Appeals of Material Supervisory Determinations: Guidelines
(October 10, 1997)
The Supervision Appeals Review Committee ("Committee") of the
Federal Deposit Insurance Corporation ("FDIC") on September 30, 1997,
considered the issues raised in [the Banks ]appeal letter dated August 15,
1997. After due consideration and deliberation by the Committee, the Bank's
appeal of the Truth in Lending violations has been denied.
The Committee's findings are presented below along with an explanation of
the reason for the decision.
Credit Life was a Factor in the Approval Process.
The Bank's position is that Regulation Z was misapplied when violations
of sections 12 C.F.R. 226.18(d) and 226.18(e) were cited, because the Bank
required all seven loans to have credit life insurance collateral but did
not include the premium in the finance charge. Each customer chose between
two sets of terms and conditions, but only after the Bank agreed
("approved") to extend credit. The approval of these extensions of credit
preceded the customers' election to provide or not provide life insurance
collateral. Therefore, the affected customer's election of one or the other
option was not a factor in the loan officers' approval of these extensions
The facts support the conclusion that the Bank offered two distinct and
separate loans. One consisted of a special low interest rate loan which
required the borrower to purchase credit life insurance. In order to obtain
the advertised low interest rate, the purchase of credit life insurance was
required. The second type carried a higher interest rate and did not require
the purchase of credit life insurance. Credit life insurance discussions
with the customer were part of the "collateralization and pricing decision"
for each loan in the special program.
The purchase of the credit life insurance was a "factor in the extension
of credit" because the insurance purchase was required for the borrower to
get the special low interest rate loan. Determining a borrower's
creditworthiness is only part of the process of extending credit. In
determining whether a borrower can service the debt, it would appear that
the Bank would need to know the monthly payment based upon the interest
rate. In this instance, credit life insurance was a factor in the decision
to approve the extension of credit, was written in connection with the
consumer credit transaction, and was incident to the extension of the
special low rate interest loan. The Bank only approved the applicant
generally as a creditworthy borrower, but it did not approve the applicant
for "the extension of credit," i.e., the special low interest rate loan,
until the applicant agreed to purchase credit life insurance. The credit
life insurance was a significant factor in the extension of the second loan
offered, because the special low interest rate was not available unless the
applicant purchased the credit life insurance.
In addition, the Bank's advertisements stated that two distinct and
separate types of automobile loans were offered: (1) one type with interest
rates ranging from 7.50 APR to 8.50 APR, and (2) the second type with
interest rates ranging from 6.75 APR to 7.75 APR. The advertisement went on
to state that the special low interest rate is available "[s]ubject
to...[the] purchase of optional payment protection plan" i.e., the credit
life insurance. Therefore, if the applicant did not purchase the credit life
insurance, the applicant did not get the special low interest rate loan. The
facts are that for all seven loans that had the special low interest rate,
the applicants purchased the credit life insurance. Two other customers, a
loan officer and an individual, were offered lower rates to match other
dealer rates, and credit life insurance was not required for these two
customers. By disclosing that the credit life insurance was voluntary, when
in fact it was required, is a violation of sections 226.4(d)(1) and
226.18(d) of Regulation Z, respectively.
The Bank's argument, if accepted, would defeat the essential purposes of
the Truth in Lending Act.
Section 102(a) of the Truth in Lending Act ("Act") states the essential
purposes of the Act , as follows:
It is the purpose of this title to assure a meaningful disclosure of
credit terms so that the consumer will be able to compare more readily the
various credit terms available to him and avoid the uninformed use of
In this case, the consumer is deprived of the ability "to compare more
readily the various credit terms available to him and avoid the uninformed
use of credit" because the APR disclosed to the consumer by the Bank is
understated. For example, the Bank offered a 60-month special low interest
rate loan with a 7.75 APR for which, by the Bank's own admission, the
purchase of credit life insurance was required but, according to the Bank,
does not need to be and is not included in the finance charge. The consumer
believes that the APR is 7.75. However, if the cost of credit life insurance
were included in the finance charge, as the Committee believes is
appropriate, the APR is approximately 9.00.1
The result is that the consumer is in fact misinformed about the use of
credit and cannot make a meaningful comparison of available credit terms.
