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FDIC Enforcement Decisions and Orders

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   [5010] FDIC Docket No. FDIC-81-27b(5-28-82).

   Bank that failed to properly disclose to borrowers the appropriate annual percentage rate on loans secured by real estate, and failed to include prepaid "finance charges" in the finance charge, ordered to cease and desist. Bank in question also ordered to reimburse all persons to whom loans were made.
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   [.1] Cease and Desist Order—FDIC Authority
   FDIC has the authority to issue cease and desist orders directed at violations of law, rules, and regulations, and to order affirmative action to correct such violations.

   [.2] Regulation Z—Reimbursement to Borrowers
   The FDIC's authority to issue cease and desist orders includes the authority to require adjustments to the accounts of borrowers (reimbursement) for certain violations.

In the Matter of: * * * (INSURED
STATE NONMEMBER BANK)





DECISION AND ORDER TO CEASE
AND DESIST
FDIC-81-27b

   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 June 29, 1981, issued a notice of charges against the abovenamed bank alleging violations of the Truth in Lending Act and Regulation Z issued thereunder by virtue of improper disclosure of annual percentage rates. The Bank filed an answer to these charges admitting the commission of the violations. On August 26 and 27, 1981 a hearing was held in * * * before Administrative Law Judge Barbara L. Hassenfeld. Thereafter, the parties filed proposed findings of fact, proposed conclusions of law and briefs. The Administrative Law Judge filed her Recommended Decision and Order on January 26, 1982.
   The Board of Directors, having considered the matter, concludes that the Bank violated the Truth in Lending Act and Regulation Z by failing to make proper disclosure with respect to annual percentage rates. The Board also finds that there existed a "clear and consistent pattern or practice" of violations. In addition, the Board of Directors finds that an order of adjustment is appropriate and would not have a potentially significant adverse impact upon the safety and soundness of the Bank.

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

   Accordingly, the Board of Directors adopts findings of fact numbered 1, 2, 5 and 9 and conclusions of law numbered 1, 2, 3 and 4 of the Administrative Law Judge. The Board also modifies the findings of fact numbered 3 and 4 and conclusions of law numbered 5 and 6 of the Administrative Law Judge to reflect the proper number of violations (nine) of the Truth in Lending Act and Regulation Z as admitted by the Bank. The Board of Directors also rejects findings of fact numbered 6, 7 and 8 and conclusion of law number 7 of the Administrative Law Judge and hereby finds the existence of a "clear and consistent pattern or practice" of violations. The Board also concludes that an order of adjustment is appropriate and would not have a potentially significant adverse impact upon the safety and soundness of the Bank.

ORDER TO CEASE AND DESIST

   NOW, THEREFORE IT IS ORDERED, that the Respondent, its trustees, officers, employees and agents cease and desist from the violations set forth in the Findings of Fact and Conclusions of Law above, and further, that Respondent take affirmative action as follow:
   1. Respondent shall, within 60 days of the effective date of this ORDER, identify all "reimbursable affected loans" which it has made. An "affected loan" is any loan involving "consumer credit," as defined in Section 226.2(p) of Regulation Z, other than "open end credit" as defined in Section 226.2(x) of Regulation Z, which is secured by real estate, and

       (a) in connection with which loan the Respondent disclosed to the borrower an "annual percentage rate" which, when increased by one-quarter of one percentage point, was less than the actual annual percentage rate calculated in accordance with Regulation Z, without regard to Section 107(c) of the Truth in Lending Act and corresponding provisions of Regulation Z, and
       (b) where such underdisclosure was caused in whole or in part by a failure to include prepaid finance charges in the "finance charge" and/or from a failure to exclude prepaid finance charges from the "amount financed" when computing the "annual percentage rate."
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       The term "reimbursable affected loan" means
       (a) an "affected loan" which (i) was "open" on Respondent's books (not completely repaid) on March 31, 1980, and which was consummated from January 1, 1977 to October 10, 1979, inclusive; or (ii) was "closed" on Respondent's books (completely repaid) on or before March 31, 1980, and which was consummated from March 31, 1978 to October 10, 1979, inclusive.
   2. Respondent shall, within 60 days of the effective date of this ORDER, pay to all persons to whom reimbursable affected loans were made, such amounts as may be necessary to prevent such persons from paying, or from having paid, an amount in excess of the dollar equivalent of the annual percentage rate actually disclosed. Such payments may be made under either the "Lump Sum Method" or the "Lump Sum/Payment Reduction Method." The Lump Sum Method involves a cash payment equal to the total adjustment to be made. The Lump Sum/Payment Reduction Method involves a cash payment that fully adjusts the borrower's account up to the time of such payment, and an appropriate reduction of the remaining payment amounts on the loan.
   The provisions of this ORDER shall be binding upon Respondent, its subsidiaries, affiliates, trustees, officers, agents, servants, employees, successors and assigns.
   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.
   This ORDER shall become effective at the expiration of 30 days after the service of such ORDER upon the Respondent.
   By order of the Board of Directors, dated May 28, 1982.

