satisfy the cost disclosure requirement because they only showed unit cost (or rate) per month, not the total dollar cost over the term of the loan. Moreover, many authorization cards were not properly filled out or completed. Seven Bank customers (out of the 20 customer sample) received no premium cost disclosure on their authorization cards (not even the monthly unit cost). Four Bank customers (out of such 20 customers) received wrong premium cost disclosures. (FDIC's Exhibit A-5.)

Monthly Charge slip. The monthly charge slip sent each month to customers did not satisfy Regulation Z because it showed only the amount debited to the customer's account for credit life insurance for the month and did not disclose the total cost of credit life insurance over the term of the note.

Note/Truth in Lending disclosure statement. The note/Truth in Lending disclosure statement used by the Bank in its consumer loans (FDIC's Exhibit A-3) would have satisfied Regulation Z's disclosure requirements had it been filled out accurately and completely. It disclosed the optional nature of the credit life insurance. It also contained blank spaces for disclosure of the total dollar cost of the insurance over the term of the note and for a signed and dated written affirmative indication of desire for credit life insurance. The Bank did not fill in any of the blank spaces in the credit life insurance portion of any of the note/Truth in Lending disclosure statements but left all blank spaces blank for all customers. (Stipulation, FDIC's Exhibit A, page 6, paragraph 10.) Therefore, the note/Truth in Lending disclosure statements did not fulfill disclosure requirements of Regulation Z.

None of the documents used by the Bank to make credit life insurance disclosures fulfilled the requirement that all of the disclosures be made at the time of consummation of each loan.

The Bank's authorization cards contained a "unit cost" (or rate) disclosure (9.8 cents per $100 of outstanding indebtedness) and contained a signed and dated affirmative written indication of the customer's desire for insurance coverage. However, under the Bank's procedures, authorization cards were not signed contemporaneous with the making of each insured loan. Many cards were signed years before the notes insured under them. (See, for example, the time gaps between authorization cards and insured notes for * * *—9 years, 2 months; * * * —8 years; * * *—8 years, 10 months; * * *—12 years, 9 months; * * * —8 years, 2 months. (FDIC's Exhibits A-2, A-3, and A-5.))

