View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal

reserve bank of

DALLAS, TEXA S

Dallas

75222

C irc u la r No. 79-175
October 30, 1979

PROPOSED AMENDMENTS TO REGULATION Z
Enforcement Guidelines

TO ALL BANKS, OTHER CREDITORS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
Uniform guidelines for enforcement of Regulation Z, T ru th in Lending,
were adopted January 4, 1979, by the five federal agencies responsible for super
vising depository institutions. The agencies believed that the guidelines would
promote uniform ity in enforcement of the Truth in Lending Act and would foster
effective enforcement by requiring specific corrective actions. In August the
Board of Governors of the Federal Reserve System authorized a temporary sus­
pension of the guidelines for reimbursement of overcharged customers pending
resolution of certain policy issues.
Now the agencies are proposing three amendments to the guidelines
and are publishing these amendments for public comment in the Federal Register
The amendments,printed on the following pages, fall into three areas: (1) toler­
ance limits - the tolerance permitted for disclosure of the annual percentage
rate would be increased from 1/8 to 1/4 of one percentage point, (2) retroactivity
the amendments provide for correction after an initial notice of a violation, and
(3) fle x ib ility - the agencies w ill retain discretion to deal with special problems.
Comments should be received on or before December 2, 1979, and should be ad­
dressed to: Interagency Enforcement Policy - Regulation Z, c/o Federal Deposit
Insurance Corporation, 550 Seventeenth S t. N . W . , Washington, D . C . 20429.
Printed on the following pages are the Board of Governors' press re ­
lease announcing the proposals and the amendments to the guidelines as they
w ill appear in the Federal R egister. Any questions concerning the proposed
amendments should be directed to the Consumer Affairs Section of our Bank
Supervision and Regulations Department, Ext. 6171.
Sincerely yours,
Robert H . Boykin
First Vice President

Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL
press

RESERVE

release

For immediate r e l e a s e

October 12, 1979

The Federal Reserve Board today proposed f o r comment r e v i s i o n s of
Truth in Lending Enforcement Guidelines intended to overcome a d m i n i s t r a t i v e
problems and permit the resumption o f reimbursements to consumers fo r
overcharges.
The Board requested comment by December 21, 1979.

The othe r

ag en cie s admini st eri ng th e Guidelines are takin g s i m i l a r a c t i o n s .
The r e v i s i o n s proposed by the Board were recommended by the Federal
F i n a n c i a l I n s t i t u t i o n s Examination Council, on which the Board i s represented by
one o f i t s members.

The Guidelines were adopted j o i n t l y in January by the f i v e
1 /

Federal bank and t h r i f t i n s t i t u t i o n r e g u la t o r s —/ t h a t a l s o are now represented on
the Examination Council.

The Council was e s t a b l i s h e d t h i s year to make recom­

mendations to i t s member agencies to promote uniformity in the su p er v is io n of
f i n a n c i a l i n s t i t u t i o n s and t o p r e s c r i b e uniform standards o f examination.
In proposing amendments to the Guidelines the Board sa id :
These recommendations are based upon the a g e n c i e s ’
ex pe riences in implementing the Guidelines over the
past nine months. D i f f i c u l t i e s have been encountered
which have r e s u l t e d in s e v e r a l a g en cie s temporarily
suspending the Guidelines on s e v e r a l o c c a s i o n s .
The
amendments proposed should a l l e v i a t e the major problems
ra ise d by the Gu id e lin e s.
In August the Board authorized temporary suspension of the requirement
of the Guidelines fo r reimbursement of overcharged customers, pending Examination
Council review and recommendations.
and reimbursements

These reimbursements would be r e i n s t a t e d ,

in gen era l would be resumed under the proposed amendments to

the Gu ide lin es .

— Federal Reserve Board; Fed era l Deposit Insurance Corporation; Fed era l Hom
e
Loan Bank Board; National Credit Union Administration and O f f i c e o f the
Comptroller o f the Currency.

-2The proposed amendments to the Guidelines f o r enforcement o f Truth
in Lending and i t s implementing Regulation Z a r e :
1.

I n c r e a s e the t o l e r a n c e fo r minor e r r o r s in d i s c l o s u r e o f the

annual percentage r a t e to a borrower, from the present 1/8 o f a percentage
point to 1/4 of a p o in t.
In ad m in ist eri n g the Guidelines the Federal su perviso rs have found
t h a t many b e l i e v e th at the "rounding to the ne a re st qu a r te r of one p e r c e n t"
permitted by the Guidelines implies an e r r o r t o l e r a n c e of 1/4 of a p o in t .
F u r t h e r , the use of 1/8 of a point e r r o r t o l e r a n c e has in many cases cr e at e d
a la r g e a d m i n i s t r a t i v e burden y i e l d i n g minimal b e n e f i t s to consumers.
2.

Amend the pr e s cr ib e d period o f r e t r o a c t i v e a p p l i c a t i o n o f the

Guidelines — incl ud ing reimbursement - - from October 28, 1974 to
a.

The date o f the previous examination, i f v i o l a t i o n s
are found in a cu rr en t examination (defined as an
examination conducted a f t e r January 4 , 1979, the
e f f e c t i v e date o f the G u id e li n e s ) .

b.

And, where an agency determines th at a c r e d i t o r has
p e r s i s t e d in a v i o l a t i o n c i t e d in a previous
examination, c o r r e c t i v e a c t i o n would be required
fo r a l l a f f e c t e d loans consummated a f t e r the date
when the c r e d i t o r was f i r s t n o t i f i e d o f the v i o l a t i o n .