The Bank's objection to the "universe" of loans in determining pattern or
The Bank disagreed that the loan sample comprised an appropriate universe
in determining whether insurance was required or optional. The Bank states
that the Examiner should have considered the universe of all loans made (or
denied or withdrawn), under the terms of the "Special (Auto) Loan Program".
In ascertaining whether or not an applicant was required to purchase
credit life insurance to be eligible for the special low interest rate loan,
examiners found nine automobile loans with the special low interest rate. Of
the nine loans, seven borrowers had purchased credit life insurance. Two
other automobile loans that had low interest rates, but no credit life
insurance, were not considered part of the loan sample because they were
made to match a low rate offered by an area car dealer.
Of a total universe of seventeen loans, as suggested by the Bank, seven
are the type which required the customer to purchase credit life insurance
in order to obtain the special low interest rate. The seven loans were a
proper universe to analyze with respect to the violations of Regulation Z.
Under the analysis, the penetration ratio was 100 percent. However, even
considering the Bank's sample of eight of twenty-one (38%), seven of
seventeen (41%), or six of eight (75%) consumers choosing the plan, the
penetration ratio is still at a high level. Coupled with the facts discussed
above, the percentage levels support our conclusion that the credit life
insurance was indeed required. It also supports our conclusion that the
Bank's violations were part of a pattern or practice which warrant
reimbursement under section 108(e) of the Act. The FDIC's reimbursement
guidelines state that a pattern or practice is not represented by a specific
number of loans, nor a specific percentage. If an institution makes one loan
of a certain type and with certain characteristics, and that one loan has an
understated APR or finance charge beyond permissible tolerances, then that
one loan may represent a pattern or practice.
The Committee concludes that the loan sample was appropriate and that a
pattern or practice was indicated.
Pattern or Practice
The Bank disagreed that they engaged in a pattern or practice of
During the examination, the Examiner reviewed all loans that could be
identified that were extended under the special program, and identified
those at the higher and special low interest rates, and those in which
credit life insurance was included. The review found two loans, one to a
loan officer and another to an individual, which were extended at the low
interest rate without credit life insurance. These two loans were extended
by the Bank to match an interest rate offered by a dealer. Further review of
the loans identified seven remaining loans with credit life insurance, with
all seven at the special low interest rate. Bank management states that the
credit life insurance was a requirement to obtain the special low rate.
The number of people who chose the higher rate auto loan, for which no
credit life insurance purchase was required, is not relevant to the issue of
whether the Bank required credit life insurance on the special low interest
rate loan. A pattern or practice occurs when errors stem from a common
cause, usually within one type of consumer credit which often has certain
common characteristics. It is concluded that there was a pattern or practice
of Regulation Z violations regarding the special low interest rate loans
because the Bank required the purchase of credit life insurance but did not
disclose the cost of the insurance in the finance charge.
The Bank is concerned that it would be impacted by the adverse
word-of-mouth publicity and tarnishment of its reputation in the community
due to the citing of reimbursable violations in the January 15, 1997, and
the previous May 3, 1995, Report of Examinations. Negative reputation is not
one of the bases of section 108(e) of the Act where reimbursement may be
The scope of this review was limited to the facts and circumstances that
existed at the time of the examination and no consideration was given to any
changes occurring after that date or to any subsequent corrective action. In
any proposed supervisory response to the Report of Examination, the FDIC's
[***] Regional Office will address the Bank's actions since the examination.
This determination is considered the Federal Deposit Insurance
Corporation's final supervisory decision.
By direction of the Supervision Appeals Review Committee of the Federal
Deposit Insurance Corporation.
The example given is for a $11,600 loan with no money down, to be paid in 60
monthly payments. The credit life
insurance premium on the loan is $339.78.