Federal Deposit
Insurance Corporation

   The Board affirmed the Administrative Law Judge's (ALJ) finding that Stutsman County State Bank's failure to disclose, in the Initial Disclosure Statement, the total finance charges for consumer credit, violates Regulation Z. The Board ordered Respondent Bank to cease and desist from violations of the Truth in Lending Act and Regulation Z, and ordered Respondent to reimburse all affected consumers.

   For approximately two years, from 1994 to 1996, Respondent offered open-ended credit accounts, secured by the consumer's deposit account previously established. With the application for the credit account, the customer submitted a Processing Fee in an amount varying from $27.00 to $59.00, payable if the credit was approved. The Application Disclosure Statement provided with the application disclosed the Processing Fee and specified the amount of it; however the Initial Disclosure Statement provided to approved applicants with their new credit cards did not disclose or reference the Processing Fee.

   As a result of the Bank's 1996 Compliance Examination, the FDIC determined that the Bank's failure to disclose the Processing Fee as a finance charge, in the Initial Disclosure Statement, violated the Truth In Lending Act (TILA) and Regulation Z. On April 25, 1997 the FDIC issued a Notice of Charges and of Hearing and a proposed Cease and Desist Order under the FDI Act, seeking to halt violations of Regulation Z and require reimbursement to the TILA.

   Both the FDIC and Respondent filed for summary disposition and on October 15, 1998 the ALJ granted the FDIC's motion, issuing a Cease and Desist Order and ordering reimbursement to all consumers affected. The Compliance Examination estimated that 25,640 consumers were affected, for a total of {{6-99 p.2)} $1,470,938. That total was offset by the credit balances of consumers in default, reducing the ALJ ordered reimbursement to $567,819 for which the Bank was adequately capitalized under section 38 of the FDI Act.

   In November 1998 the Respondent Bank filed seven exceptions, six dealing with reimbursement. One exception filed by Respondent argued that their disclosures sufficiently met the requirements of Regulation Z. The Board agreed with the ALJ that the purpose of the TILA was to protect consumers and enable them to make meaningful choices among competing credit opportunities without undue confusion. The Board determined that disclosure of the Processing Fee in statements other than in the Initial Disclosure Statement, as one integrated document, were not sufficient to satisfy the TILA and Regulation Z.

   The Board adopted the ALJ's Findings of Fact and Conclusions of Law that found Respondent's disclosure violations constitutes a "clear and consistent pattern or practice of violations" under the TILA. However, the Board concluded that ordering reimbursement upon a finding of a clear and consistent pattern or practice of violations requires the Board to consider four exceptions listed in the Truth in Lending Act (15 U.S.C. 1607(e)(2)(A)—(D)). If any of the exceptions apply the adjustment, the FDIC is allowed to use its discretion to waive reimbursement. The four exceptions, allowing the FDIC discretion occur when:

   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 APR or finance charge was disclosed correctly;

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

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   4. The error resulted from a unique circumstance involving clearly technical and nonsubstantive disclosure violations that do not adversely affect information provided to the consumer and that have not misled or deceived the consumer.

   The Board agreed with the ALJ that the Respondent's failure to make required disclosures did not fall within any of the exceptions. Although the second exception is arguable, the Board determined that the Respondent's situation did not fall within the spirit and intent of the exception, which is to excuse obvious errors on the part of creditor, including those that are less likely to mislead consumers. In this case, even the most informed consumer credit shopper could be misled by the Respondent's practices.

   The Board further stated that even if the exceptions applied, they would use their discretion to impose the full reimbursement because of the serious and substantive disclosure errors. Before doing so, however, the Board had to consider whether the required reimbursement would impact the safety and soundness of the Bank. The Board is empowered to order a partial adjustment or a payout over an extended period of time if necessary for the safety of the Bank or to assure that the Bank is not undercapitalized nor would it significantly adversely impact the safety and soundness, based on the record of June 30, 1998. They ordered further examination of the records to determine the required reimbursement and a schedule determined and overseen by the Regional Office to assure that the Bank is not put in danger of becoming undercapitalized.

   The Board agreed with the FDIC Counsel's exception, that the Order should not include the reimbursement of a set dollar amount until the exact number of affected consumers and the amount of the total Processing Fees is known. The ALJ's order, with that amendment, was adopted on April 20, 1999.

   The FDIC released one adjudicated decision in April 1999. It can be found in Volume 1 of FDIC Enforcement Decisions and Orders.

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   The FDIC issued five consent orders in April 1999—one cease and desist order, three orders of removal and prohibition, and one call report penalty. They are listed below, by paragraph number, and can be found in Volume 2 of FDIC Enforcement Decisions and Orders.

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   Orders in the following dockets were terminated or modified in April 1999. These orders appear in Volume 2 of FDIC Enforcement Decisions and Orders.