Depending upon the record of compliance of a c r e d i t o r , c o r r e c t i v e a c t i o n
could be r e qu ir ed , under t h i s p o l i c y , back to 1969, when the Truth in Lending
Act became e f f e c t i v e .
At p r e s e n t, the Guidelines c a l l f o r c o r r e c t i v e a c t i o n on v i o l a t i o n s
on outstanding loans consummated s i n c e October 28, 1974, and on terminated loans
consummated wit hin two years o f the time when the v i o l a t i o n was noted.
The agen cie s have found t h a t use o f a s i n g l e r e t r o a c t i v e date r a i s e s
questions o f equal treatment and p r a c t i c a l i t y .

The proposed r e v i s i o n seeks to

overcome th ese problems by r e q u ir in g reimbursement only where lenders p e r s i s t
in v i o l a t i o n s a f t e r being o f f i c i a l l y warned a g a in s t them.

-3­
3.

Add a part o f the Guidelines pe rm it tin g the agencies to use

d i s c r e t i o n in applying enforcement p o li c y where a v i o l a t i o n p re sen ts a unique
or s i g n i f i c a n t problem.
This amendment would give r e c o g n i t i o n to the many d i f f e r e n t types of
v i o l a t i o n s t h a t may a r i s e and, f u r t h e r , to the f a c t t h a t is s u es may be involved
th a t have not been f o r e s e e n , or t h a t common c r e d i t o r p r a c t i c e s may be encountered
th a t c a l l f o r a v a r i a t i o n in a p p l i c a t i o n o f enforcement r u l e s .
Such v a r i a t i o n s would be allowed, under the pro po sa l, only i f they are
c o n s i s t e n t with the purposes o f the Guidelines and ( i n the case of v i o l a t i o n s
involving a common c r e d i t o r p r a c t i c e ) a f t e r n o t i f i c a t i o n to the Examination
Council.

Such n o t i f i c a t i o n would give a l l member a g en cie s an opportunity to

make s i m i l a r r u li n g s or to ask f o r a review of v a r i a t i o n s t h a t appear to depart
s i g n i f i c a n t l y from the uniform a p p l i c a t i o n o f the G u id e lin e s.
The Fed era l Reserve Board asked, in a d d i t i o n ,

f o r com ent on the
m

qu e st io n whether S t a t e s t h a t have received Board exemption from the Federal
Truth in Lending Act (on grounds t h a t the S t a t e has a s i m i l a r s t a t u t e in f o r c e ,
with adequate measures f o r enforcement) should be required to adopt enforcement
p o l i c i e s s u b s t a n t i a l l y s i m i l a r to the G u id e li n e s,

i f they are to continue to

meet the requirement o f having in fo r ce adequate enforcement p r o v i s i o n s .
Agencies a dm in is te r in g the Guidelines have noted th at mortgage loans
o f t e n pres en t lenders with p a r t i c u l a r d i f f i c u l t i e s
percentage r a t e (APR) f o r the loan.

in s t a t i n g an a c c u r a t e annual

In part t h i s i s because some o f the c l o s i n g

c o s t s t y p i c a l l y accompanying a mortgage loan must be included in the APR, while
o the rs are not included, and in part i t is due to involvement of c e r t a i n uneven
payment sche du les .

-4 Consequently the Board asked:

--What a sp e c t s o f r e a l property t r a n s a c t i o n s c r e a t e
the most s e r i o u s problems in complying with
Reg ulat ion Z, and what are the appro pri at e s o l u t i o n s ?
--How u s e f u l i s the AFR to the average borrower in
s e l e c t i n g a lende r in a r e a l property t r a n s a c t i o n ?
--Would i t be e q u i t a b l e — a t l e a s t tem porarily - - to
l i m i t minimum c o r r e c t i v e a c t i o n in the case of
understated APRs, f o r r e a l property t r a n s a c t i o n s ,
to inform the borrower o f the c o r r e c t APR and o f the
c i v i l l i a b i l i t y pr ovi sio ns under S e c t i o n 130 o f the
Truth in Lending Act?
The Board would welcome comment on any o th e r as p e ct s o f the Guidelines,
includ ing c o s t s and b e n e f i t s .
The o f f i c i a l n o t i c e o f proposed amendments to the Guidelines for
Enforcement o f R eg ula ti on Z i s a tt ac he d.
-0-

FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

O BEHALF OF ITS CONSTITUENT AGENCIES
N
REGULATION Z
JOINT NOTICE OF STATEMENT OF ENFORCEMENT POLICY
AGENCIES:

The Board of Governors o f the F ed er a l Reserve System, the
Comptroller of the Currency, the Fed era l Deposit Insurance
Corporation, the F ed er al Home Loan Bank Board, and the
National Credit Union A d m in is tr a ti on .

ACTION:

Proposed Amendments to the Statement o f Enforcement
P o l i c y - Regulation Z.

SUM ARY:
M
The Uniform Guidelines f o r Enforcement o f R eg ula ti on Z were
adopted, e f f e c t i v e January 4 , 1979, by the Fed era l agen cie s r e s p o n s i b l e
f o r su pe rv isi n g depo sito ry i n s t i t u t i o n s . The a g en cie s b e li e v e d t h a t
Guide lin es would promote uniformity in enforcement of the Truth in Lending
A c t, and t h a t more e f f e c t i v e enforcement would be achieved by r e q u ir in g
s p e c i f i c c o r r e c t i v e a c t i o n by f i n a n c i a l i n s t i t u t i o n s , inc luding reimburse­
ment to borrowers who had r ec eiv ed i n c o r r e c t d i s c l o s u r e s in v i o l a t i o n of
the Act. A f t e r reviewing the a p p l i c a t i o n o f the Guidelines f o r nine
months, the agen cie s b e l i e v e t h a t they a r e broadly serving the goals f o r
which they were adopted and are s i g n i f i c a n t l y i n c r e a s i n g awareness among
f i n a n c i a l i n s t i t u t i o n s of the requirements o f the Truth i n Lending
law.
However, c e r t a i n q ue sti on s of eq u it y and o the r problems with the a p p l i c a t i o n
of the Guidelines have a r i s e n which make amendments d e s i r a b l e .
In a d d it io n ,
s e v e r a l q ue st io ns have been r a i s e d on which the a g en cie s d e s i r e f u r t h e r i n f o r ­
mation and comment. Recognizing the value of p u bl ic p a r t i c i p a t i o n in the
promulgation of these G u i d e l i n e s , the a g e n ci e s r eq u est comments on these
proposed changes and q u e s t io n s .
DATES:

Comments must be r ec eiv ed on or be f o re December 2 1 , 1979.

