Home > News & Events > Financial Institution Letters




Financial Institution Letters


Truth in Lending Restitution

FIL-19-97
March 10, 1997

 

TO: CHIEF EXECUTIVE OFFICER AND COMPLIANCE OFFICER
SUBJECT: Requests for Relief from Reimbursement under the Truth in Lending Act

Historically, the FDIC has treated a request made by non-member banks seeking relief from making reimbursement under the Truth in Lending Act, 15 U.S.C. 1601 et seq. (TILA), as an application under its regulations. The Board has delegated authority to the Director of the Division of Compliance and Consumer Affairs (DCA) to grant or deny these requests. The Director has further delegated this authority to the Regional Directors (DCA) but only to deny requests where the amount of reimbursement totals less than $25,000.

The TILA grants the enforcement agencies very little discretion to grant relief from reimbursement for violations. Because of this limited discretion, the FDIC has not been able to grant relief in many instances. From 1991 through 1996, a total of 63 requests were reviewed at the Washington level and only one of these requests was granted. In that one instance, it was determined that the cited violation was, in fact, not a violation of Regulation Z.

Should a nonmember bank wish to pursue a request for relief, even though there is a strong likelihood that a request will not be granted, the request will be processed within established time frames (see FIL-26-96, "Regulatory Responsiveness," dated May 6, 1996, concerning application processing time lines):

    Requests that can be processed under delegated authority by the Regional Director and Regional Counsel must be completed within 60 days after receipt unless the institution has agreed in writing to an extension of time to make the determination.

    Requests requiring action by the Washington Office will be referred by the Regional Office to the Washington Office within 45 days of receipt. A decision will be made within 45 days of receipt in Washington.

Legal Background: Section 108(e) of the TILA, which governs enforcement of TILA, provides a very specific framework for requiring agency action on restitution. Once the FDIC determines that a disclosure error involving an inaccurate APR or finance charge has occurred, and that the error has resulted from "gross negligence," or a "clear and consistent pattern or practice of violations," the agency shall require an adjustment unless one of four stated exceptions applies, in which case the agency need not require an adjustment. If the exceptions apply, or in cases of similar disclosure errors, an agency may require an adjustment.

The use of the terms "shall require an adjustment," "need not require an adjustment" and "may require an adjustment" within the same section of the statute suggests that Congress intended the term "shall require" to be mandatory. The Congress used the word must, indicating the compulsory nature of its direction that an agency enforce the TILA with regard to the specific kinds of violations enumerated, as contrasted with the agency's discretion to order restitution in other situations:

    "Where the violation resulted from a pattern or practice of violations, gross negligence, or a willful violation intended to mislead, an agency must, subject to the restrictions discussed below, order restitution to the consumer designed to assure that the consumer pays no more than the lower of the finance charge or annual percentage rate actually disclosed.... In the case of violations not falling under any of the above criteria, each agency may in its discretion order restitution." Id. at 12; accord verbatim, S.Rep. No. 368, 96th Cong., 1st Sess. 26 (1979).

There are four instances where the FDIC has discretion to waive reimbursement. Three of these exceptions are straightforward and are fact specific. It would be unusual to find a bank which could successfully assert one of these exceptions as a defense, since it is unlikely that restitution would have been ordered in the first place as FDIC examiners carefully evaluate whether any of the exceptions exist before requesting that a bank make restitution.

The first three exceptions are where:

1. The error involves a fee or charge that would otherwise be excludable in computing the finance charge;

2. The error involved a disclosed amount which was 10 percent or less of the amount that should have been disclosed and either the annual percentage rate (APR) or finance charge was disclosed correctly; or

3. The error involved a total failure to disclose either the APR or finance charge.

The fourth exception is the one most frequently cited by an institution in requesting relief. It is the one that is most difficult to meet since it contains four elements, all four of which must be met for the exception to apply. The conditions are that:

    the error resulted from a unique circumstance,

    the disclosure violations are clearly technical and non- substantive,

    do not adversely affect information provided to the consumer, and

    have not misled or otherwise deceived the consumer.

The legislative history of TILA does not define the term "unique circumstance"; however, the FDIC considers the term "unique" to have the traditional meaning, including "unusual," "atypical," and "infrequent." Where violations involving the finance charge and APR are concerned, the requirement that the error be "clearly technical and nonsubstantive" generally cannot be met. Technical and nonsubstantive violations do not include those which could affect the outcome of a borrower's decision in credit shopping. See S. Rep. No. 368, 96th Cong., 1st Sess. 16-17 (1979). Congress intended the "technical and non-substantive" exception to be construed very narrowly for use in such situations as clerical or computer errors.

