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[5083] FDIC Docket No. FDIC-86-42b (2-3-87).

   When a bank allocated notary and legal fees to the "amount financed" rather than to the "finance charge" on the bank's disclosure form used for direct bank financing of consumer loans secured by automobiles, the FDIC Board ordered the bank to cease and desist from this practice, and to reimburse all affected customers. (This decision was affirmed by the U.S. Court of Appeals for the Fifth Circuit, 833 F.2d 548 (1987)).

   [.1] Regulation Z—Legislative Intent
   At the time of enactment, the general legislative intent of the Truth in Lending Act was to strengthen competition among financial institutions and other entities extending consumer credit by promoting informed use of credit. By requiring that all information necessary to compare the terms and cost of credit options offered be made available to consumers, Congress intended to enable them to make meaningful choices from among competing credit terms.

   [.2] Regulation Z—Disclosure of Charges
   Accurate disclosure of the finance charge is the linchpin of the Truth in Lending Act.

   [.3] Regulation Z—Disclosure of Charges
   Disclosure of the finance charge promotes comparison among lenders and facilitates the choice between financing the purchase or paying cash.

   [.4] Regulation Z—Subsequent Disclosure—Reimbursement of Gains
   When a bank has stipulated that it has engaged in a pattern and practice of excluding legal and notary fees from the finance charge, reimbursement is the appropriate remedy. 15 U.S.C. § 1607(2)(A).

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


DECISION AND ORDERFDIC-86-42b

DECISION

   The Board of Directors ("Board") has reviewed the record and finds that the Administrative Law Judge's ("ALJ's") recommended Initial Decision (appended hereto) is in all material respects fully supported by the law and the evidence. We therefore adopt the Administrative Law Judge's Initial Decision and incorporate it herein by this reference.
   The * * * Bank (the "Bank" or "Respondent") filed exceptions to the Initial Decision which assert that the ALJ considered improper arguments and made inappropriate findings regarding certain legal issues. The substance of these exceptions is that the ALJ did not agree with certain of Respondent's arguments and evidence. No purpose would be served by repeating here the ALJ's Initial Decision, which details why the ALJ rejected Respondent's contentions. We have examined the record in light of all of Respondent's exceptions and find that none require a modification of the Initial Decision.
   Respondent having violated Regulation Z, 12 C.F.R. Part 226, the Board finds that the ALJ's proposed Order is an appropriate remedial order. The Order requires the Bank to search all consumer automobile loans originated since October, 1982, and make reimbursement, as required by Section 108(e) of the Truth in Lending Act, 15 U.S.C. § 1607(e).
ORDER
   IT IS ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from violating the Truth in Lending Act and Regulation Z and take AFFIRMATIVE ACTION as follows:
   1. Within 60 days from the effective date of this ORDER, the Bank shall conduct a file search of all consumer automobile loans which originated since October 1, 1982, in which the annual percentage rate and finance charge were understated and shall reimburse, in accordance with section 108(e) of the Truth in Lending Act, 15 U.S.C. § 1607(e), all affected customers. On or before the sixtieth day, the Bank shall submit a list to the * * * Regional Office of the FDIC of the customers reimbursed and the dollar amount of each reimbursement made.
   2. During the period this ORDER is in effect, the Bank shall not destroy any record {{4-1-90 p.A-1033}}within the scope of Section 226.26(a) of Regulation Z, 12 C.F.R. § 226.26(a).
   3. On the fifteenth day of the second month following the date of the issuance of this ORDER, the Bank shall furnish a written progress report to the Regional Director of the FDIC * * * Regional Office detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof.
   The effective date of this ORDER shall be thirty (30) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall be modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 3rd day of February, 1987.
/s/ Margaret M. Olson
Deputy Executive Secretary