ADDRESSES:

Written comments should be addressed t o :
In ter ag en cy Enforcement P o l i c y - Re gulation Z
c / o Federal Deposit Insurance Corporation
550 Seventeenth S t r e e t , N.W.
Washington, D. C. 20429

FOR FURTHER INFORMATION CONTACT: Glenn Loney, Fed era l Reserve Board,
( 2 0 2 ) 4 5 2 - 3 5 8 5 ; Alan Dombrow, Comptroller of the Currency, (202)
4 4 7- 16 00 ; P e t e r M. K r a v i t z , Federal Deposit Insurance Corporation,
( 202) 38 9 - 4 4 2 7 ; John P r i c e , Federal Home Loan Bank Board,
(2 02 ) 3 77 - 65 24 ; and Harry B l a i s d e l l , Na tional Cred it Union Admi nis tr ati on,
( 202) 2 5 4- 8 76 0.
SUPPLEMENTARY INFORMATION: This document s e t s f o r t h proposed amendments
to and q ue st io ns concerning the Uniform Guidelines f o r Enforcement of
Re gulation Z, which were adopted e f f e c t i v e January 4, 1979 (44 F .R . 12 2 2) .
The Guidelines were adopted because c o o r d in a t io n among the agen cie s i s

d e s i r a b l e i n order to br ing about uniformity in the a d m i n i s t r a t i v e a c t i o n s
which w i l l be taken when v i o l a t i o n s o f the Truth i n Lending Act and
R e g u la t io n Z are d e te c t e d .
I n i s s u i n g the G u id e li n e s , the agen cie s sa id , "as new examina­
t i o n data concerning the e x t e n t and type of v i o l a t i o n s are r e c e i v e d , the
Guidelines w i l l be reviewed and r e vi se d as a p p r o p r i a t e . " The agencies
have undertaken a review of the Guidelines because of problems which
have a r i s e n with t h e i r implementation. During t h i s review period,
the a g en ci e s ar e cont inuin g to r e q u ir e f u l l p r o sp e ct iv e c o r r e c t i o n of
Truth i n Lending v i o l a t i o n s .
The a g en ci e s published the c o r r e c t i v e a c t i o n Guide lin es i n
proposal form f o r p u b li c comment on October 18, 1977. More than th r ee
hundred comment l e t t e r s were re ce iv e d and analyzed, and many recommenda­
t i o n s were r e f l e c t e d i n the f i n a l Guidelines published i n December, 1978.
I n g e n e r a l , however, the p u b li c comments on the proposed Gu idelines did
not c o n t a i n recommendations which, i f adopted, would have prevented the
problems which have developed s i n c e the Enforcement P o l i c y went in t o
effect.
The d i f f i c u l t i e s have su rf ace d as a r e s u l t of ex pe r ie n ce with
implementing the p o l i c y .
The a g en ci e s b e l i e v e t h a t the problems which have a r i s e n
de riv e p r im a r il y from the complexity of the Truth i n Lending law and i t s
implementing R e g u l a t i o n Z. The law and r e g u l a t i o n went i n t o e f f e c t in
1969. Si n ce t h a t time, both the law and the r e g u l a t i o n have been amended
and expanded. Many s t a f f opinion l e t t e r s and i n t e r p r e t a t i o n s have been
published, and twelve thousand la w s u its have been brought under the Act.
The a g en ci e s st ro ng ly support the fundamental d i s c l o s u r e
p r i n c i p l e s of Truth i n Lending, and b e l i e v e th a t the c o m p l e x it ie s which
have developed r e s u l t pr im ar ily from e f f o r t s to apply th ese broad prin ­
c i p l e s i n a hi g hl y s p e c i f i c manner to the numerous and complex c r e d i t o r
p r a c t i c e s found i n the marketplace. The d e t a i l and i n t r i c a c y of the law's
cu rr en t requirements have the e f f e c t , i n many i n s t a n c e s , of confusing
r a t h e r than a s s i s t i n g the p r o sp e ct iv e borrower, and of imposing e x t e n s iv e
compliance burdens on f i n a n c i a l i n s t i t u t i o n s .
The a g e n ci e s s t r o n g ly
b e l i e v e t h a t s t a t u t o r y s i m p l i f i c a t i o n of Truth in Lending i s now necessary
to ach ie ve i t s purpose of providing borrowers with u s e f u l in fo rm at io n.
Recent e f f o r t s by Congress to enact such s i m p l i f i c a t i o n have
been supported by the a g e n c i e s , but have not yet been adopted.
I n the absence of s t a t u t o r y s i m p l i f i c a t i o n , the agen cie s issued
c o r r e c t i v e a c t i o n Gu idelines which are based on the c u r r e n t law and regu­
l a t i o n , and which tend to r e f l e c t t h e i r continuing d i f f i c u l t i e s .
In l i g h t
of ex pe rie n ce with implementing the Gu ide lin es , the a g en cie s now b e l i e v e
t h a t a d m i n i s t r a t i v e a c t i o n i s necessary to s im p li f y them and make them
more workable.

