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Inactive Financial Institution Letters |
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FIL-19-97
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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
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:
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
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:
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.
Attachments
(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
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.
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
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:
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
Violations
Involving
the
Improper
Disclosure
of
Credit
Life,
Accident,
Health,
or
Loss
of
Income
Insurance
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
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