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FDIC Enforcement Decisions and Orders |
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FDIC issued a cease and desist order to a bank that included a charge designated as a closing cost as a component of the amount financed in real estate and residential loans; did not itemize the closing cost; disclosed and included the cost of credit life insurance as a component of the amount financed instead of the finance charge; did not clearly and conspicuously disclose in writing to its customer that credit life insurance was not required; extended closed-end credit without specifically disclosing the actual number of payments and due dates; did not clearly disclose to its closed-end customers the terms and conditions of its prepayment penalty policy; failed to give borrowers notice of their right to rescind; denied loan applications without giving written notification to the denied applicants of the reasons; made federally related mortgage loans without using the uniform settlement statement; and failed to collect and retain documentation for loans. The FDIC also ordered the bank to reimburse affected customers.
[.1] Cease and Desist OrderFDIC Authority
[.2] Cease and Desist OrderAffirmative ActionReimbursement
[.3] Cease and Desist OrderDefensesCessation of Violation
In the Matter of* * * (INSURED
FINDINGS OF FACT
The Board adopts the Findings of Fact recommended by the Administrative Law Judge. Said Findings of Fact are as follows:
With one exception, the Board adopts as findings the Conclusions of Law recommended by the Administrative Law Judge. The Board believes that Proposed Conclusion of Law Number 3 (Recommended Decision, page 18) is not correct and it is not adopted. The Board adopts a different Conclusion of Law in lieu of the said Number 3 proposed by the Administrative Law Judge (also designated below as Number 3) and has slightly modified proposed Conclusion of Law Number 2. The said Conclusions of Law which the Board adopts are as follows:
[.2] 3. FDIC has the authority, under statute, to issue cease and desist orders requiring affirmative action, including reimbursement.
[.3] 4. Cessation of violations of law or regulations is not a defense to a cease and desist order.
The Board believes that the Administrative Law Judge's incorrect interpretation of the law with regard to the type of relief available to the FDIC in this proceeding caused the recommended order to be inappropriate in part. The Board concludes that affirmative action in connection with the admitted violations of Regulation Z in connection with credit life disclosures and Regulation B are appropriate, in addition to the affirmative action recommended by the Administrative Law Judge. Further, the Board believes that it is appropriate that the Bank designate an employee as compliance officer to bring the Bank in full compliance with the laws at issue in this case (the Board notes that the person so designated would normally not be expected to spend full-time on this assignment) and to make appropriate reports to the FDIC's Regional Director. Accordingly,
BEFORE ADMINISTRATIVE LAW
This case is before the undersigned upon Notice Of Charges and Of Hearing, duly issued by the Federal Deposit Insurance
{{4-1-90 p.A-102}}Corporation, (hereinafter referred to as the Corporation), under the provisions of Section 8(b)(1) of the Federal Deposit Insurance Act and pursuant to the Corporation's Rules Of Practice and Procedures.
VIOLATION OF REGULATION Z IN CONNECTION WITH REAL ESTATE LOANS
The Corporation alleges that the Bank is in violation of Sections 226.1(a), 226.5(b)(1), 226.8(b)(2), and 226.8(d)(3) in connection with its handling of real estate loans, for failure to properly determine and disclose the finance charge and for failure to properly determine and disclose the annual percentage rate.