Before: ALAN W. HEIFETZ
Administrative Law Judge

INITIAL DECISION

Statement of the Case

   This administrative action was initiated by the Board of Review of the Federal Deposit Insurance Corporation ("FDIC") on February 12, 1986, when it issued a Notice of Charges and of Hearing ("Notice") against * * * Bank, * * * ("Bank"), pursuant to the provisions of Section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and the FDIC Rules of Practice and Procedures, 12 C.F.R. Part 308. The Notice charged the Bank with violation of the Truth in Lending Act, as amended, 15 U.S.C. §&sec; 1601-1667e, and Regulation Z of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 226.
   On March 7, 1986, the Bank filed an Answer to the Notice and, by letter dated April 4, 1986, the matter was referred to me for hearing and initial decision. Pursuant to agreements reached at prehearing conferences in April, May and June 1986, the case was submitted on the basis of joint stipulations of facts and initial and reply briefs.1 Upon the entire record, which was closed on August 15, 1986, I make the following findings of fact, conclusions of law and recommended order:

Findings of Fact

   The Bank is a corporation organized, existing and doing business under the laws of the State of * * *, having its principal place of business at * * *. At all times pertinent to this proceeding, the Bank has been, and continues to be, an insured nonmember bank subject to the Act, 12 U.S.C. §&sec; 1811-1831d, the FDIC's Rules and Regulations, 12 C.F.R. Chapter III, the amended Truth in Lending Act, 15 U.S.C. §&sec; 1601 et seq., the Federal Reserve Board Regulation Z, 12 C.F.R. §&sec; 226 et seq., as revised effective April 1, 1981, and the Federal Reserve Board Official Staff Commentary which became effective October 1, 1982. The Bank is also subject to the laws of the State of * * *, including the * * * Consumer Credit Law * * *-R.S. 9:3510 et seq. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. (Stip. §&sec; 1-4).
   During a Compliance Examination of the Bank, covering the period from June 20, 1981 through December 21, 1983, an FDIC examiner found that notary and legal fees were being allocated to the "amount financed" rather than to the "finance charge" on the Bank's disclosure form used for direct bank financing of consumer loans secured by automobiles. These fees were also excluded from the annual percentage rate ("APR") disclosures when the Bank extended consumer credit other than open-ended credit (12 C.F.R. § 226.2(a)(12)). This pattern and practice has continued since October 1, 1982. (Stip. §&sec; 5, 9-12, 34-35).
   Pursuant to * * * law, in order for the Bank to perfect a security interest in an automobile for which it extends credit to a


1 For purposes of this decision, the following abbreviations will be used: Stipulation of Facts, Contentions of the Parties and Issues of Law ("Stip."); Supplemental Stipulation of Facts ("Supp. Stip."); Brief ("Br.") and Reply Brief ("R. Br.").
{{4-1-90 p.A-1034}}customer, it must receive a valid chattel mortgage, i.e., one that is drafted in proper form pursuant to * * * law and is notarized. There is no legal requirement that a chattel mortgage be drafted by licensed attorneys or notaries public. (Stip. §&sec; 20, 29-31).
   At all pertinent times * * * law has recognized a notary as a public official and required that a notary post bond in the amount of $5,000.00 for the faithful performance of notarial duties as required by law. (Stip. § 32). At all pertinent times, reasonable notarial fees not to exceed five dollars were and are set or authorized by the * * * Consumer Credit Law for each consumer credit finance charge secured by mortgage, and such notarial fees were and are properly excludable from the Finance Charge block in the "Federal Box" of the Bank's disclosure form and from APR disclosure in consumer loans. (Stip. § 33).
   During the period from September 1, 1983 to November 30, 1983, the Bank directly financed 51 consumer loans secured by automobiles.2 In 20 of these loans, notary and legal fees were paid outside closing, in cash, by the customer directly to his or her attorney.3 In the remaining 31 (the "Affected loans"), notary and legal fees were financed by the Bank, included in the disclosed Amount Financed, and excluded from the Finance Charge block in the "Federal Box" of the Bank's disclosure form and from the APR disclosures. However, the Bank separately disclosed and itemized the notary and legal fees on the Bank's disclosure form. (Stip. §&sec; 13-15).
   The Appendix consists of summaries of the 31 affected loans, including the disclosed amount financed, finance charge and APR, and the FDIC's calculated amount financed, finance charge and APR. (Supp. Stip § 1).
   In 26 of the 31 Affected loans, legal notary fees were paid to "* * * Office Account," and in five, they were paid to " * * *." These fees ranged from $55.00 to $151.00 per loan and were fixed by the attorney who rendered the legal services to perfect the security instrument evidencing the Bank's collateral. The Bank did not retain any portion of the disputed fees. (Stip. §&sec; 16-19).
   As of December 1, 1983, the 37,100 outstanding shares of the Bank's stock were widely distributed among 382 shareholders. The nine largest shareholders are the following:

