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5000 - Statements of Policy
{{8-31-99 p.5049}}
ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING
ACT—
RESTITUTION
Joint Statement of Policy
The Depository Institutions Deregulation and Monetary Control Act of
1980 (Pub. L. 96-221) was enacted on March 31, 1980. Title VI of that
Act, the Truth in Lending Simplification and Reform Act, amends the
Truth in Lending Act, 15 U.S.C.
1601, et seq. Section 608 of Title VI, effective
March 31, 1980, authorizes the federal Truth in Lending enforcement
agencies to order creditors to make monetary and other adjustments to
the accounts of consumers where an annual percentage rate (APR) or
finance charge was inaccurately disclosed. It generally requires the
agencies to order restitution when such disclosure errors resulted from
a clear and consistent pattern or practice of violations, gross
negligence, or a willful violation which was intended to mislead the
person to whom the credit was extended. However, the Act does not
preclude the agencies from ordering restitution for isolated disclosure
errors.
This policy guide summarizes and explains the restitution provisions
of the Truth in Lending Act (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 the agencies the authority to take equitable
remedial action.
The agencies anticipate that most financial institutions will
voluntarily comply with the restitution provisions of the Act 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; 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 Act
and Regulation Z, 12 CFR Part
226.
1. "Current examination" means the most recent examination
begun on or after March 31, 1980, in which compliance with Regulation Z
was reviewed.
2. "Lump sum method" means a method of reimbursement in which
a cash payment equal to the total adjustment will be made to a
consumer.
3. "Lump sum/payment reduction method" means a method of
reimbursement in which the total adjustment to a consumer will be made
in two stages:
a. A cash payment that fully adjusts the consumer's account up to
the time of the cash payment; and,
b. A reduction of the remaining payment amounts on the loan.
4. "Understated APR" means a disclosed APR that is
understated by more than the reimbursement tolerance provided in the
Act 1
, as follows:
For loans 2
with an amortization schedule of 10 years or less, a disclosed APR
which, when increased by the greater of the APR tolerance specified in
the Act 3
and
{{8-31-99 p.5050}}Regulation
Z 4
or one-quarter of one percent, is less than the actual APR calculated
under the Act 5
.
For loans with an amortization schedule of more than 10 years,
a disclosed APR which, when increased by the APR tolerance specified in
the Act and Regulation Z (i.e., one-quarter of one percent for
irregular loans, one-eighth of one percent for all other closed-end
loans) is less than the actual APR 6
.
5. "Understated finance charge" means a disclosed finance
charge which, when increased by the greater of the finance charge
dollar tolerance specified in the Act and Regulation Z or a dollar
tolerance that is generated by the corresponding APR reimbursement
tolerance 7
, is less than the finance charge calculated under the Act.
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
1. Open-end credit transactions will be subject to an adjustment if
the violation occurred within the two-year period preceding the date of
the current examination.
2. Closed-end credit transactions will be subject to an adjustment
if the violation resulted from a clear and consistent pattern or
practice or gross negligence where:
a. There is an understated APR on a loan which originated
between January 1, 1997 and March 31, 1980.
b. There is an understated APR or understated finance charge,
and the practice giving rise to the violation is identified during the
current examination. Loans containing the violation which were
consummated since the date of the immediately preceding examination are
subject to an adjustment.
c. There is an understated APR or understated finance charge,
the practice giving rise to the violation was identified during a prior
examination and the practice is not corrected by the date of the
current examination. Loans containing the violation which were
consummated since the creditor was first notified in writing of the
violation are
{{8-31-99 p.5051}}subject to an adjustment. (Prior
examinations include any examinations conducted since July 1, 1969).
3. Each closed-end credit transaction, consummated since July 1,
1969, and containing a willful violation intended to mislead the
consumer is subject to an adjustment.
4. For terminated loans subject to 2, above, an adjustment will not
be ordered if the violation occurred in a transaction consummated more
than two years prior to the date of the current examination.
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:
1. Understated APR violations on transactions consummated between
January 1, 1977 and March 31, 1980, or
2. Willful violations which were intended to mislead the consumer.
On all other transactions, applicable tolerances provided in the
definitions of understated APR and understated 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
1. In cases where an APR was required to be disclosed but was not,
the disclosed APR shall be considered to be the contract rate, if
disclosed on the note or the Truth in Lending disclosure statement.
2. In cases where an APR was required to be disclosed but was not,
and no contract rate was disclosed, consumers will not be required to
pay an amount greater than the actual APR reduced by one-quarter of one
percentage point, in the case of first lien mortgage transactions, and
by one percentage point in all other transactions.