/s/ Alan J. Kaplan (for)
Hoyle L. Robinson
Executive Secretary

FDIC-81-27b

RECOMMENDED DECISION

STATEMENT OF PROCEEDINGS AND
ISSUES
:

   A hearing was held in * * *, on August 26 and 27, 1981, regarding charges brought against the * * * Bank by the Federal Deposit Insurance Corporation (FDIC, Petitioner) as a result of an examination performed by the agency.
   The * * * Bank (Bank, Respondent) was charged with violating 12 CFR 226.8 for a period covering January 1, 1977, to October 10, 1979, by failing to properly disclose to borrowers on loans secured by real estate the appropriate annual percentage rate. The Petitioner alleges that in violation of existing law the * * * Bank "failed to include prepaid `finance charges' in the finance charge and/or from its failure to exclude such charges from the `amount financed' when computing the `annual percentage rate'". The allegations involve disclosure errors which exceeded a tolerance of one-quarter of one percent less than the actual annual percentage rates properly computed.
   The present law requires an adjustment to be made where the disclosure error resulted from: (1) a clear and consistent pattern or practice of violations, (2) gross negligence, or (3) a willful violation which was intended to mislead the person to whom the credit was extended. Furthermore, no adjustment can be ordered "if it would have a significantly adverse impact on the safety or soundness of the creditor. . . ."
   The FDIC did not allege nor attempt to prove gross negligence or willful conduct but presented its testimony to establish a clear and consistent pattern or practice of violations. (Tr. 19) By its answer, the Respondent admitted it had committed errors but denied that the violations were part of a clear and consistent practice and further asserted that any adjustments to the borrowers would have an adverse effect on the safety of the Bank.

EVIDENCE:

   Mr. * * *, a compliance examiner for the Federal Deposit Insurance Corporation (Tr. 21-22), testified that he had examined disclosure statements of real estate loans made by the * * * Bank and that he found violations. The witness testified in detail as to the violations he found in Exhibit P-2 through P-10, and he presented Exhibits P-11 and P-12 to compare his calculations with the Bank's. In Exhibits P-2 through P-10, he found six of them to be in violation, but he also produced Exhibit P-14 as an example of a "perfect" form. He stated that the problem he found in the exhibits that were in violation was that the Bank calcu- {{4-1-90 p.A-125}}lated its disclosure percentage based on the full amount of the loan and failed to deduct the prepaid finance charge from the amount of the loan on which the interest was charged. In two instances, i.e., in Exhibits P-3 and P-10, the Bank overstated the amount (see Tr. 38 and 53) and in Exhibit P-8 the Respondent stated it correctly. (Tr. 49)
   Mr. * * * opined that the Bank had not made a centralized effort to acquaint the loan officers with the regulations, but he stated that there was no evidence that it intended to deceive its customers. (Tr. 129)
   Mr. * * *, auditor of the * * *, estimated that there would be $122,000 in reimbursable violations. (Tr. 133-135) Mr. * * *, President of the Bank (Tr. 3), testified as to its financial condition and explained the reasons why the surplus ratio was so low and opined that a restitution would adversely affect the soundness of the Bank. (Tr. 5)
   The Respondent produced Exhibits R-2 through R-12 which were disclosure statements properly calculated on loans secured by real estate for the same period of time as those sampled by Mr. * * *.

RECOMMENDED FINDINGS OF FACT:

   1. Respondent is a corporation existing and doing business under the laws of the State of * * *, with its principal place of business in * * *. At all times pertinent hereto, the Respondent has been an insured State nonmember bank.
   2. During the period from January 1, 1977, to October 10, 1979, inclusive, the Respondent in the ordinary course of business extended "consumer credit," as defined in Section 226.2(p) of Regulation Z, other than "open-end credit" as defined in Section 226.2(x) of Regulation Z, in the form of loans secured by real estate.
   3. The Petitioner, in the usual course of its business, conducted an examination of the Respondent as of the close of business on October 10, 1979. During the course of that examination, as part of his loan-sampling procedure, Mr. * * *, a bank examiner employed by the Petitioner, reviewed disclosure statements given to borrowers in connection with 46 or 47 loans. Nine of these loans were secured by real estate and were subject to the provisions of Regulation Z. Disclosure statements given in connection with some of these nine loans failed to disclose the appropriate annual percentage rates.
   4. In connection with the loans that were in violation, the Respondent failed to disclose to each borrower the appropriate "annual percentage rate" in accordance with the requirements of Section 226.8 of Regulation Z (12 C.F.R. §226.8). These failures to make proper disclosures resulted from the Respondent's failure to include prepaid finance charges in the "finance charge" and/or from its failure to exclude such charges from the "amount financed" when computing the "annual percentage rate." The loans in violations are Exhibits P-2, P-4, P-5, P-6, P-7 and P-9:

