[Federal Register Volume 63, Number 173 (Tuesday, September 8, 1998)]
[Notices]
[Pages 47495-47498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24057]
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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
Administrative Enforcement of the Truth in Lending Act--
Restitution
ACTION: Notice and request for comment.
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SUMMARY: The Consumer Compliance Task Force of the Federal Financial
Institutions Examination Council (FFIEC) is issuing a revised Joint
Statement of Policy on the Administrative Enforcement of the Truth in
Lending Act--Restitution (Policy Statement). The Policy Statement
issued by the FFIEC on July 21, 1980 must be revised to reflect the
statutory changes to certain provisions of the Truth in Lending Act
(TILA)
[[Page 47496]]
made by the Congress in 1995 and 1996. The staffs of the Office of the
Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the
Federal Deposit Insurance Corporation (FDIC), the Office of Thrift
Supervision (OTS) and the National Credit Union Administration (NCUA)
have prepared this revised Policy Statement to reflect the changes made
to the TILA.
DATES: Public comment is invited on a continuing basis.
ADDRESSES: Questions and comments may be sent to Keith J. Todd, Acting
Executive Secretary, Federal Financial Institutions Examination
Council, 2100 Pennsylvania Avenue NW, Suite 200, Washington, DC 20037,
or by facsimile transmission to (202) 634-6556.
FOR FURTHER INFORMATION CONTACT:
OCC: Gene Ullrich, National Bank Examiner, Community and Consumer
Policy, (202) 874-4866, Office of the Comptroller of the Currency, 250
E Street SW, Washington, DC 20219.
FRB: Anthony Iwuji, Review Examiner, Division of Consumer and
Community Affairs, (202) 452-3946, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue NW, Washington, DC
20551.
FDIC: James K. Baebel, Senior Review Examiner, Division of
Compliance and Consumer Affairs, (202) 942-3086, Federal Deposit
Insurance Corporation, 550 17th Street NW, PA-1730-7048, Washington, DC
20429.
OTS: Gary Jackson, Program Analyst, Compliance Policy, (202) 906-
5653, Office of Thrift Supervision, 1700 G Street NW, Washington, D.C.
20552.
NCUA: Jodee Wuerker, Program Officer, Office of Examination and
Insurance, (703) 518-6375, National Credit Union Administration, 1775
Duke Street, Alexandria, VA 22314-3428.
SUPPLEMENTARY INFORMATION:
Background
The Truth in Lending Act Amendments of 1995 and the Economic Growth
and Regulatory Paperwork Reduction Act of 1996 amended the TILA to
incorporate new tolerances for disclosures of the finance charge and
other disclosures affected by the finance charge on certain types of
loans. These amendments specify that in closed-end consumer credit
transactions secured by real property or a dwelling, the disclosed
finance charge and other disclosures affected by the disclosed finance
charge shall be treated as accurate if the amount disclosed as the
finance charge is overstated, or is understated by no more than $100
for transactions consummated on or after September 30, 1995, or $200
for loans made before that date. The Federal Reserve Board proposed and
adopted amendments to Regulation Z in 1996 to implement the statutory
changes (12 CFR 226.18(d)(1), 226.18(d)(2), 226.22(a)(4) and
226.22(a)(5)).
The Policy Statement originally issued in 1980 was directly
affected by the amendments to the TILA and the changes to Regulation Z
in several respects. First, the changes to the tolerances affect the
definition for understated annual percentage rates (APR) contained in
the Policy Statement. Second, the amendments enhanced the agencies'
abilities to make modifications to the amount or timing of restitution
in the event that payment of restitution would adversely affect the
capital position of the financial institution. In the main, the
revisions to the Policy Statement make only those changes necessary to
accommodate statutory requirements. Some other editorial changes were
made, however, to reflect that some provisions of the original Policy
Statement were no longer needed due to the passage of time.
Summary of Changes
The revised Policy Statement drops the definition of ``Irregular
Mortgage Transaction.'' The term is used in the Truth in Lending
Simplification and Reform Act in the definition of an understated APR
for loans secured by dwellings consummated prior to March 31, 1982.
There is no longer any need for maintaining a separate definition of
this term in the Policy Statement. A footnote has been included in the
revised Policy Statement to indicate that, should loans consummated
prior to March 31, 1982 having understated APRs be found, the original
Policy Statement should be consulted for guidance.
The definition of the term ``Understated APR'' in the Policy
Statement has been modified to reflect revised tolerances for certain
real estate secured transactions. The Truth in Lending Amendments of
1995 and the Economic Growth and Regulatory Paperwork Reduction Act of
1996 mandated these revisions. The Policy Statement has also been
revised to consolidate six separate sub-parts to the definition of an
``Understated APR'' into two sub-parts; (1) Loans having an
amortization schedule of 10 years or less, and (2) loans with an
amortization schedule of more than 10 years.