3. In cases where a finance charge was not disclosed, no adjustment
will be ordered.
Violations Involving the Improper Disclosure of Credit Life,
Accident, Health, or Loss of Income Insurance
1. If the creditor has not disclosed to the consumer in writing
that credit life, accident, health, or loss of income insurance is
optional, the insurance shall be treated as having been required and
improperly excluded from the finance charge. An adjustment will be
ordered if it results in an understated APR or finance charge. The
insurance will remain in effect for the remainder of its term.
2. If the creditor has disclosed to the consumer in writing that
credit life, accident, health, or loss of income insurance is optional,
but there is either no signed insurance option or no disclosure of the
cost of the insurance, the insurance shall be treated as having been
required and improperly excluded from the finance charge. An adjustment
will be ordered if it results in an understated APR or finance charge.
The insurance will remain in effect for the remainder of its term.
Special Disclosures
Adjustments will not be required for violations involving the
disclosures required by sections 106(c) and (d) of the Act,
(15 U.S.C. § 1605(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.
{{8-31-99 p.5052}}
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 non-substantive 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 some cases, an agency may order, in place of an immediate, full
adjustment, either a partial adjustment, or a full adjustment in
partial payments over an extended time period that the agency considers
reasonable. The agency may do so if it determines that (1) the full,
immediate adjustment would have a significantly adverse impact upon the
safety and soundness of the creditor, and (2) a partial adjustment, or
making partial payments over an extended period of time, is necessary
to avoid causing the creditor to become
undercapitalized 8
.
Exemption from Restitution Orders
A creditor will not be subject to an order to make an adjustment if
within 60 days after discovering a disclosure error, whether pursuant
to a final written examination report or through the creditor's own
procedures, the creditor notifies the person concerned of the error and
adjusts the account to ensure that such person will not be required to
pay a finance charge in excess of that actually disclosed or the dollar
equivalent of the APR disclosed, whichever is lower. This 60-day period
for correction of disclosure errors is unrelated to the provisions of
the civil liability section of the Act.
By order of the Federal Financial Institutions Examination
Council.
[Source:
63 Fed.
Reg. 47497; September 8, 1998]
[The page following this is 5057.]
1 15 U.S.C. 1607(e) Go Back to Text
2 For loans consummated after March 31, 1982. For loans
consummated prior to that date refer to the Policy Guide dated July 21,
1980 (45 Fed. Reg. 48712) for additional guidance. Go Back to Text
3 15 U.S.C. 1606(c) Go Back to Text
4 12 CFR 226.14(a)
and 226.22(a) Go Back to Text
5 If, however, the loan is closed-end credit secured by real
estate or a dwelling and the APR is understated by more than
one-quarter of one percent, the APR will be considered accurate and not
subject to reimbursement if: (1) the finance charge is understated but
considered accurate in accordance with the Act and Regulation (i.e.,
the finance charge is not understated by more than $100 on loans made
on or after 9/30/95, or $200 for loans made before that date); and (2)
the APR is not understated by more than the dollar equivalent of the
finance charge error and the understated APR resulted from the
understated finance charge that is considered accurate. Go Back to Text
6 If, however, the loan is closed-end credit secured by real
estate or a dwelling and the APR is understated by more than one-eighth
of one percent if the transaction is not considered to be an irregular
transaction as defined by Regulation
(12 CFR 226.22(a)(3)) or one
quarter of one percent if the transaction is irregular according to the
definition, the APR will be considered accurate and not subject to
reimbursement if: (1) the finance charge is understated but considered
accurate according to the Act and Regulation (i.e., the finance charge
is not understated by more than $100 on loans made on or after 9/30/95,
or $200 for loans made before that date); and (2) the APR is not
understated by more than the dollar equivalent of the finance charge
error and the understated APR resulted from the understated finance
charge that is considered accurate. Go Back to Text
7 The finance charge tolerance for each loan will be generated
by the corresponding APR tolerance applicable to that loan. For
example, consider a single-payment loan with a one-year maturity that
is subject to a one-quarter of one percent APR tolerance. If the amount
financed is $5,000 and the finance charge is $912.50, the actual APR
will be 18.25%. The finance charge generated by an APR of 18%
(applying the one-quarter of one percent APR tolerance to 18.25%) for
that loan would be $900. The difference between $912.50 and $900
produces a numerical finance charge tolerance of $12.50. If the
disclosed finance charge is not understated by more than $12.50,
reimbursement would not be ordered. Go Back to Text
8 The term "undercapitalized" will have the meaning as
defined in § 38 of the Federal Deposit Insurance Act
(12 U.S.C. § 1813o). Go Back to Text
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