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FE D E R A L RESERVE B A N K
OF N EW YO R K
r Circular No. 8 8 7 1 1
L
July 11, 1980
J
R E S T IT U T IO N U N D E R T H E T R U T H IN L E N D IN G A C T
P o licy G u id e F or R estitu tion
To A ll Member Banks, and Others Concerned,
in the Second Federal Reserve District:
Enclosed is a copy of a “Policy Guide for Restitution under the Truth in Lending A ct/’
adopted by the Board of Governors of the Federal Reserve System, that explains the conditions
under which reimbursement by State member banks to borrowers must be made when the annual
percentage rate or finance charge required to be disclosed under the Truth in Lending Act has
been understated. The following is quoted from the text of a statement issued by the Board of
Governors, announcing the adoption of the Policy Guide:
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 T ruth in Lending Simplifica
tion 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 T ruth in Lending dis
closures. 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 A P R or
finance charge was understated will be subject to adjustm ent according to different time frames, going back in
some cases as far as July 1, 1969 (see Corrective Action in the [enclosed] Policy Guide).
W here the amount of an adjustm ent 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 deter
mine if restitution is necessary under the new policy.
1 Title VI of the Depository Institutions Deregulation and Monetary Control Act of 1980
Additional copies of the Policy Guide will be furnished upon request. Questions regarding the
Board’s restitution policy may be directed to our Consumer Affairs and Bank Regulations
Department (Tel. No. 212-791-5914).
A
nthony
M.
S olom on,
P r e s id e n t.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
P O L IC Y G U ID E F O R R E S T IT U T IO N U N D E R T H E T R U T H IN L E N D IN G AC T
ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING ACT - RESTITUTION
The Depository In stitu tio n s Deregulation and Monetary Control Act
o f 1980 (P. L. 96-221), was enacted on March 31, 1980. T itle VI of that
Act, the Truth in Lending Sim p lifica tio n and Reform Act, amends the Truth
in Lending Act, 15 U.S .C.§ § 1601 et seq. Section 608 of T itle 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. I t generally requires the agencies to order r e s t i
tution when such disclosure errors resulted from a clear and consistent
pattern or practice of v io la tio n s, gross negligence, or a w illfu l vio la tio n
which was intended to mislead the person to whom the cre d it was extended.
However, the Act does not preclude the agencies from ordering re stitu tio n
for isolate d disclosure errors.
This policy guide summarizes and explains the re stitu tio n provisions
of the Truth in Lending Act, as amended. The material also explains corrective
actions the fin a n cia l regulatory agencies believe w ill be appropriate and
generally intend to take in those situ a tio n s in which the Act gives the
agencies the authority to take equitable remedial action.
The agencies anticipate that most fin an cial in stitu tio n s w ill
vo lu n tarily comply with the re stitu tio n provisions of § 608 as part of the
normal regulatory process. I f a creditor does not vo lu n ta rily act to correct
v io la tio n s, the agencies w ill use th eir cease and d e sist 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, and the O ffice of the Comptroller of the
Currency; 15 U.S.C. § 1607 and 12 U.S.C. §§ 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.
§ 1786(e)(1) in the case of the National Credit Union Administration.
[Enc. Cir. No. 8871]
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RESTITUTION PROVISIONS
D e fin itio n s
Except as provided below, a ll d e fin itio n s are those found in the Truth in
Lending Act ("A c t") 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.
"Irre g u la r Mortgage Transaction" means a loan secured by real estate for
which the annual percentage rate (APR) cannot be calculated using Volume 1
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 w ill be made to a consumer.
4.
"Lump Sum/Payment Reduction Method" means a method of reimbursement in
which the total adjustment to a consumer w ill be made in two stages:
5.
a)
a cash payment that f u lly 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.
"Understated APR" means:
a.
For other than irre gu la r mortgage transactions, a disclosed APR
which, when increased by one-quarter of one percentage point, is
le ss than the actual APR calculated under the Act, without taking
into account the tolerance provided by section 107(c) of that Act.
b.