STOCKHOLDER SHARES PERCENTAGE
* * * Bank Employee Stock 4438 12.0
Ownership Plan Trust
* * * Estate 2787 8.0
* * * 2742 7.4
* * * 2742 7.4
* * * 2235 6.0
* * * 2088 5.6
* * * 1592 4.3
* * * 936 2.5
* * * 881 2.4
(Supp. Stip. § 2).

   At all relevant times, * * * has been president of the Bank as well as a stockholder, director, and member of the Bank's Executive, Loan and Investment Committees. He has never served as chairman of the Board of Directors. Mr. * * * and his law firm have provided certain legal services to the Bank as one of its outside counsel. (Stip. § 21).
   At all relevant times, * * * has been a stockholder and director of the Bank, a member of the Bank's Loan Committee,


2 These do not include loans of which the Bank is an assignee or other transferee of retail installment contracts or other installment consumer paper.

3 Although the FDIC contends that such fees are prepaid finance charges and should have been included in APR and Finance Charge disclosures, because it presently lacks certain details of these fees, it does not seek reimbursement for any improper disclosure.
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and a named partner in the law firm of * * * which has performed certain legal services to the Bank as one of its outside counsel. At the time of the October 2, 1984, examination of the Bank by the * * * Office of Financial Institutions, * * * were on retainer to the Bank for $1,200 per month. (Stip. § 22).
   At all relevant times there have been approximately 15 members on the Bank's Board of Directors which is the governing entity responsible for setting the policies of the Bank, including its loan policy relating to the extension of consumer credit. The Board's April 17, 1985, Loan Policy set for the Bank states that preparation of chattel mortgages is a function of one licensed to practice law and that the Bank should not engage in such practice. That policy also expressly states that customers of the Bank shall use the attorney of their choice to prepare the requisite chattel mortgage instruments. However, the Bank requires the borrower-purchaser to provide the Bank with a valid chattel mortgage prepared by an attorney acceptable to the Bank. (Stip. §&sec; 23-25, 27).
   If the Bank does not remit the correct sums due to Mr. * * *'s law firm for the disputed legal and notary fees, the Bank is charged for the difference and is required to look to its customers for reimbursement. (Stip. § 26).
   The disputed legal and notary fees were charged for the following services:
       (a) The preparation of chattel mortgages;
       (b) Correspondence to the Clerk of the Court for recordation, the Department of Public safety, etc.;
       (c) Preparation of affidavits of personal knowledge or non-use; and
       (d) Notarization of chattel mortgages. (Stip. § 28).
   By letter dated March 29, 1984, the FDIC advised the Bank that "reimbursements are required" and that it "intends to seek the reimbursements required by § 108 of the amended Truth in Lending Act." By letters dated September 13, 1984, and October 16, 1984, the Bank requested of the FDIC relief from reimbursement pursuant to § 108(c)(2) of the amended Truth in Lending Act, 15 U.S.C. § 1607(2). On June 12, 1985, the Board of Review of the FDIC, acting under delegated authority from the Board of Directors of the FDIC, denied the Bank's request for relief. The Bank has not made reimbursement to the customers affected by the alleged violations because it contends that it has not violated the amended Truth in Lending Act. (Stip. §&sec; 7-8).
   The Bank continues to exclude the disputed notary and legal fees from the Finance Charge block in the "Federal Box" of the Bank's disclosure form and from the APR disclosures when it extends consumer credit other than open-ended credit (12 C.F.R. § 226.2(a)(12)). (Stip. § 9).