Loans having an amortization schedule of 10 years or less
will be provided a tolerance of 25 basis points (one-quarter of one
percent). Loans that are secured by real estate or a dwelling will be
provided the tolerances permitted by 12 CFR 226.22(a)(4) and (5).
Loans having an amortization schedule of more than 10
years will be provided a tolerance of 12.5 basis points (one-eighth of
one percent) in the case of a regular transaction and 25 basis points
(one-quarter of one percent) in the case of an irregular transaction.
Loans that are secured by real estate or a dwelling will be provided
the tolerances permitted by 12 CFR 226.22(a)(4) and (5).
References to 15 U.S.C. 1606(c) contained in the body of the
definition of an understated APR in the original Policy Statement have
now been moved to footnote 3 in the revised Policy Statement. The
change was purely editorial in nature. A new footnote 4 has been added
to more specifically identify the sections of Regulation Z (12 CFR
226.14(a) and 226.22(a)) that define the requirements for annual
percentage rate disclosures.
The ``Corrective Action Period'' section of the original Policy
Statement contains time frames for determining which loans are subject
to adjustment when violations are discovered. Previously, the agencies
have collectively taken the position that the phrase ``immediately
preceding examination'' in subsection 2.b. means the most recent
examination that precedes the current examination in which compliance
with Regulation Z and the Act was reviewed. However, the United States
Court of Appeals for the 8th Circuit (First National Bank of Council
Bluffs v. Office of the Comptroller of the Currency, 956 F.2d 1456 (8th
Cir. 1992)), and the United States Court of Appeals for the Eleventh
Circuit, (Consolidated Bank, N.A. v. United States Department of the
Treasury, 118 F.3d 1461 (11th Cir. 1997)) determined that the phrase
``immediately preceding examination'' should be read as referring to an
examination of any type conducted immediately prior to the current
examination, including examinations in which no review of compliance
with Regulation Z or the Act is conducted. Consequently, the agencies,
as a matter of policy, will now apply the decisions reached by the
Eighth and Eleventh Circuit Courts in carrying out their enforcement
responsibilities with respect to the meaning of ``immediately preceding
examination.'' No changes to the Policy Statement are necessary to
effect this policy position made by the agencies. Additional guidance
will be provided to the examination staff for
[[Page 47497]]
each agency to advise on the proper period for corrective action when
violations requiring adjustments are discovered.
In the section of the Policy Statement entitled ``Violations
Involving the Improper Disclosure of Credit Life, Accident, Health, or
Loss of Income Insurance,'' the original Policy Statement had a
separate provision detailing how certain violations involving credit
life insurance disclosures would be treated until March 31, 1982. Since
this time period has now expired that portion of the section has been
deleted.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
provided additional flexibility for the regulatory agencies to require
partial or delayed payments for reimbursements by an institution if the
payment would cause the institution to become undercapitalized as that
term is defined in section 38 of the Federal Deposit Insurance Act.
Those provisions are now reflected in the section of the Policy
Statement entitled ``Safety and Soundness.'' That section states that
if the results of a full and immediate adjustment required under the
Policy Statement would have a significant adverse impact on the capital
position of the creditor, the agencies can permit partial adjustments
to be made or permit partial payments over an extended period of time.
The text of the revised Policy Statement follows:
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; 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
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:
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\1\ 15 U.S.C. 1607(e)
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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 Regulation Z \4\ or one-quarter
of one percent, is less than the actual APR calculated under the
Act.\5\
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\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 FR 48712) for additional guidance.
\3\ 15 U.S.C. 1606(c)
\4\ 12 CFR 226.14(a) and 226.22(a)
\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.
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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\
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\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 the 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 no subject to reimbursement if: (1) The finance charge
is understated but considered accurate according to the Actual
Regulation (i.e., 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.
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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.
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\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.
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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.
[[Page 47498]]
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, 1977 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 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.
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\
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\8\ The term ``undercapitalized'' will have the meaning as
defined in section 38 of the Federal Deposit Insurance Act (12
U.S.C. 1831o).
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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.
Dated: September 2, 1998.
Keith J. Todd,
Acting Executive Secretary, Federal Financial Institutions Examination
Council.
[FR Doc. 98-24057 Filed 9-4-98; 8:45 am]
BILLING CODES FRB: 6210-01-P 20%, OTS: 6720-01-P 20%, FDIC: 6714-01-P
20%, OCC: 4810-33-P 20%, NCUA: 7535-01-P 20%