-2 -

The agencies' primary concerns revolve around the following

areas:
F i r s t , the agen cie s b e l i e v e t h a t the complexity of the Guide­
l i n e s has r e s u l t e d in confu sion among c r e d i t o r s , borrowers, and agency
examiners regarding t h e i r a p p l i c a t i o n .
Some of the que stion s which have
been r a i s e d were addressed through the p u b l i c a t i o n of an interagency
Question and Answer Paper on J u l y 5 , 1979. However, a la r g e number of
new q u e st io n s and i s s u e s continue to a r i s e , which suggests t h a t s e r i o u s
d i f f i c u l t i e s are s t i l l being encountered in implementing the G u id e lin e s.
P a r t of the reason f o r the g r e a t number of que stion s about
th e Guide lin es i s t h a t they c u r r e n t ly permit l i t t l e agency f l e x i b i l i t y
and d i s c r e t i o n i n t h e i r i n t e r p r e t a t i o n and a p p l i c a t i o n . The ag en cie s
i n t e n t i o n a l l y l i m i t e d such d i s c r e t i o n , because they be li e v e d t h a t i n t r a and in te ra g e nc y un ifo rm it y must be maintained in order to ass ur e equal
treatment of a l l i n s t i t u t i o n s and t h e i r customers. While the agencies
continue to be committed to the p r i n c i p l e of u ni f o r m it y , ex pe ri en ce
i n d i c a t e s t h a t g r e a t e r f l e x i b i l i t y i s necessary to permit p r a c t i c a l
implementation o f c o r r e c t i v e a c t i o n . Also, the a g en cie s r e g u l a t e
d i f f e r e n t types of i n s t i t u t i o n s which, to some e x t e n t , engage or s p e c i a l i z e
in d i f f e r e n t types o f lending.
The a g en ci e s re cognize t h a t a degree of uniformity must be
s a c r i f i c e d in order to permit the f l e x i b i l i t y needed f o r workable imple­
mentation of the G u id e li n e s. N e v e r t h e le s s , the agencies are committed
to equal treatment of a l l p a r t i e s and intend to use the review period
to co nsi de r methods of i n c r e a s i n g un iformit y where i t i s important and
feasible.
This commitment to equal tre atment of a l l p a r t i e s was the
reason f o r the o r i g i n a l d e c i s i o n to i s s u e uniform Gu ide lines .
I n a d d i t i o n to r e cog ni zin g a need f o r g r e a t e r f l e x i b i l i t y i n
g e n e r a l implementation, the agen cie s b e l i e v e t h a t the cu rr en t Guidelines
are too r i g i d , s p e c i f i c a l l y in regard to the time period f o r which r e t r o ­
a c t i v e c o r r e c t i v e a c t i o n w i l l be requ ire d.
The Guidelines c u r r e n t l y
de sig na te a s i n g l e d a t e , October 2 8 , 1974, as the s t a r t of the period
of r e t r o a c t i v i t y . While the agen cie s b e l i e v e the use of t h i s date i s
v a l i d i n p r i n c i p l e , they have found t h a t i t r a i s e s problems i n p r a c t i c e .
I n some i n s t a n c e s , the 1974 date appears to impose unduly burdensome
requirements on c r e d i t o r s , while i n o th er case s i t tends to hinder the
ap pr o pr ia te r e s o l u t i o n of problems which were in e x i s t e n c e p r i o r to 1974.
The a g en ci e s b e l i e v e t h a t the Guidelines would oper at e more e f f e c t i v e l y
i f t h e i r r e t r o a c t i v e a p p l i c a t i o n were t a i l o r e d more p r e c i s e l y to the past
performance of the i n d iv id u a l i n s t i t u t i o n s .
The a g en ci e s are a l s o concerned about the e x te n s iv e demands
which implementation of the Guidelines i s pla ci ng on t h e i r own personnel
and r e s o u r c e s .
Given the cu rr en t complexity and scope of the program,
e f f e c t i v e implementation i s n e c e s s a r i l y drawing r es our ce s away from
enforcement of o the r consumer laws and from examination of the i n s t i t u ­
t i o n s f o r s a f e t y and soundness. While the agen cie s are committed to
-3-

r e q u i r i n g c o r r e c t i v e a c t i o n f o r Truth in Lending v i o l a t i o n s , they b e l i e v e
th a t t h e i r re so u r ce s could be a l l o c a t e d more e f f e c t i v e l y i f the Guidelines
were narrower i n scope and focused more on s i g n i f i c a n t problem a r e a s .
In view of the foreg oin g c o n s i d e r a t i o n s , the a g en cie s are
proposing th r ee amendments to the Gu id e lin e s.
1.

Tolera nce L im it s .
The t o l e r a n c e permitted f o r d i s c l o s u r e of the annual percentage r a t e
would be in c r ea se d from o ne- ei gh th to on e- q u ar te r of one percentage
po in t . A t o l e r a n c e margin i s provided under the Guide lin es i n order
to recog niz e the need f o r a degree of f l e x i b i l i t y , as suggested by
the p r o vi si on s contained in 15 U.S.C. 1606 and 12 CFR 22 6 .5 which
permit rounding of APR c a l c u l a t i o n s . The t o l e r a n c e p r o v i s i o n avoids
d i s c r i m i n a t i o n a g a i n s t c r e d i t o r s attempting to d i s c l o s e the e xac t
APR as a s e r v i c e to t h e i r customers, r a t h e r than u t i l i z i n g the
method o f rounding permitted by the Truth in Lending Act and
Re g u la t io n Z to d i s c l o s e l e s s p r e c i s e r a t e s .
The agen cie s a r e proposing to i n c r e a s e the t o l e r a n c e l e v e l because:
(a) computing p r e c i s e l y a c c u r a t e annual percentage r a t e s i s d i f f i ­
c u l t f o r many types of c r e d i t t r a n s a c t i o n s , due to the need to
account f o r the m u l t i p l i c i t y of fin an ce ch arg es , odd days i n t e r e s t ,
and o th e r compl ica ti ng f a c t o r s ; (b) a widespread p e r ce pt io n e x i s t s
among c r e d i t o r s t h a t rounding to the " n e a r e s t q u a r t e r of 1 p e r c e n t , "
12 CFR 2 2 6 . 5 ( a ) , implies an e r r o r t o l e r a n c e of o ne -q u ar te r of a per­
centage p o in t ; and ( c ) the ag en cie s b e l i e v e t h a t the use of a one-eighth
per ce nt t o l e r a n c e f r e q u e n tl y produces an a d m i n i s t r a t i v e burden
which i s e x c e s s i v e i n r e l a t i o n to the corresponding b e n e f i t to the
customer.