VIOLATION OF REGULATION Z IN CONNECTION WITH CLOSED END CREDIT LOANS AND INSURANCE PREMIUM CHARGES
The Corporation alleges that the Bank violated Sections 226.4(a), 226.5(b)(1), 226.8(b)(2), and 226.8(d)(3), of Regulation Z, by failing to properly determine and disclose the amount financed and by failing to properly determine and disclose the annual percentage rate, by reason of the fact that it did not include as part of the finance charge, charges or premiums for insurance, when it was not clearly and conspicuously disclosed in writing to the customer that the
VIOLATION OF SECTION 226.8(b)(3)
The Corporation alleges that the Bank violated Section 226.8(b)(3) of Regulation Z, by failing to properly disclose the number of payments and due dates scheduled to repay the indebtedness. Section 226.8(b)(3) requires that, in a closed and credit transaction, the Bank has the obligation to disclose to the borrower the number, amount, and due dates or periods of payments scheduled to repay the indebtedness. The evidence in this regard comes from a random and judgmental sampling of loan transactions. It establishes that, in a substantial number of closed and credit loan transactions, the Bank failed to specifically disclose by setting them out, the actual number of payments and due dates scheduled to repay the loan. This is a violation of the Section, and a Cease and Desist order is therefore appropriate. However, a review of the disclosure statements and loan transaction files admitted into evidence, establishes that in almost every case, although the exact number of payments and due dates were not specifically stated, any individual who can read, write, and do simple arithmetic, could, from the papers which he was given, determine with minimum effort the number of payments and due dates necessary and required to repay the loan. Under the circumstances, while there is a clear technical violation of Section 226.8(b)(3), there is clearly no failure, to disclose the required information to the borrower, to justify affirmative action requiring the bank to search its outstanding loans and make such complete and correct disclosure to the customer at this time.
VIOLATION OF SECTION 226.8(b)(5)
The Corporation alleges that the Bank violated section 226.8(b)(5), by failure to make a clear and complete disclosure concerning the security interest held or to be retained by the Bank in connection with loan transactions. Section 226.8(b)(5) requires that a description or identification of the type of security interest to be held by the bank, and a clear identification of the properties to which a security interest relates, be included in disclosure to the borrower. Section 5.1, page 7 of the Consumer Protection Handbook (Bank Exhibit 7) further amplifies that "clear identification" means merely an adequate description, so that the consumer knows which items of property are being given as collateral for the loan. Review of the exhibits offered in evi-
{{4-1-90 p.A-106}}dence to support this alleged violation, and the testimony of Examiner * * *, establish that with the exception of one loan transaction (* * *, et al), while the security interest may not have been as specifically and accurately described with words of art and precision as might be desired, the customer was given a clear enough identification so that he knew what items of property were being given as collateral for the loan. In this instance, therefore, no consistent or ongoing pattern of violation of section 226.8(b)(5) is shown and no Cease and Desist order is justified.
VIOLATION OF SECTION 226.8(b)(6)
The Corporation alleges that the Bank violated section 226.8(b)(6) of Regulation Z, by failing to disclose to its customers a description of the penalty charge which it imposed for prepayment. This violation refers only to real estate loans. The evidence is established by a valid sampling of the Bank's real estate loans. It was the practice of the Bank to impose a penalty of 6 months interest if the loan was prepaid within the first 6 months, and to impose no penalty thereafter for prepayment. The evidence establishes that the disclosure made to customers consisted of the statement "No penalty after six months." This is clearly not a disclosure of the penalty charges that would be imposed for prepayment with an explanation of the method of computation and the conditions under which it might be imposed. A Cease and Desist order is clearly proper. The Corporation proposes an order requiring the Bank to review all extensions of closed end credit consummated since December 12, 1976, which are outstanding and where the customers did not receive proper and adequate disclosure required by section 226.8(b)(6). The order would then require the Bank to notify by letter, each customer who did not receive a proper disclosure and make the correct disclosure to the customer. The efficacy of such a requirement is not explained or supported by the Corporation. To require the Bank to notify, by letter, every customer who has a current outstanding account and did not receive such a proper and accurate disclosure, is meaningless if more than 6 months have passed since, after the passage of 6 months there is no prepayment penalty on the real estate loan transactions here in question. However, it is clear that the violation was material if in fact a customer who did not receive the explicit and clear disclosure required by section 226.8(b)(6), did prepay his note prior to the expiration of 6 months and paid the prepayment interest penalty without accurate and precise knowledge of such penalty as required by the disclosure provisions, at the time of the loan transaction. Therefore, it would appear appropriate in this case that an order be entered requiring the Bank to review all extensions of closed end credit consummated since December 12, 1976, where the customers did not receive proper and accurate disclosures as required by section 226.8(b)(6). The Bank should further be required to notify, by letter, each of those customers listed who did not receive such disclosure, and who actually paid a prepayment penalty, that it had failed to make such a disclosure and what the correct disclosure should have been.