Similarly, where there is an understatement of the finance charge or APR, it is unlikely that there will be "no adverse effect on information provided to the consumer" and that the error would not have "misled or otherwise deceived the consumer." Thus, it is extremely rare that the conditions contained in the fourth exception are ever met. For example, some recent requests by institutions seeking relief from having to make reimbursement have included some of the following reasons as a defense that the FDIC determined to be unacceptable:

    Consumers did not pay any additional amount because of inaccurate disclosures

    Impact on the institution's reputation in its community

    Size of the institution

    Consumers signed the credit life insurance application but did not affirmatively indicate a desire to purchase the insurance

    Provider of form/software purchased by institution gave erroneous advice

    Consumers were given new disclosures but were not provided monetary reimbursement

    Examiners did not cite violation at previous examination

Procedures for Making a Request: If an institution decides to make a request for relief from reimbursement, it should do so within 30 days of receipt of the report of examination containing the request to conduct a file search and make restitution to affected customers. The request should be directed to the attention of the Regional Director (DCA) and must address the statutory factors contained in Section 108(e) of the TILA. The Regional Director will notify the institution of the receipt of the request and that pending a final determination, the institution is not required to complete corrective action on the restitution request.

When restitution must be made, the FDIC expects the institution to carry out the reimbursement to the customer expeditiously according to the Joint Statement of Policy on Restitution adopted on July 11, 1980. (A copy of the Statement is attached.) When lump sum payments to consumers are required to be made, they must be provided to the consumer either by official check or a deposit into an existing unrestricted consumer asset account, such as an unrestricted savings, checking or NOW account. If, however, the loan is delinquent, in default, or has been charged off, the creditor may apply all or part of the reimbursement to the amount past due, if permissible under law.

There have been instances where institution personnel have inappropriately requested consumers to return reimbursement checks to the institution. This, and any like practice, is not permissible and the FDIC views any such attempts to prevent unrestricted access by the consumer to reimbursement proceeds as a serious breach of fiduciary duty as well as a violation of law and regulation. These violations will be subject to enforcement actions, including but not limited to, assessment of civil money penalties, orders to cease and desist, and possible removal/prohibition orders.

Questions about the procedures for requesting relief from reimbursement may be directed to any of the DCA Review Examiners in Washington or the Regional Offices listed in Attachment 2.


Carmen J. Sullivan
Director

Attachments (2)
   Attachment 1
   Attachment 2

Distribution: FDIC-Supervised Banks (Commercial and Savings)

Note: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, N.W., Room 100, Washington, D.C. 20434 ((703) 562-2200 or 800-276-6003).


ATTACHMENT 1

ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING ACT -

RESTITUTION

Joint Statement of Policy

The Depository Institutions Deregulation and Monetary Control Act of 1980 was enacted on March 31, 1980. The Truth in Lending Simplification and Reform Act amends the Truth in Lending Act, 15 U.S.C. 1601, et seq. effective March 31, 1980 and authorized the federal Truth in Lending enforcement agencies to order creditors to make monetary and other adjustments to consumers' accounts when an annual percentage rate (APR) or finance charge was inaccurately disclosed. It generally requires the agencies to order restitution when such disclosure errors resulted from a clear and consistent pattern or practice of violations, gross negligence, or a willful violation that was intended to mislead the person to whom the credit was extended. However, the Act does not preclude the agencies from ordering restitution for isolated disclosure errors.

This policy guide summarizes and explains the restitution provisions of the Truth in Lending Act, as amended. The material also explains corrective actions the financial regulatory agencies believe will be appropriate and generally intend to take in those situations in which the Act gives them the authority to perform equitable remedial action.

The agencies anticipate that most financial institutions will voluntarily comply with the restitution provisions of Section 608 as part of the normal regulatory process. If a creditor does not voluntarily act to correct violations, the agencies will use their cease and desist authority to require correction pursuant to: 15 U.S.C. 1607 and 12 U.S.C. 1818(b) in the cases of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision; and 15 U.S.C. 1607 and 12 U.S.C. 1786(e)(1) in the case of the National Credit Union Administration.