2.

R etroactivity.
The time period to which the Guidelines apply would be modified.
C o r r e c t iv e a c t i o n would be required as f o l l o w s :
(1) for v io latio n s
c i t e d i n the c u r r e n t examination, c o r r e c t i v e a c t i o n would be required
on loans consummated s i n c e the date of the immediately preceding exam­
i n a t i o n ; or (2) where the c r e d i t o r had f a i l e d to c o r r e c t p r a c t i c e s or
procedures r e s u l t i n g i n v i o l a t i o n s c i t e d i n previous examinations,
c o r r e c t i v e a c t i o n would be requ ired f o r loans consummated a f t e r the
date on which n o t i c e of the v i o l a t i o n was f i r s t given to the c r e d i t o r .
Depending upon the compliance h i s t o r y of the v i o l a t i o n , c o r r e c t i v e
a c t i o n could be requ ired back to the date of enactment of the
Truth i n Lending Act.
A " c u r r e n t examination" would be defined as an examination con­
ducted subsequent t o January 4 , 1979, which was the e f f e c t i v e
date of the o r i g i n a l G u id e li n e s. R e v is io n s i n the Guidelines made
pursuant to t h i s pro po sal , however, would a l s o be applied to e a r l i e r
examinations.

-4-

The fol low ing t a b l e i l l u s t r a t e s the periods f o r which c o r r e c t i v e
a c t i o n would be ordered. The dates r e p r e s e n t the dates of examina­
t i o n s , with 1979 being the cu rr en t examination.
"V" means t h a t a
p a t t e r n or p r a c t i c e c o n s t i t u t i n g a given v i o l a t i o n was c i t e d i n t h a t
examination, and "NV" means t h a t the same type of v i o l a t i o n was not
cited.
I n each c a s e , r e t r o a c t i v e c o r r e c t i v e a c t i o n would be requ ired from
the date of the examination which appears immediately below the h o r i ­
z o n t a l l i n e s shown i n the t a b l e .
This means th at c o r r e c t i v e a c t i o n
would be ordered on a l l loans co nt a in in g the v i o l a t i o n which were
consummated a f t e r t h a t date.
No c u t - o f f date i s neces sar y on the
c o r r e c t i v e a c t i o n p e r io d , because i t would a u t o m a t i c a l l y terminate
a t the po int a t which the i n s t i t u t i o n ceased engaging i n the prac­
t i c e which caused the v i o l a t i o n .
Examination
Date________

Representative Situations
1

2

3

4

5

1979

V

V

V

N
V

N
V

1978

N
V

V

V

N
V

V

1977

N
V

N
V

V

V

V

1976

N
V

N
V

N
V

N
V

N
V

In s i t u a t i o n s 1 and 2, c o r r e c t i v e a c t i o n would be ordered f o r loans
c o n t a in in g the v i o l a t i o n which were consummated s i n c e the date of the
1978 examination. Note t h a t the date in th ese two s i t u a t i o n s i s the
same, d e s p i t e the f a c t t h a t s i t u a t i o n 2 involves a repeat v i o l a t i o n
and s i t u a t i o n 1 does not. This i s due to the f a c t t h a t the proposed
amendment would d i s t i n g u i s h between past examinations and cu rr en t
ones. For pa st examinations, p r i o r to January 4 , 1979, c o r r e c t i v e
a c t i o n would be t r i g g e r e d i f an i n s t i t u t i o n f a i l e d to respond ade­
q u a t e ly to n o t i f i c a t i o n from i t s supervisory agency t h a t i t was
engaging i n a p r a c t i c e which c o n s t i t u t e d a Truth i n Lending vio­
l a t i o n . Thus, i n s t i t u t i o n s would be a b l e to avoid the r e t r o a c t i v e
requirements of the Gu idelines i f , upon i n i t i a l n o t i f i c a t i o n th a t
they were i n v i o l a t i o n of the law, they promptly took a c t i o n to c o r ­
r e c t the p r a c t i c e p r o s p e c t i v e l y . For c u r re n t examinations, i n c o n t r a s t ,
the proposal would r e q u ir e reimbursement f o r ne wl y- cit ed v i o l a t i o n s ,
on loans consummated s i n c e the date of the previous examination.
I n s i t u a t i o n 3, c o r r e c t i v e a c t i o n would be ordered f o r loans cont ain ing
the v i o l a t i o n which were consummated s i n c e the date of the 1977
examination. I n s i t u a t i o n 4, no c o r r e c t i v e a c t i o n would be ordered,
because the i n s t i t u t i o n c o r r e c t e d the v i o l a t i o n upon i n i t i a l n o t i f i ­
c a t i o n . S i t u a t i o n 5 i s s i m i l a r to s i t u a t i o n 2; c o r r e c t i v e a c t i o n