Discussion

   To determine the appropriate treatment of costs incurred by the borrower in providing the Bank with a valid chattel mortgage, the overall purpose of the Truth in Lending Act4 must be considered.

   [.1] At the time of enactment, the general legislative intent of the Truth in Lending Act was to strengthen competition among financial institutions and other entities extending consumer credit by promoting informed use of credit. By requiring that all information necessary to compare the terms and cost of credit options offered be made available to consumers, Congress intended to enable them to make meaningful choices from among competing credit terms. 15 U.S.C. § 1601. Commentators have noted that Congress was also concerned about creditors deceiving or deliberately confusing borrowers with respect to credit terms. Their hope was that required disclosure of credit terms would minimize such abuse. See, e.g., Beardsley, Truth In Lending Act: A Summary of Consumer Remedies, 22 S.D.L. Rev. 332 (1977).
   The statute gave the Federal Reserve Board authority to set up a regulatory framework for meaningful disclosure and informed comparison of credit terms. Regulation Z, codified at 12 C.F.R. 226 et seq., is the result of the Reserve Board's efforts.

   [.2] The concept of a "finance charge" is an essential component of the legislative and regulatory Truth in Lending scheme of disclosure, for it is the finance charge that states the actual cost of credit. The finance


4 Consumer Credit Protection Act, Title I, 15 U.S.C. §&sec; 1601-1665 (as amended) (1985).
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charge is also used to calculate the annual percentage rate —another important consideration for the borrower. Accurate disclosure of the finance charge, then, is the linchpin of the Act. To that end, 15 U.S.C. § 1605(a) defines the finance charge as follows:
       (a) Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The finance charge does not include charges of a type payable in a comparable cash transaction.
   The remainder of § 1605(a) and subsections (b) and (c) (See infra, p. 10) elaborates upon specific charges that fall into the category of finance charges. Items exempted from disclosure as part of the finance charges are found in §&sec; 1605(d) and (e) (See infra, pp. 11-12).
   The definition of the term finance charge is reiterated in Regulation Z, 12 C.F.R. § 226.4. This section also includes more detailed examples of finance charges and a more complete list of charges excluded from the category of finance charge. See 12 C.F.R. § 226.4(b) and (c).
   Whether the legal and notary fees in this case fall within the definition or come within one or more of the noted exceptions is a matter of statutory construction since the particular fees at issue are not specifically mentioned in either the Act or the Regulations.5
   The Bank contends that the fee was properly omitted from the Finance Charge portion of the disclosure form because the fee does not come within the statutory definition. Specifically, the Bank argues that since the chattel mortgages were required by * * * law, the disputed fees were set and retained by the lawyers who drafted them and who were selected by the borrowers. Therefore, the Bank posits that the fees were imposed by the lawyers, and since it neither directly nor indirectly imposed the fee itself, the fee does not fall within the statutory definition.
   While it is true that the actual amount of each borrower's fee is set by the attorney retained to prepare the mortgage, and that the laws of the State of * * * require a bank to have a valid chattel mortgage before it may extend credit for an automobile, it does not follow that the onus is on the borrower to provide and pay for the mortgage documents. Nor does it follow that the documents must be drawn by any attorney, let alone an attorney acceptable to the Bank. It was the Bank rather than any statute or regulation that placed the burden of providing and paying for the chattel mortgage on the borrower. It was also the Bank that chose to base the validity of a mortgage on its requirement that the documents be drafted by an "acceptable" attorney. * * * law does not foreclose the Bank, itself, from providing a valid chattel mortgage to perfect its security interest, nor does it foreclose the borrower from minimizing the economic cost of any requirement of providing a valid chattel mortgage. To the extent that the fees charged by lawyers "acceptable" to the Bank exceed (1) those charged by other lawyers whose fees for drafting a valid chattel mortgage are lower, and (2) the cost of purchasing a blank form of a valid chattel mortgage to be filled in by the borrower, the Bank has imposed on the borrower an avoidable economic cost. And it is this imposition of the cost that satisfies the statutory requirement.
   The Bank next challenges the FDIC's contention that since the disputed fees are not imposed "but/for" the extension of credit, it necessarily follows they must be disclosed as part of the finance charge. The FDIC rests its contention not only on the definition in the statute which states that "[t]he finance charge does not include charges of a type payable in a comparable cash transaction," 15 U.S.C. § 1605(a), and the comparable language found in Regulation Z, 12 C.F.R. § 226.4(a), but also on the interpretation given this language by commentators, courts and the Federal Reserve Board itself in its Official Staff Commentary for § 226.4(a).
   The Federal Reserve Board (FRB) Official Staff Commentary suggests use of the following test to determine whether a particular charge constitutes a finance charge:

5 Although some court cases interpreting the aforementioned provisions of Regulation Z were litigated prior to revision of the regulation in 1982, reliance on their rationale is still appropriate since the particular sections which affect determination of the finance charge do not differ significantly from the earlier version.
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       1. Charges in comparable cash transactions. Charges imposed uniformly in cash and credit transactions are not finance charges. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question with a similar cash transaction. A creditor financing the sale of property or services may compare charges with those payable in a similar cash transaction by the seller of the property or service. FRB Official Staff Commentary for 12 C.F.R. § 226.4(a).
   According to this interpretation, the disputed fees fall within the finance charge since the costs incurred in providing the documentation for a chattel mortgage are not encountered in a similar cash transaction.
   An analogous test is advanced by Professor Jonathan Landers. In his article, Determining the Finance Charge Under the Truth In Lending Act, 1977 Am. B. Found. Research J. 45 (1977), Landers concludes that the language of the statute should be construed as follows:
       In defining finance charge to include any charge imposed upon the consumer directly or indirectly as an "incident" to the extension of credit, Congress started with the proposition that all additional charges that in any way related to the credit-gaining aspects of the transaction were part of the finance charge. While the term "incident" could be read broadly to include all charges that were part of the same transaction or occurrence as the grant of credit, such a reading is overly broad in the context of a credit cost disclosure law. While this definition causes some uncertainties in connection with charges for tied-in services, it undoubtedly applies to charges that inhere in the loan transaction. Indeed, Congress appears to have adopted a virtual "total cost of credit" approach to such charges. Thus, if the particular charge would not be imposed "but for" the extension of credit, it is part of the finance charge. That is, if there is no possible way that a cash customer would pay the charge, then it is part of the finance charge. Indeed, such an interpretation finds support in the very limited exclusion for certain filing fees or insurance in lieu of filing fees —this is the only departure from a total cost of credit approach for charges that inhere in the credit transaction.6
   In Landers' view, any charge that would not be imposed in a comparable cash transaction, including compensation to the lender both for the use of the funds and for the risk of non-payment, is a part of the finance charge. Landers at 58. Indeed, he would require that any such charge not specifically excepted by his definition be disclosed as part of the finance charge. According to Landers, since there is no need for a chattel mortgage in the case of a cash sale of an automobile, the disputed fee should be disclosed as part of the finance charge. In Frazier v. Center Motors, Inc., 418 A2d 1018 (1980), the District of Columbia Court of Appeals cites Professor Landers' interpretation in reaching the conclusion that "[I]ncluded [in the finance charge] are all charges that would not be imposed but for the existence of a credit transaction." Frazier at 1023. However, the Court takes a less restrictive view of the articulated test stating that its conclusion that the fee at issue did constitute a finance charge also took into account "the broad array of charges which have been found to be `finance charges', coupled with the legislative history of the Act." Frazier at 1024.
   The Court's use of Landers' "but/for" test to provide initial guidance is preferable to use of the "but/for" test as an absolute determinant of whether a given charge falls within the category of "finance charge." Especially in light of the recent revision of the Regulation, which clarified and enumerated those fees excepted from the finance charge, it is essential to analyze more closely any fee that appears, under the "but/for" test, to fall within the definition of a finance charge. This closer look must be taken not only with respect to similarities between the disputed fee and others previously construed as finance charges (as suggested by Frazier), but also with respect to those charges specifically excepted from the definition of what constitutes a finance charge. This more thorough analysis must also take into account the policies underlying the dis-