In addition, the authorization cards contained a statement implying that credit life insurance could be required by the creditor and might not be optional. (See FDIC's Exhibits A-5 and A-8; statement in authorization cards: "Where insurance is required by the creditor, the debtor has the option of furnishing existing or new insurance." (Emphasis added.)) Yet, at the time notes were signed, the Bank disclosed that the insurance was optional. While it is conceivable that some Bank customers could have been misled there is no evidence that any were, or in fact that any customer of the Bank at any time complained about the way the {{4-1-90 p.A-121}}Bank handled this matter of credit insurance.
   Nevertheless, the Bank's method of disclosing insurance cost and obtaining the affirmative written indication of desire for the insurance years before the optional nature disclosure violated Regulation Z's requirement that all disclosures be made clearly, conspicuously, and in meaningful sequence. 12 C.F.R. 226.6(a)(1980).
   To remedy violations of the Truth in Lending Act and Regulation Z involving inaccurate finance charge disclosures, Section 108(e)(1) of the Truth in Lending Act requires agencies generally to compel creditors to adjust the customer's account to assure that the customer will not be required to pay a finance charge in excess of the finance charge actually disclosed. 15 U.S.C. §1607(e)(1). Pursuant to the statute, the FDIC must require banks under its jurisdiction to make such an adjustment where it determines that the disclosure error resulted from a clear and consistent pattern or practice of violations. 15 U.S.C. §1607(e)(2)(A). However, under Section 108(e)(2)(A), for only a prescribed two-year period, FDIC may require such remedial action as it determines to be equitable. Id. The Bank's disclosure violations fit the category of Section 108(e)(2)(A): they are disclosure errors which involves a charge that would otherwise be excludable in computing the finance charge under Section 106(b) of the Truth in Lending Act.
   My proposed Order to Cease and Desist would require the Bank to cease and desist from violating Section 226.8(d)(3) of Regulation Z (12 C.F.R. 226.8(d)(3) (1980)). The more difficult task is to fashion a remedy which will be equitable both for the Bank and to its customers who did not receive full and complete disclosure as required. I am mindful that under the proposed Order submitted by Counsel for the FDIC that no customer may request a refund and conceivably there would be no dollar cost to the Bank. On the other hand, this Bank might be required to refund as much as $30,000 (Tr. 21) which would in many cases be a complete windfall to some customers who may not be as honest as they should be.
   Before fashioning any remedy, two preliminary issues must be discussed. The first of these is the Bank's argument that if it did violate the Truth in Lending Act and Regulation Z, the violations were technical and nonsubstantive. Technical and nonsubstantive violations do not result in orders to the Bank to make adjustments to customers' accounts.* However, the Bank's violations were not "clearly technical and nonsubstantive." The Bank frustrated a regulation which helped borrowers compare prospective creditors. The Bank did not make technical mistakes in its disclosure of total dollar costs, it simply did not disclose such costs. This failure could adversely affect the Bank's customers. The Bank's violations were not merely technical and nonsubstantive.
   The parties also dispute how far back in time the remedy can reach. This period is determined by §108(e)(3)(C)(i) of the Truth in Lending Act which provides:
       "(3) Notwithstanding paragraph (2), no adjustment shall be ordered. . . .
       (i) . . . except in connection with violations arising from practices identified in the current examination and only in connection with transactions that are consummated after the date of the immediately preceding examination. . . ."
   The parties disagree on what "immediately preceding examination" means. The Bank says its plain meaning is obvious, that "examination" means any examination regardless of its purpose. The FDIC argues that "examination" is limited to an examination that covers the area of compliance with the Truth in Lending Act and Regulation Z. The FDIC's interpretation makes more sense. Neither policy nor logic suggest a reason why an examination of a Bank's financial strength should excuse its failure to comply with the Truth in Lending Act. The Bank's interpretation would as a practical matter force the FDIC to conduct only all encompassing examinations or be giving
* Section §108(e)(2)(D) of the Truth in Lending Act provides:
   "(2) . . . except where such disclosure error resulted from a willful violation which was intended to mislead the person to whom credit was extended, an agency need not require such an adjustment if it determines that such disclosure error-
   (D) resulted from any other unique circumstance involving clearly technical and nonsubstantive disclosure violations that do not adversely affect information provided to the consumer and that have not misled or otherwise deceived the consumer."
{{4-1-90 p.A-122}}"immunity" to Banks for all areas not covered where there are violations. Any benefits arising from brief or specialized examinations would be lost. The fairest view of §108(e)(3)(C)(i) is that it simply prohibits the FDIC from punishing a Bank for activities that the FDIC has examined and approved. This reading grants Banks the security of knowing that their entire past is not subject to examination and punishment. The proper remedial period starts on October 12, 1977, the date of the immediately preceding examination that addressed compliance with the Truth in Lending Act and Regulation Z and not the intervening examination of 1979 which addressed only the question of whether the Bank was safe and sound. See also Section 226.6(i)(2)(i) of Regulation Z.
   In deciding upon an equitable remedy, I note that there has been no allegation that the insurance premiums were unreasonable. I note further that the Bank did disclose to their affected customers the "cost as a rate" for the credit insurance as distinguished from simply deducting the premiums. Lastly, I find no evidence that the Bank intended to deliberately mislead its customers for the financial benefit of the Bank. The Bank must, of course, be ordered to cease and desist from the violation of the Truth in Lending Act and Regulation Z discussed, infra. In addition, the Bank should be ordered to inform each affected customer as defined in finding of fact No. 7 who still has an outstanding loan of the total future dollar cost of the credit life insurance. These customers must be given the opportunity to cancel the insurance if they so desire.
   The particulars of the cease and desist order I propose are different from the remedy recited in the so-called policy guide or guidelines, i.e., the Joint Notice of Enforcement Policy, 45 Fed. Reg. 48712 (July 21, 1980). The Board of Directors of the FDIC, however, has the authority to enact a cease and desist order with terms that they deem to be appropriate, which terms may or may not track the so-called policy guide or guidelines.
   My position on the guidelines is that it is not a substantive rule which requires notice and comment under Section 553 of the Administrative Procedure Act. The guidelines merely state what the financial regulatory agencies believe will be appropriate and what action they generally intend to take in those situations in which they have authority to take equitable remedial action. They are not bound to take that action. The guidelines are not enforceable.

PROPOSED ORDER TO CEASE AND
DESIST

   1. The Bank and its Board of Directors forthwith shall cease and desist from violating Section 226.8(d)(3) of Regulation Z (12 C.F.R. 226.8(d)(3) (1980)).
   2. That all affected customers as defined in finding of fact No. 7 who have outstanding loans be informed in writing within forty-five days of the effective date of this Order of the total dollar cost to continue credit life insurance on their loans. The Bank must also inform these affected customers that they have the option to cancel continued coverage at that time.
   3. The provisions of this Order shall be binding on the Bank and its present and future subsidiaries, affiliates, directors, officers, agents, servants, employees, successors, and assigns.
   4. The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this Order shall be modified, terminated, suspended, or set aside by the Board.
Issued at Washington, D.C. on August 28, 1981

/s/ Martin J. Linsky
Chief Administrative Law Judge
U.S. Department of Housing and Urban Development
1875 Connecticut Avenue, N. W.
Suite 1170
Washington, D.C. 20009
(202) 673-6128

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