-5 -

would be ordered f o r loans co n t ai n in g the v i o l a t i o n which were con­
summated s i n c e the date of the 1977 examination.
Note t h a t , i n determining whether c o r r e c t i v e a c t i o n would apply with
r e s p e c t to pa st examinations, the key would be whether the same p a t t e r n
or p r a c t i c e c o n s t i t u t i n g a v i o l a t i o n was not c o r r e c t e d by the i n s t i t u t i o n
a f t e r being c i t e d in the previous examination.
Citations for d iffe ren t
v i o l a t i o n s would not be covered f o r the purposes of r e t r o a c t i v e c o r r e c t i v e
a c t i o n . However, the a g en ci e s maintain the a u t h o r i t y , made c l e a r i n
the c u r r e n t G u i d e l i n e s , to re q u ir e c o r r e c t i v e a c t i o n beyond the minimum
standard s e t by the Guidelines i n any case where the i n s t i t u t i o n has
engaged i n a w i l l f u l or egregious p a t t e r n of v i o l a t i o n s .
The ag en ci e s b e l i e v e t h a t t h i s proposed r e v i s i o n to the Guidelines w i l l
r e s u l t i n more e q u i t a b l e treatment of i n s t i t u t i o n s and t h e i r customers,
and more re as on a b le a d m i n i s t r a t i v e c o s t s f o r implementaion and compliance.
3*

F lex ib ility .
A phrase would be added to the Gu idelines to make i t c l e a r t h a t the agen­
cies retain f l e x i b i l i t y
to respond a p p r o p r ia t e l y to unique
circumstances
or s i g n i f i c a n t problems. The amendment would pl a c e g r e a t e r r e l i a n c e on
the judgment and d i s c r e t i o n of the a g en cie s to deal with unique s i t u a t i o n s
which r a i s e t e c h n i c a l q ue s tio ns concerning the a p p l i c a t i o n of the
G u id e li n e s. This st ep toward s i m p l i f i c a t i o n would avoid the c o s t s and
a d m i n i s t r a t i v e burdens of int eragency c o o r d in a t io n and a c t i o n i n
s i t u a t i o n s which apply to very few i n s t i t u t i o n s .
The amendment
a l s o r e co g ni z es t h a t the ag encies may encounter s i t u a t i o n s which
in volve s i g n i f i c a n t i s s u e s or common c r e d i t o r p r a c t i c e s which may
r e q u i r e varying the implementation of the G u id e li n e s . Thie proposal
would permit such v a r i a t i o n s i f they are c o n s i s t e n t with the purposes
of the G u id e li n e s , a f t e r n o t i f i c a t i o n by the agency to the F ed er a l
F i n a n c i a l I n s t i t u t i o n s Examination Council. This n o t i f i c a t i o n process
i s intended to give the o th er agencies an opportunity to make s i m i l a r
r u l i n g s , or to ask f o r a review of v a r i a t i o n s which appear to depart
s i g n i f i c a n t l y from uniform treatment of a l l i n s t i t u t i o n s .

I n a d d i t i o n t o th es e th r ee proposed amendments, the ag en ci e s wish
t o i n v i t e comment on any o the r a s p e c t s of the Gu idelines which have r a i s e d
problems or q u e s t i o n s .
For example, a l a r g e p o r t i o n o f the Question and
Answer Paper which the agen cie s issued deals with the a p p l i c a t i o n of the
Guidelines to c r e d i t insur ance i s s u e s . The ag en ci e s would welcome recom­
mendations f o r improving the Gu idelines in th es e and any o th e r a r e a s .
In a d d i t i o n , th er e are th ree s p e c i f i c matters on which the
a g en cie s wish to s o l i c i t p u b li c comment and advice.
1.

Cost and B e n e f i t I n f o r m a ti o n .
The ag en cie s b e l i e v e th at a d d i t i o n a l info rmat ion on the c o s t s as s o ­
c i a t e d with implementation of the Guidelines would be h e l p f u l .
Two
a r e a s are of p a r t i c u l a r concern.
-6-