6 Landers, Determining the Finance Charge Under the Truth In Lending Act, 1977 Am. B. Found Research J. 45, 57-58 (1977) (footnotes omitted).
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closure provisions of the statute and regulations.
   Section 1605(a) of the Act lists the following as examples of charges which should be included in the finance charge:
       (1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges.
       (2) Service or carrying charge.
       (3) Loan fee, finder's fee, or similar charge.
       (4) Fee for an investigation or credit report.
       (5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss.
   Sections 1605(b) and (c) deal with the inclusion of insurance premiums in the finance charge. Section 1605(b) states that credit life, health and accident insurance premiums are to be included in the finance charge unless coverage is not a factor taken into account prior to extension of credit, this fact is clearly disclosed in writing, and the borrower, after the above disclosure, as well as disclosure of the "policy cost," affirms in writing a desire to purchase the insurance.
   Section 1605(c) provides similar requirements for the exclusion of loss or damage and liability insurance premiums from the finance charge, stating that these premiums are included in the finance charge unless the creditor furnishes the borrower with a written statement disclosing the cost of the insurance and the fact that borrower may obtain the insurance from a source other than the creditor.
   Regulation Z, 12 C.F.R. § 226.4(b), includes the following in its list of examples of charges that constitute finance charges:
       (2) ...transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.
       (3) Points ... assumption fees ... and similar charges.
       (4) Appraisal, investigation, and credit report fees.

    * * *

       (6) Charges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation.
       (7) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction.
       (8) Premiums or other charges for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, written in connection with a credit transaction.
       (9) Discounts for the purpose of inducing payment by a means other than the use of credit.