Name(s) of Borrower(s) Loan Number Date
* * * 21-020255-3 8-27-79 (EX P-2)
* * * 21-020217-7 8-10-79 (EX P-4)
* * * 21-019526-1 1-19-79 (EX P-5)
* * * 21-019967-6 6-15-79 (EX P-6)
* * * 21-019839-3 5-08-79 (EX P-7)
* * * 21-019992-5 6-01-79 (EX P-9)

   5. In the cases of the loans in violation, the disclosed annual percentage rate was more than 25 "basis points" (hundredths of a percentage point) lower than the annual percentage rate properly computed in accordance with Regulation Z. This is not within the tolerance allowed by Section 107(c) of the TIL Act (15 U.S.C. §1606(c)) and Section 226.5(b) of Regulation Z, which allow a creditor to "round off an annual percentage rate to the nearest quarter of one percentage point.
   6. Although six of the nine disclosure statements produced by the Petitioner were in violation, four others were not. In addition, the Respondent produced eleven cor- {{4-1-90 p.A-126}}rected calculated ones for the same time period. Thus, even though the record shows that Examiner * * * found violations, this was not enough to meet the Petitioner's burden of proof to establish a clear and consistent pattern or practice of violations.
   7. Since the Petitioner did not meet its burden of proof, there is no need to make findings on whether or not the present law allowing for adjustments is applicable to the instant case.
   8. In the alternative to paragraph 7, if it is found that there was a clear and consistent pattern or practice of violation and assuming adjustments could legally be ordered, then I find that to order adjustments would have a significantly adverse effect on the safety or soundness of the creditor.
   9. Petitioner's Requested Findings of Fact paragraphs 8, 9 and 10 are adopted.

RECOMMENDED CONCLUSIONS OF
LAW
:

   1. Petitioner has jurisdiction over the Respondent and the subject matter of this proceeding.
   2. Respondent has been at all times mentioned herein, and is, subject to the provisions of:

       (a) the Federal Deposit Insurance Act (12 U.S.C. §1811, et seq.) and the Rules and Regulations of the Petitioner (12 C.F.R. Part 303, et seq.) (Notice, paragraph 1; Answer, paragraph 1); and
       (b) the Truth in Lending Act, Title 1 of the Consumer Credit Protection Act (15 U.S.C. §1601 et seq.) and Regulation Z of the Board of Governors of the Federal Reserve System (12 CFR Part 226) promulgated thereunder.

   [.1] 3. Petitioner has the authority, under Section 8(b) of the Federal Deposit Insurance Act, to issue "cease and desist" orders directed at violations of law and violations of rules and regulations and to order affirmative action to correct such violations.

   [.2] 4. Petitioner's present authority to issue "cease-and-desist" orders includes the authority to require adjustments to the accounts of borrowers ("reimbursement") for certain kinds of violations of Regulation Z (15 U.S.C. §1607(a)(1)).
   5. During the period from January 1, 1977, to October 10, 1979, inclusive, Respondent on six occasions violated Section 226.8(b) of Regulation Z by failing to disclose, in connection with certain loans, the correct annual percentage rate properly computed in accordance with Section 226.5(b) of Regulation Z.
   6. In the six loans referred to in paragraph 5 herein, the disclosed annual percentage rate was more than 25 "basis points" (hundredths of a percentage point) lower than the annual percentage rate properly computed in accordance with Regulation Z. This determination does not reflect the latitude provided by Section 107(c) of the TIL Act (15 U.S.C. §1606(c)) and Section 226.5(b) of Regulation Z.
   7. The violations described in paragraphs 5 and 6 of these Conclusions of Law were not part of a clear and consistent pattern or practice.

RECOMMENDED ORDER

   That the charges against * * * Bank be vacated.

/s/ BARBARA L. HASSENFELD
Judge, OSHRC

   Dated: January 26, 1982

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