F i r s t , info rm at io n i s requested on the d i r e c t and i n d i r e c t c o s t s
a s s o c i a t e d with implementation of the Gu id e lin e s, both f o r a c t u a l
reimbursement and f o r required a d m i n i s t r a t i v e p ro ce sse s such as
l o c a t i n g and i d e n t i f y i n g loans r e q u ir in g c o r r e c t i v e a c t i o n , con­
t a c t i n g a f f e c t e d customers, and so f o r t h .
Second, comments are requested on ways i n which the Guidelines could
be amended to reduce a d m i n i s t r a t i v e burdens on f i n a n c i a l i n s t i t u t i o n s ,
while a s su r in g b e n e f i t s to customers e n t i t l e d to c o r r e c t i v e a c t i o n ,
in cl ud ing reimbursement. Suggestions regarding the standards the agen­
c i e s should use i n ev a lu a ti n g these c o s t - b e n e f i t c o n s i d e r a t i o n s are a l s o
r equ ested.
Treatment of Re a l E s t a t e Loans.
The a g en cie s want to i n v i t e comment on the treatment of r e a l e s t a t e lo an s .
I t has been the e xp e r ie n ce of the en f o r c in g ag en cie s t h a t long-term r e a l
property t r a n s a c t i o n s ( e . g . , mortgage loans) have presented c r e d i t o r s
with p a r t i c u l a r d i f f i c u l t i e s i n ach ie vi ng t o t a l compliance i n the c a l c u l a ­
t i o n of the Annual Percentage R a t e (APR). To some e x t e n t , thes e d i f f i c u l ­
t i e s r e s u l t from the requirement t h a t some, but not a l l of the numerous
c l o s i n g c o s t s a s s o c i a t e d with the t y p i c a l mortgage loan are included in
the APR c a l c u l a t i o n .
The f a c t t h a t d i f f e r e n t r u l e s apply to d i f f e r e n t
types of ch a rg e s, a l l of which may be c o l l e c t e d to g e th e r at c l o s i n g ,
has o f t e n c r e a te d c r e d i t o r confusion and r e s u l t e d In the in ad ver ten t
omission of one or more components of the fi n an c e charge when computing
the APR.
Another pr e v a l en t cause f o r d i f f i c u l t y r e l a t e s to the various uneven
payment schedules encountered with mortgage loan t r a n s a c t i o n s , s o - c a l l e d
" i r r e g u l a r t r a n s a c t i o n s . " Such uneven schedules most o f t e n r e s u l t from
renewal premiums f o r p r i v a t e or government mortgage guarantee in su ra nce .
These renewal premiums, which must be included as part of the fin an c e
charge under the r e g u l a t i o n , are ass e ss ed In a number of ways depending
on the i n s u r e r . Many common p o l i c i e s compute the premium annually on
the d e c l i n i n g balance of the loan p r i n c i p a l , with o n e - t w e l f t h of the
annual premium c o l l e c t e d by the c r e d i t o r monthly. Because the premium
d e c l i n e s each 12-month per io d, i t i s neces sary to c r e a t e a loan amorti­
z a t i o n schedule, de rive the a n t i c i p a t e d annual renewal premium charge
a t each ann iversary d a t e , and then determine the r e s u l t a n t d e c l i n i n g
payment schedule. The APR f o r the payment schedule thus developed may
be derived by the F ed era l Reserve Board 's "General Formula" ( Supplement I
to R e g u la t io n Z) or the F e d e r a l Reserve Bo ard's APR T a b l e s , Volume I I ,
f o r i r r e g u l a r t r a n s a c t i o n s . Use of the Volume I I t a b l e i s complex and
time consuming. Use of the "General Formula" r e q u i r e s , a t the l e a s t , a
f i n a n c i a l f u n c t i o n or programmable c a l c u l a t o r , and i f a s i g n i f i c a n t
volume of loans i s to be achieved, complete automation of the e n t i r e
computation proce ss i s d e s i r a b l e .
The same g en er a l process de scr ibe d above would apply to any mortgage
loa n t r a n s a c t i o n t h a t involves unequal disbursements or payments over

the term of the loan. A t y p i c a l example would be a common c o n s t r u c t i o n
loan where funds are disbursed as needed a t i r r e g u l a r i n t e r v a l s .
In
such complex s i t u a t i o n s , c r e d i t o r s have been prone both to computational
e r r o r s and t o attempting mathematical s h o r t c u t s which may r e s u l t in
erroneous APR d i s c l o s u r e s .
Because the d i s c l o s u r e s given i n connection with mortgage loans are
o f t e n c o r r e c t exce pt f o r the f i n a l computation of the APR, and because
of contin uin g c r e d i t o r confusion with r e s p e c t to (a) d i f f e r e n t i a t i n g
between c l o s i n g c o s t s which are and are not considered prepaid f in a n c e
charges and (b) the c o r r e c t method f o r c a l c u l a t i n g the APR on " i r r e g u l a r
loan t r a n s a c t i o n s , " e s p e c i a l l y where mortgage guarantee insurance or
c o n s t r u c t i o n f in a n c i n g i s involved, the agen cie s request comment on
the th r e e q ue sti on s s e t f o r t h below.
F i r s t , comment i s requested on the p a r t i c u l a r a sp e c t s of r e a l property
t r a n s a c t i o n s t h a t c r e a t e the most se r io u s problems f o r c r e d i t o r s attempting
to comply with R e g u l a t i o n Z. Comment i s requested on f e a s i b l e s o l u t i o n s
to th es e problems, in c lu d in g , but not l i m i t e d t o , such things as the
a v a i l a b i l i t y of more e x t e n s iv e t e c h n i c a l i n s t r u c t i o n s , b e t t e r education
of c r e d i t o r s t a f f s and changes i n lending p r a c t i c e s designed to f a c i l i t a t e
e a s i e r computation of APRs.
Second, the a g en ci e s requ est comment on how important or u s e f u l the APR
d i s c l o s u r e i s to the borrower's a c t u a l s e l e c t i o n of a lender in r e a l
property c r e d i t t r a n s a c t i o n s .
I n p a r t i c u l a r , comment i s requested on
whether borrowers normally have already s e l e c t e d a c r e d i t o r on the b a s i s
of o the r info rmat ion by the time APR (and o the r TIL) d i s c l o s u r e s are
provided p r i o r to consummation of the loan c o n t r a c t .
I f creditor se lec­
t i o n does take pla c e p r i o r to the r e c e i p t of Truth i n Lending d i s c l o s u r e s ,
the ag en ci e s requ est comment on:
(1) what o th er comparative information
and c r i t e r i a are used i n shopping f o r mortgage c r e d i t , and (2) what
e f f e c t t h i s s i t u a t i o n should have on Truth i n Lending enforcement
procedures, e s p e c i a l l y with regard to reimbursement f o r understated
APRs.
Third, comment i s requested on whether i t would be e q u i t a b l e to l i m i t
the minimum c o r r e c t i v e a c t i o n required by the Guidelines f o r understated
APRs, in conne ct ion with r e a l property t r a n s a c t i o n s , to informing the
a f f e c t e d borrowers of t h e i r c o r r e c t APR and of the c i v i l l i a b i l i t y pro­
v i s i o n of S e c t i o n 130 o f the Truth in Lending Act.
I f such minimum
c o r r e c t i v e a c t i o n requirement were adopted by the a g e n c i e s , comment i s
requested on:
(1) whether t h i s pr ovi sio n should remain e f f e c t i v e f o r
only a l i m i t e d period of time during which c r e d i t o r s would be expected
to seek out expe rt advice and p e r f e c t t h e i r computational procedures,
a f t e r which time un de rstated APRs would r e q u i r e reimbursement, and
(2 ) whether such l i m i t e d minimum c o r r e c t i v e a c t i o n should apply only
to " i r r e g u l a r t r a n s a c t i o n s " such as loans having mortgage guarantee
in surance or loans f o r c o n s t r u c t i o n fi n a n c in g .