Restitution Provisions

Definitions

Except as provided below, all definitions are those found in the Truth in Lending Act (Act) and Regulation Z, 12 CFR Part 226.

  1. "Current examination" - the most recent examination begun on or after March 31, 1980, in which compliance with Regulation Z was reviewed.

  2. "Irregular Mortgage Transaction" means a loan secured by real estate for which the annual percentage rate (APR) cannot be calculated using Volume I of the Federal Reserve System's Truth in Lending, Regulation Z, Annual Percentage Rate Tables.

  3. "Lump sum method" means a method of reimbursement in which a cash payment equal to the total adjustment will be made to a consumer.

  4. "Lump sum/payment reduction method" means a method of reimbursement in which the total adjustment to a consumer will be made in two stages:

    1. A cash payment that fully adjusts the consumer's account up to the time of the cash payment; and,

    2. A reduction of the remaining payment amounts on the loan.

  5. "Understated APR" means:

    1. For other than irregular mortgage transactions, a disclosed APR, which, when increased by one-quarter of one percentage point, is less than the actual APR calculated under the Act, without taking into account the tolerance provided by section 107(c) of that Act.

    2. For irregular mortgage transactions consummated before April 1, 1981, a disclosed APR which is less than the actual APR calculated under section 107(c) of the Act, including a one-half of one percentage point tolerance.

    3. For irregular mortgage transactions consummated after March 31, 1981, but before April 1, 1982, a disclosed APR which, when increased by one- quarter of one percentage point (instead of one-half of one percentage point), is less than the actual APR calculated under the Act, without taking into account the tolerance provided by section 107(c) of that Act.

    4. For all loans consummated after March 31, 1982 (including irregular mortgage transactions), which have an amortization of 10 years or less, a disclosed APR which, when increased by one-quarter of one percentage point, is less than the actual APR calculated under the Act, without taking into account the tolerance provided by section 107(c) of the Act.

    5. For all loans consummated after March 31, 1982 (including irregular mortgage transactions), which have an amortization schedule of more than 10 years, a disclosed APR which is less than the actual APR, including the tolerance contained in section 107(c).

    6. For all loans determined to contain a willful violation intended to mislead a consumer, a disclosed APR which is less than the actual APR including the tolerance contained in section 107(c).

  6. "Understated finance charge" - A disclosed finance charge which, when increased by the greater of the finance charge dollar tolerance specified in the Act and Regulation Z or a dollar tolerance that is generated by the corresponding APR reimbursement tolerance, is less than the finance charge calculated under the Act.

De Minimis Rule

If the amount of adjustment on an account is less than $1.00, no restitution will be ordered. However, the agencies may require a creditor to make any adjustments of less than $1.00 by paying into the United States Treasury, if more than one year has elapsed since the date of the violation.

Corrective Action Period

  1. Open-end credit transactions will be subject to an adjustment if the violation occurred within the two-year period preceding the date of the current examination.

  2. Closed-end credit transactions will be subject to an adjustment if the violation resulted from a clear and consistent pattern or practice or gross negligence where:

    1. There is an understated APR on a loan which originated between January 1, 1977 and March 31, 1980.

    2. There is an understated APR or understated finance charge, and the practice giving rise to the violation is identified during a current examination. Loans containing the violation that were consummated since the date of the immediately preceding examination are subject to an adjustment.

    3. There is an understated APR or understated finance charge, the practice giving rise to the violation was identified during the prior examination and the practice is not corrected by the date of the current examination. Loans containing the violation which were consummated since the creditor was first notified in writing of the violation are subject to an adjustment. (Prior examinations include any examinations conducted since July 1, 1969).

  3. Each closed-end credit transaction containing a willful violation intended to mislead the consumer consummated since July 1, 1969 is subject to an adjustment.

  4. For terminated loans subject to 2 above, an adjustment will not be ordered if the violation occurred in a transaction consummated more than two years prior to the date of the current examination.

Calculating the Adjustment Consumers will not be required to pay any amount in excess of the finance charge or dollar equivalent of the APR actually disclosed on transactions involving:

  1. Understated APR violations on transactions consummated between January 1, 1977 and March 31, 1980, or

  2. Willful violations that were intended to mislead the consumer.

On all other transactions, applicable tolerances provided in the definitions of understated APR and finance charge may be applied in calculating the amount of adjustment to the consumer's account.

Methods of Adjustment

The consumer's account will be adjusted using the lump sum method or the lump sum/payment reduction method, at the discretion of the creditor.

