Joint Policy Statement on Administrative Enforcement of the Truth in Lending Act—Restitution

RESTITUTION PROVISIONS

Effective July 21, 1980; revised September 8, 1998

RESTITUTION PROVISIONS

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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 USC 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 in cases where an annual percentage rate 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 USC 1607 and 12 USC 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 USC 1607 and 12 USC 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 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

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 loans² 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 act³ and Regulation Z⁴ or one-quarter of 1 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 1 percent for irregular loans, one-eighth of 1 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.

15 USC 1607(e).

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. 48,712) for additional guidance. 48,712) for additional guidance.

15 USC 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 1 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.

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 1 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 1 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.

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 1 percent APR tolerance. If the amount financed is $5,000 and the finance charge is $912.50, the APR will be 18.25 percent. The finance charge generated by the APR of 18 percent (applying the one-quarter of 1 percent APR tolerance to 18.25 percent) 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.

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, 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 a current examination (Loans containing the violation which were consummated since the date of the immediately preceding examination are subject to an adjustment.); and

c. there is an understated APR or understated finance charge, the practice giving rise to the violation was identified during the 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.

Violation Involving the Nondisclosure 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 1 percentage point, in the case of first-lien mortgage transactions, and by 1 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 understated 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 USC 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 circumstance 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 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

⁸

The term “undercapitalized” will have the meaning as defined in section 38 of the Federal Deposit Insurance Act (12 USC 1831o).

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.

Issued by the Consumer Compliance Task Force of the Federal Financial Institutions Examination Council.