   [.3] Each of the items listed meets the requirements of the "but/for" test described earlier, and since each is incurred only in credit transactions, disclosure of these charges not only promotes comparison among lenders but also facilitates the choice between financing the purchase or paying cash.
   These examples of finance charges have an additional common factor in that while the borrower bears the financial burden for each of the charges listed, it is the lender who receives the benefits. For example, fees imposed for appraisals, credit reports and insurance, though paid by the consumer benefit the lender since the underlying products are essential to the safe and sound extension of credit and reduce the risk of loss or nonperformance of the loan.
   Analysis of the charges delineated as exclusions from the finance charge is more complex. The Act contains the following exceptions:
       (d) (1) Fees and charges prescribed by law which actually are or will be paid to public officials for determining the existence of or for perfecting or releasing or satisfying any security related to the credit transaction ("Official Fees Exception"; also in Regulation Z, 12 C.F.R. § 226.4(e)(1)).
       (2) The premium payable for any insurance in lieu of perfecting any security interest otherwise required by the creditor in connection with the transaction, if the premium does not exceed the fees and charges prescribed in paragraph (1)
    {{4-1-90 p.A-1039}}which would otherwise be payable ("Insurance Exception"; also in Regulation Z, 12 C.F.R. § 226.4(e)(2)).
       (e) The following items, when charged in connection with any extension of credit secured by an interest in real property, shall not be included in the computation of the finance charge with respect to that transaction:
       (1) Fees or premiums for title examination, title insurance, or similar purposes.
       (2) Fees for preparation of a deed, settlement statement, or other documents.
       (3) Escrows for future payments of taxes and insurance.
       (4) Fees for notarizing deeds and other documents.
       (5) Appraisal fees.
       (6) Credit reports.
       ("Real Estate Exception"; also in Regulation Z, 12 C.F.R. 226.4(c)(7)). 15 U.S.C. § 1605(d) and (e).
   Regulation Z expands the list to include the following:
       (1) Application fees charged to all applicants for credit, whether or not credit is actually extended ("Application Fee Exception").
       (2) Charges for actual unanticipated late payment, for exceeding a credit limit or for delinquency, default, or a similar occurrence ("Penalty Exception").
       (3) Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing ("Overdraft Exception").
       (4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis ("Credit Plan Exception").
       (5) Seller's points.
       (6) Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit ("Forfeited Interest Exception"). 12 C.F.R. § 226.4(c).
   All of the exceptions fall into one of three categories. The first includes those fees for services which benefit both the borrower and the lender. For example, examination of title to real estate and preparation of a deed are necessary not only to provide the lender with security for the payment of the debt, but also to insure that the borrower receives good and marketable title to the property. The second category includes charges incurred, if at all, at the discretion of the borrower for further extensions of credit. Penalty and overdraft exceptions fall into this group. The final category is comprised of uniform charges for services provided to customers regardless of whether credit is ultimately approved or whether an approved credit line is actually drawn upon, and charges uniformly imposed on all credit transactions but which do not affect the borrower's choice of credit terms. Yearly fees for credit cards and the official fees exceptions are examples which are included in this category.
   When examined in light of the policies of the Act, the fees at issue fit clearly into the group of charges that must be disclosed as finance charges rather than into the exceptions. Certainly the attorneys' fees for the chattel mortgage would not be incurred but for the extension of credit, since a similar cash sale would obviate the need for any security interest. Furthermore, the fees do not fall within any class entitled to exception from the definition of "finance charge." First, the benefit of a chattel mortgage runs only to the lender since its sole purpose is to create a lien upon the property as security for the payment of the note. Second, the cost is unilaterally imposed on the borrower, without regard to the provision of additional credit or services as a quid pro quo. Finally, it is a charge imposed only on customers who actually receive the benefit of an extension of credit and, except for the five dollars authorized by * * * law for reasonable notarial fees, is set and charged not uniformly, but rather according to the individual fee schedule of whichever attorney, if any, is engaged to draft the chattel mortgage.7

7 In view of the conclusion that to the extent the fees exceed the five dollar notary fee, they must be included in the finance charge and APR disclosures, I do not reach two arguments raised by the FDIC, namely, (1) that the attorneys who draft the chattel mortgage are not "public officials" within the meaning of the Act, and (2) that * * * and * * * (Continued)

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   Since I conclude that the disputed fees should have been disclosed as part of the finance charge and the APR, the only issue remaining is whether reimbursement of the improperly disclosed amounts is the appropriate remedy.
   The FDIC maintains that not only is reimbursement authorized, but, in fact, it is statutorily mandated. This contention is based on the administrative enforcement provisions of the Truth in Lending Act (15 U.S.C. § 1607) which states, in pertinent part, that where the true finance charge or APR exceeds the disclosed finance charge or APR by more than a specified tolerance:

       (2) Each agency shall require such an adjustment [to the account of the borrower] when it determines that such disclosure error resulted from (A) a clear and consistent pattern or practice of violations, (B) gross negligence, or (C) a willful violation which was intended to mislead the person to whom the credit was extended (emphasis added).
   The Bank asserts that reimbursement is an inappropriate remedy in this matter because its actions were conducted in good faith and were based upon what was believed to be a reasonable interpretation of the Truth in Lending Act and Regulation Z. It further contends that since the fee was separately disclosed and itemized on the disclosure form, borrowers were adequately informed of the fee. Finally, the Bank points out that because it was the attorneys and not the Bank who retained the disputed fees, requiring the Bank to reimburse money it never received would result in a windfall to the customers and a penalty to the Bank. The Bank maintains that any remedy granted should be prospective only and should not include reimbursement.
   The Bank's arguments are unpersuasive and ignore the plain language of the statute. In the first place, the mere fact that a fee is not included at all in the "finance charge" will affect computation of the annual percentage rate, with the result that the disclosed APR will be lower than the actual APR. Consumers who choose credit terms based solely on the disclosed APR will ordinarily choose the lower APR, not realizing that their total costs will be higher than those associated with what appears to be a higher rate. Even where such "hidden finance charges" are, in some fashion, disclosed in the paper work, the consumer has great difficulty in comparison shopping. Where, as here, the attorney fees are aggregated with notary fees and disclosed simply as "VDD", "Attorney", "Atty.", or "notary" or disclosed by amount only and without separate itemization or description (Stip. attachments), that task is virtually impossible. Second, the assertion that the Bank did not retain any of the disputed fees ignores the fact that that not only did the chattel mortgages, drawn by attorneys acceptable to the Bank, benefit the Bank, but also their cost was inflated by the Bank's restrictions on the means and methods of their production. Finally, the argument that exclusion of the fees from the finance charge was based upon a good faith, reasonable interpretation of the Act and Regulation Z ignores the disjunctive construction of the statute. Neither gross negligence nor intent to mislead the borrower is necessary to invoke the requisite remedy. The existence of a pattern or practice of disclosure violations, in and of itself, is enough to trigger the remedial measure. In fact, Congress anticipated that the "pattern or practice of violations" criterion would form the most common basis for mandatory restitution orders.8 It also provided that the "bona fide error" defense to civil liability applied to "mechanical and computer errors, provided they are not the result of erroneous legal judgment as to the Act's requirement."9

   [.4] In the instant case, the Bank has stipulated that it has engaged in a pattern and practice of excluding the disputed fees from the finance charge and APR disclosures (Stip. §&sec; 34 and 35). Accordingly, restitution is the appropriate remedy.
   Having found and concluded that the Bank imposed the disputed fees upon its consumer borrowers as a condition of the extension of credit, that to the extent that the fees exceeded the five dollar notary fee authorized by * * * Law they should have been included within the finance charge and APR disclosures, that the failure to include the fees in such disclosures violates the amended Truth in Lending Act and revised Regulation Z, and that the viola-


7 Continued: control or set Bank policy. The former is an issue not joined by the pleadings; the stipulated facts cannot be distended to cover the latter.

8 S. Rept. No. 73, 96th Cong., 1st Sess. at 12 (1979).

9 Id. at 7.
{{4-1-90 p.A-1041}}tions as found constitute a pattern and practice of violations of the Act and Regulation, I recommend that the Board of Directors of the Federal Deposit Insurance Corporation issue the following:

ORDER

   IT IS ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from violating the Truth in Lending Act and Regulation Z and take AFFIRMATIVE ACTION as follows:
   1. Within 60 days from the effective date of this ORDER, the Bank shall conduct a file search of all consumer automobile loans which originated since October 1, 1982, in which the annual percentage rate and finance charge were understated and shall reimburse, in accordance with section 108(e) of the Truth in Lending Act (15 U.S.C. § 1607(e)), all affected customers. On or before the sixtieth day, the Bank shall submit a list to the * * * Regional Office of the FDIC of the customers reimbursed and the dollar amount of each reimbursement made.
   2. During the period this ORDER is in effect, the Bank shall not destroy any record within the scope of Section 226.26(a) of Regulation Z (12 C.F.R. § 226.26(a)).
   3. On the fifteenth day of the second month following the date of the issuance of this ORDER, the Bank shall furnish a written progress report to the Regional Director of the FDIC * * * Regional Office detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof.
   The effective date of this ORDER shall be ten (10) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of the ORDER shall be modified, terminated, suspended, or set aside by the FDIC.
   ORDERED this 21st day of October, 1986.
/s/ Alan W. Heifetz
Chief Administrative Law Judge
U.S. Department of Housing
and Urban Development
451 7th Street, S. W., #2156
Washington, D.C. 20410

CERTIFICATE OF SERVICE

   I hereby certify that copies of this INITIAL DECISION issued by ALAN W. HEIFETZ, Chief Administrative Law Judge, FDIC-86-42b, were sent to the following parties on this 21st day of October, 1986.
/s/ Helen L. Shepard

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