Violations Involving the Non-Disclosure of the APR or Finance Charge

  1. In cases where an APR was required to be disclosed but was not, the disclosed APR shall be considered to be the contract rate, if disclosed on the note or the Truth in Lending disclosure statement.

  2. In cases where an APR was required to be disclosed but was not, and no contract rate was disclosed, consumers will not be required to pay an amount greater than the actual APR reduced by one-quarter of one percentage point, in the case of first lien mortgage transactions, and by one percentage point in all other transactions.

  3. In cases where a finance charge was not disclosed, no adjustment will be ordered.

Violations Involving the Improper Disclosure of Credit Life, Accident, Health, or Loss of Income Insurance

  1. Through March 31, 1982:

    1. If the creditor has not disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, the insurance shall be treated as having been required and improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. The insurance will remain in effect for the remainder of its term.

    2. If the creditor has disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, but there is either no signed insurance option or no disclosure of the cost of the insurance, the creditor shall, unless a claim was made on the insurance policy and paid, be required to send a written notice to the affected consumer disclosing the cost of the insurance and notifying the consumer that the insurance is optional and may be canceled within 45 days to obtain a full refund of all premium charged. If the creditor receives no response from the consumer within 45 days, the insurance will remain in effect and no further corrective action, with respect to that loan, will be required.

    3. After March 31, 1982, the above violations of section 106(b) of the Act will be treated as APR or finance charge violations for adjustment purposes, as applicable.

Special Disclosures

Adjustments will not be required for violations involving the disclosures required by 106(c) and (d).

Obvious Errors

If an APR was disclosed correctly, but the finance charge required to be disclosed was understated, or if the finance charge was disclosed correctly, but the APR required to be disclosed was understated, no adjustment will be required if the error involved a disclosed value which was 10 percent or less of the amount that should have been disclosed.

Agency Discretion

Adjustments will not be required if the agency determines that the disclosure error resulted from any unique circumstances involving a clearly technical and nonsubstantive disclosure violation which did not adversely affect information provided to the consumer and which did not mislead or otherwise deceive the consumer.

Safety and Soundness

In connection with loans consummated before April 1, 1980, if full adjustments would have a significantly adverse impact upon the safety and soundness of the creditor, partial adjustments which do not have such an impact may be required. In connection with loans consummated after March 31, 1980, full adjustments will always be required. However, the affected creditor will be permitted to make the full adjustment in partial payments over an extended period to minimize the adverse impact to its safety and soundness.

Exemption from Restitution Orders

A creditor will not be subject to an order to make an adjustment if within 60 days after discovering a disclosure error, whether pursuant to a final written examination report or through the creditor's own procedures, the creditor notifies the person concerned of the error and adjusts the account to ensure that such person will not be required to pay a finance charge in excess of that actually disclosed or the dollar equivalent of the APR disclosed, whichever is lower. This 60-day period for correction of disclosure errors is unrelated to the provisions of the Civil Liability section of the Act.

By order of the Federal Financial Institutions Examination Council.


ATTACHMENT 2

REGIONAL OFFICE CONTACTS

ATLANTA - Ms. Lisa Drag, Review Examiner (404) 817-2525
BOSTON - Ms. Carol-Ane Woodard, Review Examiner (617) 320-1731
CHICAGO - Mr. Christopher Lombardo, Review Examiner (312) 382-7584
DALLAS - Mr. Wayne Perun, Review Examiner (214) 220-3357
KANSAS CITY - Ms. Janet Kincaid, Review Examiner (816) 234-8153
MEMPHIS - Mr. James Francomacaro, Review Examiner (901) 821-5231
NEW YORK - Mr. John Soffronoff, Review Examiner (212) 704-1405
SAN FRANCISCO - Ms. Carol Saccomonto, Review Examiner (415) 978-0475

WASHINGTON OFFICE CONTACTS

LEGAL - Ms. Andrea Winkler, Counsel, Compliance and Enforcement (202) 736-0762
DCA - Mr. Ken Baebel, Sr. Review Examiner, Compliance and Enforcement (202) 942-3086
Ms. Alice Beshara, Review Examiner, Compliance and Enforcement (202) 942-3087
Mr. Eric Kooistra, Review Examiner, Compliance and Enforcement (202) 942-3339

Last Updated 07/16/1999 communications@fdic.gov