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F ederal r e se r v e Bank o f Dallas
DALLAS, TEXAS

75222

Circular No. 80-142
July 23, 1980

TRUTH IN LENDING
Administrative Enforcement of Restitution
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
On July 3, 1980, the Board of Governors of the Federal Reserve
System adopted the attached policy guide which calls for restitution of
understated finance charges and annual percentage rates in consumer credit
transactions. The policy guide was developed by the Federal Financial Institutions
Council and has been adopted by the Comptroller of the Currency, the F.D.I.C.,
the Federal Home Loan Bank Board and the other agencies represented on the
Council.
Under the policy guide, restitution will be required where there is a
clear and consistent pattern or practice of violations or where gross negligence
or willful violations designed to mislead borrowers have occurred.
The policy guide, which is enclosed, follows the provisions of the Truth
in Lending Simplification and Reform Act and is more fully explained in the press
release printed on the following pages. Member banks should place this circular
with the Regulation Z section of their Regulations Binders for future reference.
Questions concerning Regulation Z 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
Enclosure (1)

Banks and others are encouraged to use the following incoming W A T S 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)

FEDERALRESERVEpressrelease

For immediate release

July 3, 1980

The Federal Reserve Board today adopted the attached Policy Guide
concerning reimbursement to borrowers by State member banks when the annual
percentage rate or finance charge required to be disclosed under the Truth in
Lending Act has been understated, in excess of certain tolerances.
The Policy Guide was developed by the Board, and other agencies
represented on the Federal Financial Institutions Examination Council, to
embody the requirements of a section of the Truth in Lending Simplification
Act .1/
In general, restitution is required under the Simplification Act
when the understatement of the cost of borrowing is part of a clear and
consistent pattern or practice of violations, or results from gross
negligence or from willful violation intended to mislead the person to whom
the credit was extended.
The restitution requirements of the Act apply to all types of
credit subject to Truth in Lending disclosures.

However, there are certain

special rules applying to mortgage transactions involving irregular payments
The Simplification Act provides that existing open-end and
closed-end transactions in which the APR or finance charge was understated
will be subject to adjustment according to different time frames, going
back in some cases as far as July 1, 1969 (see Corrective Action in the
attached Policy Guide).

Title VI of the Depository Institutions Deregulation and
Monetary Control Act of 1980

-2 Where the amount of an adjustment would be less than $1, no
restitution

to the consumer would be required, but in such cases outstanding

for more than a year after the violation, payments to the U.S. Treasury may
be ordered.
A uniform interagency plan will be developed within the Examination
Council for implementing the restitution provisions.

Institutions identified

as having reimbursable violations under Regulation Z Enforcement Guidelines
that were developed by the agencies last year will be examined by the agencies
within a year, to determine if restitution is necessary under this new policy.

Attachment

ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING ACT - RESTITUTION

The Depository Institutions Deregulation and Monetary Control Act
of 1980 (P. 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 in cases where an annual percentage rate or finance charge was
inaccurately disclosed.

It generally requires the agencies to order resti­

tution 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, 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
normal regulatory process.

S 608

as part of the

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

-2-

Deposit Insurance Corporation, and the Office of the Comptroller of the
Currency; 15 U.S.C

S

1607 and 12 U.S.C.

SS

1464(d)(2) and 1730(e) in the

case of the Federal Home Loan Bank Board; and, 15 U.S.C. § 1607 and 12 U.S.C.
S 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 Truth in
Lending Act ("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.

"Irregular Mortgage Transaction" means a loan secured by real estate for
which the annual percentage rate (APR) cannot be calculated using Volume I
of the Federal Reserve System's Truth in Lending, Regulation Z, Annual
Percentage Rate Tables.

3.

"Lump Sum Method" means a method of reimbursement in which a cash payment
equal to the total adjustment will be made to a consumer.

4.

"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)
5.

a reduction of the remaining payment amounts on the loan.