VIOLATION OF SECTION 226.9(b) OF
The Corporation alleges that the Bank violated section 226.9(b) of Regulation Z, by extending credit and retaining a security interest other than a first mortgage, in real property which was used by the customer as his principal residence, without giving the customer notice of right to rescind as required by section 226.9(b).
VIOLATION OF SECTION 615 OF THE
The Corporation alleges that the Bank violation Section 615 of the Fair Credit Reporting Act by denying credit or increasing the cost of credit to a customer, when that decision was based wholly or partly on information obtained from a person other than a consumer reporting agency, and failing to make the disclosures to the customer required by section 615. Section 615 requires that the nature of the information used shall be clearly disclosed to the customer. The only evidence to support this allegation is testimony of Examiner * * *, which is extremely vague, uncertain, completely undocumented, and based on an oral interview with one Bank officer. In any event, even Mr. * * * vague memory is that if this happened, it happened only once or very few times sometime in the past, and he was unable to affirm the date of such alleged violation. The only other evidence is that this happened once, 10 years ago. Under these circumstances, there is not substantial or material evidence to support a finding that the Bank violated section 615 of the Fair Credit Reporting Act.
VIOLATION OF SECTION 202.9 OF
The Corporation alleges that the Bank violated Section 202.9 of Regulation B, by failure to give the required written notice of adverse action to loan applicants. The evidence, including the testimony of the Bank's executive vice president, establishes that such notice was not being given and records of the same were not being kept as required by section 202.12 of Regulation B. An order should, therefore, be entered requiring the Bank to comply with these requirements. The Corporation also requests that the Bank be required to review all applications since June 12, 1978, on which adverse action was taken, and prepare a list of the applicants who were not provided proper written notification and send the notification to each such applicant. No equitable purpose would be served by such required affirmative action nor was any condition shown which should be remedied by the same at this late date. However, the Bank should be required to prepare a written form of ECOA notice which is to be used in all future adverse action notifications and such notice should be approved by the Regional Director.
VIOLATION OF SECTION 202.5(a) AND
The Corporation alleges that the Bank was in violation of sections 202.5(a) and 202.6 of Regulation B because it had a policy of inquiring into credit applicants' marital status, age, or source of income for the purpose of determining credit worthiness. The evidence establishes, without dispute, that this was the policy of the Bank as of December 12, 1978, and under its resolution with regard to the Equal Credit Opportunity Act passed at its board meeting of December 3, 1977. The Corporation asserts that the policy of making inquiries applied to any person applying for credit and would discourage reasonable persons from making or pursuing application for credit within the meaning of Regulation B. However, there is no evidence to all to support this contention. The evidence is that the Bank's resolution was a good faith attempt at compliance. The Corporation also requests an order requiring the Bank to prepare a list of applications where such improper inquiries were made or unlawful use of the same made, and in the case of applicants who had been discriminatorily rejected through the use of such information, there be refunded any fees, costs, etc. paid by them in conjunction with their applications, and to solicit new applications from such applicants. This order is more in the nature of effecting a remedy for such applicants rather than simple affirmative action to correct conditions resulting from noncompliance. Also, there is no evidence at all to support a finding that, while the Bank did make such inquiries that it actually engaged in any such discriminatory loan policy practices. The only evidence at all, in this regard, is the Bank's resolution passed on December 3, 1977, which provides that it shall not have any such discriminatory policies. Any
{{4-1-90 p.A-108}}requests for or use of such information appears to be within the limits set by sections 202.5 and 202.6. Therefore, this action requested by the Corporation is not in order.
VIOLATION OF SECTION 3500.7(f)
The Corporation alleges that the Bank violated section 3500.7(f) and 3500.8(a) of Regulation X, in that it made federally-related mortgage loans without making the disclosure and maintaining the records required by said section. The evidence establishes that this allegation is true, and a cease and desist order should be entered.
