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Home > News & Events > Inactive Financial Institution Letters
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Inactive Financial Institution Letters |
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FIL-20-98
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The Federal Deposit Insurance Corporation (FDIC) is providing additional
guidance to bank management on how to prevent violations of the Truth in
Lending Act and its implementing regulation, Regulation Z. These violations
have the potential to expose an institution to civil liability and require
adjustments to the accounts of individual consumers.
Because of the statutory requirements of the Truth in Lending Act, the FDIC
(as well as the other federal banking agencies) has little supervisory
latitude to negotiate settlements involving reimbursements. See FIL-19-97,
dated March 10, 1997, "Requests for Relief from Reimbursement under the
Truth in Lending Act."
There are two distinct areas we would like to highlight where
examiners
have occasionally discovered reimbursable violations. The first
involves
the disclosure of credit life insurance when it is written in
connection
with a credit transaction. The second involves the incorrect usage
of
Appendix D in making disclosures for multiple advance construction
loans.
Credit Life Disclosures
A violation occurs when an institution fails to
provide required
disclosures on insurance policies written in
connection with credit
transactions. Some institutions incorrectly assume
that if insurance
is not categorized as "credit life"
insurance by state law, the disclosures
in §226.4(d) of Regulation Z do not apply.
The provisions of §226.4(d) apply to
the premiums for credit life, accident,
health, or loss-of-income insurance as well
as debt cancellation coverage.
If a term insurance policy is
written in connection with a credit
transaction and the institution is
the beneficiary of the policy
directly
(or indirectly through assignment by
the beneficiary), the product should
be treated as credit life. The
institution must then provide the
proper
disclosures to the consumer or it
must include the premium in
calculating
the finance charge.
Regulation Z requires that
the premium for insurance
written in connection
with a credit transaction be
included in the finance
charge unless
all three of the
following requirements are
met:
A number of
violations
of
§226.4(d)
requirements
have
occurred
because
the
institution
failed to
obtain the
customer's
affirmative
written
request
indicating
that the
insurance
coverage was
desired.
Having the
customer
complete an
application
to the
insurance
company for
the
insurance is
not a
substitute
for
obtaining
the
customer's
affirmative
request for
insurance.
At a
minimum, a
"yes"
or
"no"
box should
be checked
to indicate
the
customer's
request.
Violations
have
also been
cited
because the
institution
failed to
disclose the
amount of
the premium
for the
initial term
of the
insurance.
Multiple
Advance
Construction
Loans
In
interim
construction
financing
involving
multiple
advances,
Appendix
D
to
Regulation
Z
may
be
used
to
estimate
the
interest
portion
of
the
finance
charge
and
calculate
the
annual
percentage
rate
(APR).
Appendix
D
uses
an
approximation
based
on
the
premise
that
only
one-half
of
the
money
is
outstanding
for
100
percent
of
the
time.
Improper
use
of
Appendix
D
may
result
in
understated
APRs,
which,
if
outside
of
the
permissible
tolerances,
will
require
reimbursement
to
the
consumer.
In
some
interim
construction
financing,
inclusion
of
the
inspection
fees
within
the
title
preparation
or
title
insurance
costs
has
resulted
in
reimbursements
to
the
consumer
because
the
fees
were
not
identified
as
a
finance
charge.
The
Federal
Reserve
Board's
"Truth
in
Lending
Official
Staff
Commentary
to
Regulation
Z
§226.4(a)"
states
that
inspection
and
handling
fees
for
the
staged
disbursement
of
construction
loan
proceeds
are
to
be
considered
as
finance
charges.
Here
are
some
suggestions
to
assist
banks
in
avoiding
the
more
common
reimbursement
pitfalls
involving
the
requirements
of
§226.4(d)
and
in
using
Appendix
D
properly:
When
violations
are
discovered
that
require
reimbursement
to
consumers,
FDIC
examiners
use
the
"Joint
Statement
of
Policy
on
Administrative
Enforcement
of
the
Truth
in
Lending
Act"
to
establish
the
corrective
action
period.
For
loans
involving
closed-end
credit,
the
corrective
action
period
has
generally
been
from
the
current
examination
back
to
the
"immediately
preceding
examination."
The
banking
agencies
had
uniformly
taken
the
position
that
compliance
with
the
requirements
of
the
Truth
in
Lending
Act
and
Regulation
Z
would
have
been
reviewed
during
the
"immediately
preceding
examination."
However,
courts
have
recently
held
that
"immediately
preceding
examination,"
means
the
examination
of
any
type
conducted
immediately
prior
to
the
current
examination,
including
examinations
in
which
no
review
of
compliance
with
the
Truth
in
Lending
Act
was
conducted.
The
banking
agencies
have
directed
their
supervisory
staff
to
implement
the
policy
as
enunciated
by
the
courts.
Guidance
has
been
transmitted
by
each
of
the
agencies
to
its
examination
and
supervision
staff
regarding
this
change
in
policy.
The
Federal
Financial
Institutions
Examination
Council's
(FFIEC)
Consumer
Compliance
Task
Force
recently
approved
the
attached
question
and
answer
guide
on
the
appropriate
time
period
for
taking
retrospective
corrective
action
when
reimbursable
violations
are
discovered.
However,
once
the
violation
has
been
brought
to
the
attention
of
bank
management,
intervening
examinations
of
any
kind
will
not
relieve
the
bank
of
the
responsibility
for
taking
corrective
action.
For
further
information,
please
contact
your
FDIC
Division
of
Compliance
and
Consumer
Affairs
(DCA)
Regional
Office
on
the
attached
list
or
one
of
the
following
FDIC
staff
members:
Attachments:
Interagency
Questions
and
Answers
Regarding
Corrective
Action
Time
Periods
Under
the
Truth
in
Lending
Act
Policy
Guide(January
1998)
FDIC
Regional
Offices
(7
kb,
PDF
help
or
hard
copy)
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
(800-276-6003
or
(703)
562-2200).
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| Last Updated 11/23/2018 | communications@fdic.gov |