"Understated APR" means:
a.

For other than irregular mortgage transactions, a disclosed APR
which, when increased by one-quarter of one percentage point, is
less than the actual APR calculated under the Act, without taking
into account the tolerance provided by section 107(c) of that Act.

-3 -

6.

b.

For irregular mortgage transactions consummated before April 1, 1981,
a disclosed APR which is less than the actual APR calculated under
section 107(c) of the Act, including a one-half of one percentage point
tolerance.

c.

For irregular mortgage transactions consummated after March 31, 1981,
but before April 1, 1982, a disclosed APR which, when increased by
one-quarter of one percentage point (instead of one-half of one
percentage point), is less than the actual APR calculated under the Act,
without taking into account the tolerance provided by section 107(c)
of that Act.

d.

For all loans consummated after March 31, 1982 (including irregular
mortgage transactions), which have an amortization schedule of 10
years or less, a disclosed APR which, when increased by one-quarter
of one percentage point, is less than the actual APR calculated under
the Act, without taking into account the tolerance provided by section
107(c) of the Act.

e.

For all loans consummated after March 31, 1982 (including irregular
mortgage transactions), which have an amortization schedule of more
than 10 years, a disclosed APR which is less than the actual APR,
including the tolerance contained in section 107(c).

f.

For all loans determined to contain a willful violation intended to
mislead a consumer, a disclosed APR which is less than the actual APR
including the tolerance contained in section 107(c).

"Understated Finance Charge" means a disclosed finance charge which, when
increased by a numerical tolerance that is generated by the corresponding
1/

APR tolerance,

is less than the finance charge calculated under the Act.

1/ Finance charge tolerance: 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
which 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 APR will
be 18.25%. The finance charge generated by the APR of 18% on that loan
would be $900. The difference between $912.50 and $900 produces a numer­
ical finance charge tolerance of $12.50. If the disclosed finance charge
is not understated by more than $12.50, reimbursement would not be ordered.

-4 -

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 vio­
lation resulted from a clear and consistent pattern or practice or gross
negligence where:

3.

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.

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.]

Each closed-end credit transaction containing a willful violation intended
to mislead the consumer consummated since July 1, 1969 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.

-5-

C alculating

th e A djustm ent

Consumers will not be required to pay any amount in excess of the
finance charge or dollar equivalent of the APR actually disclosed on trans­
actions 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 Non-Disclosure of the APR or Finance Charge
1.

In cases

where an APR was required to be disclosed

but was not, the dis­

closed 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.

T hrough March 3 1 ,

1982:

-6 -

a. 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.
b. 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 creditor shall, unless a claim was made on
the insurance policy and paid, be required to send a written notice
to the affected consumer disclosing the cost of the insurance and
notifying the consumer that the insurance is optional and may be can­
celled within 45 days to obtain a full refund of all premiums charged.
If the creditor receives no response from the consumer within 45 days,
the insurance will remain in effect and no further corrective action,
with respect to that loan, will be required.
2.

After March 31, 1982, the above violations of section 106(b) of the Act
will be treated as APR or finance charge violations for adjustment pur­
poses, as applicable.

Special Disclosures
Adjustments will not be required for violations involving the dis­
closures required by sections 106(c) and (d) of the Act.
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 cor­
rectly 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 non-substantive disclosure violation which did not adversely
affect information provided to the consumer and which did not mislead or
otherwise deceive the consumer.

-7 -

S a f e t y and S o u ndness

In connection with loans consummated before April 1, 1980, if full
adjustments would have a significantly adverse impact upon the safety and
soundness of the creditor, partial adjustments which do not have such an
impact may be required.

In connection with loans consummated after March 31,

1980, full adjustments will always be required.

However, the affected cred­

itor will be permitted to make the full adjustment in partial payments over
an extended period in order to minimize the adverse impact on its safety and
soundness.
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 the finance charge 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 5 130,
Civil Liability, of the Truth in Lending Act.