-8-

3.

Treatment of Exempt States.

The Board of Governors of the F e d e ra l Reserve System r e q u e st s comment
on whether s t a t e s which have re ce iv e d an exemption from the Truth in
Lending requirements should be required to adopt enforcement p o l i c i e s
s u b s t a n t i a l l y s i m i l a r to the Guidelines i n order to maintain t h e i r
exemption.
Currently f i v e s t a t e s (Maine, M a ssa ch u se tt s, Con ne cticu t,
Oklahoma, and Wyoming) have been granted exemptions from most of the
F e d e ra l Truth i n Lending requirements by v i r t u e of t h e i r having sub­
s t a n t i a l l y s i m i l a r s t a t e laws and adequate p r o v i si o n s f o r e nf or c in g
those laws. Thus, s t a t e - c h a r t e r e d i n s t i t u t i o n s normally s u b j e c t to
F ed era l Truth i n Lending j u r i s d i c t i o n are in s t e a d s u b j e c t to s t a t e
jurisdiction.
The i s s u e i s whether those s t a t e s , as a c o n d it io n of
maintaining adequate p r o v i si o n f o r enforcement, and thus t h e i r e l i g i ­
b i l i t y f o r exemption, should be required to have pr o vi sio n s f o r reim­
bursement s i m i l a r to those which would be imposed by the Federal
ag en cie s i f the exemption did not e x i s t .
*

*

*

*

*

*

*

The fol low ing amendments a re proposed pursuant to the enforcement a u t h o r i t y
contained i n 15 U.S.C. S e c t i o n 1607 and 12 U.S.C. S e c t i o n 1818(b) i n the case s
of the Board of Governors of the F e d e ra l Reserve System, the F ed er a l Deposit
Insurance Corporation, and the O f f i c e of the Comptroller of the Currency,
pursuant to 15 U.S.C. S e c t i o n 1607 and 12 U.S.C. S e c t i o n s 1 4 6 4 ( d ) ( 2 ) and 1730( e)
i n the case of the F ed er a l Home Loan Bank Board, and pursuant to 15 U.S.C.
S e c t i o n 1607 and 12 U.S.C. S e c t i o n 1 7 8 6 ( e ) ( 1 ) i n the ca s e of the National
Credit Union Ad minist ra tion.
1.

D e f i n i t i o n s , S e c t i o n 3 i s amended by s u b s t i t u t i n g " 1 /4 of 1
percentage p o i n t " f o r " 1 / 8 of 1 percentage p o i n t . "

2.

General P o l i c i e s , S e c t i o n 3 i s amended d e l e t i n g the cu rr en t
s e c t i o n and s u b s t i t u t i n g the f o llo w in g :
. . . C o r r e c t i v e a c t i o n s h a l l be required f o r a l l v i o l a t i o n s wit hin
the scope of th es e Guidelines ( 1 ) c i t e d i n the c u rr e n t examination,
or (2) c i t e d i n an e a r l i e r examination or supervisory l e t t e r when
an agency determines t h a t the c r e d i t o r f a i l e d to c o r r e c t any such
p r a c t i c e by the next succeeding examination.
C o rr e c t iv e a c t i o n
under ( 1 ) w i l l be required f o r a l l loans consummated si n c e the
date of the examination immediately preceding the c u r re n t examina­
tion.
C o r r e c t i v e a c t i o n under ( 2 ) w i l l be required f o r a l l loans
consummated a f t e r the date of such r e p o r t or l e t t e r in which the
p r a c t i c e was f i r s t c i t e d .
Current examinations s h a l l mean examina­
t i o n s conducted a f t e r January 4 , 1979.

3.

General P o l i c i e s , S e c t i o n 1 (a ) i s amended by adding the fo llowing
a t the end of the s e c t i o n :
. . . n o r w i l l i t preclude any agency from de v ia ti n g from the Guidelines
( 1 ) with regard to an i n d iv id u a l c r e d i t o r when the agency encounters
-9-

unique s i t u a t i o n s r a i s i n g t e c h n i c a l q ue st io n s as to the a p p l i c a t i o n
o f the G u id e li n e s , or ( 2 ) a f t e r n o t i c e to the F ed era l F i n a n c i a l
I n s t i t u t i o n s Examination C oun ci l, when the agency encounters s i t u a ­
t i o n s which involve s i g n i f i c a n t i s s u e s or common c r e d i t o r p r a c t i c e s .
Any such d e v ia ti o n s s h a l l be c o n s i s t e n t with the i n t e n t o f the
Guidelines•

Dated:

Dated:

October 15, 1979

Dated:

October 15, 1979

Dated:

October 15 , 1979

Dated:

(s ig n e d ) Theodore E. A l l i s o n
Theodore E. A l l i s o n , S e c r e t a r y
Board of Governors o f the
Fed era l Reserve System

October 15, 1979

October 15, 1979

( si g ne d) J . J . Finn___________
J . J . Finn, S e c r e t a r y
Fed era l Home Loan Bank Board

(s ig ne d) Lewis G. Odom, J r .
Lewis G. Odom, J r .
Se n io r Deputy Comptroller
Comptroller of the Currency

(s ig ne d) Hoyle L. Robinson_____________
Hoyle L. Robinson
Ex ec u ti ve S e c r e t a r y
Feder al Deposit Insurance Corporation

( signed) Rosemary Brady
Rosemary Brady
S e c r e t a r y to N
CUA Board
National Credit Union Administration

-1 0 -


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102