VIOLATION OF SECTION 338.4 OF
The Corporation alleges that the Bank violated Section 338.4 because it failed to collect and retain the information required by Section 338.4 on a fair housing log sheet as required by the section. The evidence establishes that the bank was making home loans, had an office located in a Standard Metropolitan Statistical Area, and had assets exceeding $10 million, and therefore, fell within the requirements of section 338.4. The evidence further establishes that the Bank was not maintaining a fair housing log sheet with complete information as required by section 338.4. Therefore, an order is appropriate to require the Bank to comply with the requirements of this section. It would also appear appropriate that the Bank should be required to compile and retain all data from July 3, 1978, as required by section 338.4 except that it will not be required to reconstruct data concerning `inquirers', and need only compile and retain such data as now exists in its files for applicants whose applications have been rejected by the Bank.
VIOLATION OF SECTION 408.052 OF
The Corporation alleges that the Bank was in violation of section 408.052 because it charged its residential real estate customers fees in excess of the maximum 1% allowed by the statute, and fees not permitted by the statute.
OTHER ORDERS REQUESTED BY
The Corporation has also requested that order be issued requiring the Bank to employ or designate a compliance officer to bring it into full compliance with the requirements of all law and regulations. The
{{4-1-90 p.A-109}}Corporation further requests an order requiring the Bank to prepare and furnish a written progress report to the Regional Director and the Commissioner of Finance of the State of * * * with regard to the actions taken to secure compliance with the order, and that such reports shall continue until the requirement is released by the Regional Director.
PROPOSED FINDINGS OF FACT
After careful consideration of all the evidence the undersigned proposes the following findings of fact:
The undersigned proposes the following conclusions of law:
In reviewing this case for determination of proposed order, the undersigned has taken into account the principles and rules of law set forth at the beginning of this decision. In addition, it is noted that the evidence establishes that the Bank did make good faith attempts to comply with the regulations and to cease violations found in the April 1978 bank examination, even though such attempts were not completely successful. There is no evidence to show any willful avoidance of the regulations or even gross neglect in failure to comply therewith. The evidence establishes that the general and usual practice, of the * * * Regional Office of the Corporation, is to hold a meeting with the Board of Directors of a bank, after an examination had disclosed violations, for the purpose of helping the bank understand the nature and extent of the violations and to come into compliance with the law and regulations. In the instant case, a brief meeting was held with the Bank directors on December 21, 1978, by a representative of the Regional Office, after the December 12, 1978, bank examination. The evidence establishes that that meeting dealt primarily with Mr. * * * method of billing the Bank for legal services in connection with closing costs on real estate loans. Mr. * * *'s memorandum of December 22, 1978, reveals little if any actual discussion of the Bank's noncompliance with various regulations. Mr. * * * compliance reports of December 12, 1978, were not forwarded to the Board of Directors of the Bank until March 9, 1979. Thereafter, although requested by the Bank, no meeting was held and no opportunity was given for the Bank to demonstrate whether it was or was not making a good
{{4-1-90 p.A-112}}faith attempt to come into compliance with the law and regulations and to cease further violations. Without further meeting or consultation with the Bank, and contrary to its usual practice and procedures, the Corporation issued its Notice of Charges and of Hearing on April 23, 1979. Much of the proposed affirmative action orders requested by the Corporation, although within its general jurisdiction and power, constitute more of a punitive action or penalty against the Bank, and/or affording and effecting a remedy for customers (in some instances beyond that which is afforded to them by specific sections of the Acts in question). Testimony of both the Bank officers and Corporation examiner establish that the Bank has made good faith attempts to come into compliance and has virtually ceased and desisted from violations found above. This is a small town bank, that has to exist in competition with much larger banks in the nearby metropolitan community of * * *. The effect of much of the affirmative action sought by the Corporation might well be to cause the Bank embarrassment, loss of faith by its customers, and potential customers, in its integrity at a banking institution, and thereby affect the soundness and financial solvency of the Bank. While this is not a reason for abstaining from a Cease and Desist Order, it is certainly a fact that must be taken into account in determining the total efficacy and reasonableness, applying all equitable principles and all factors above, in determining whether and what kind of affirmative action should be required. Having these principles and facts in mind, the undersigned proposes the following orders:
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Last Updated 6/6/2003 | legal@fdic.gov |