For irre gu la r mortgage transactions consummated before April 1, 1981,
a disclosed APR which is le ss than the actual APR calculated under
section 107(c) of the Act, including a one-half of one percentage point
tolerance.
c.
For irre gu la r mortgage transactions consummated after March 31, 1981,
but before A pril 1, 1982, a disclosed APR which, when increased by
one-quarter of one percentage point (instead of one-half of one
percentage poin t), is le ss than the actual APR calculated under the
Act, without taking into account the tolerance provided by section
107(c) of that Act.
d.
For a ll loans consummated a fte r March 31, 1982 (including irre gu lar
mortgage tran saction s), which have an amortization schedule o f 10
years or le ss , a disclosed APR which, when increased by one-quarter
of one percentage point, is le ss than the actual APR calculated under
the Act, without taking into account the tolerance provided by
section 107(c) of the Act.
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6.
e.
For a ll loans consummated after March 31, 1982 (including irre gu la r
mortgage tran saction s), which have an amortization schedule of more
than 10 years, a disclosed APR which is le ss than the actual APR,
including the tolerance contained in section 107(c).
f.
For a ll loans determined to contain a w illfu l v io la tio n intended to
mislead a consumer, a disclosed APR which is le ss 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
APR tolerance, 1/ is le ss than the finance charge calculated under the Act.
De Minimis Rule
I f the amount of adjustment on an account is le ss than $1.00, no
re stitu tio n w ill be ordered. However, the agencies may require a creditor to
make any adjustments of le ss than $1.00 by paying into the United States
Treasury, i f more than one year has elapsed since the date of the v io la tio n .
Corrective Action Period
1.
Open-end cred it transactions w ill be subject to an adjustment i f the
v io la tio n occurred within the two-year period preceding the date of the
current examination.
2.
Closed-end cre d it transactions w ill be subject to an adjustment i f the
v io latio n 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 giv in g rise to the v io la tio n is id en tifie d during
a current examination. Loans containing the v io la tio n which were
consummated since the date of the immediately preceding examination
are subject to an adjustment.
1/ Finance charge tolerance: the finance charge tolerance for each loan w ill
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. I f the amount
financed is $5,000 and the finance charge is $912.50, the APR w ill 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 numerical
finance charge tolerance of $12.50. I f the disclosed finance charge is not
understated by more than $12.50, reimbursement would not be ordered.
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c.
There is an understated APR or understated finance charge, the
practice giv in g rise to the v io la tio n was id en tifie d during the
prior examination, and the practice is not corrected by the date
of the current examination. Loans containing the v io la tio n which
were consummated since the creditor was f i r s t n otifie d in w riting
of the v io la tio n are subject to an adjustment. [Prior examinations
include any examinations conducted since July 1, 1969.]
3.
Each closed-end credit transaction containing a w illfu l v io la tio n 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 w ill not be ordered
i f the v io la tio n occurred in a transaction consummated more than two years
prior to the date of the current examination.
C alculating the Adjustment
Consumers w ill not be required to pay any amount in excess of the
finance charge or d o lla r equivalent of the APR a ctu ally disclosed on tran s
actions involving:
1.
Understated APR v io la tio n s on transactions consummated between
January 1, 1977 and March 31, 1980, or
2.
W illfu l v io la tio n s which were intended to mislead the consumer.
On a ll other transactions, applicable tolerances provided in the
d e fin itio n s of understated APR and understated finance charge may be applied
in calcu la tin g the amount of adjustment to the consumer's account.
Methods of Adjustment
The consumer's account w ill be adjusted using the lump sum method or
the lump sum/payment reduction method, at the discretion of the creditor.
V iolation 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 d is
closed APR shall be considered to be the contract rate, i f 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 w ill not be required to pay an
amount greater than the actual APR reduced by one-quarter of one percentage
point, in the case of f i r s t lie n mortgage transactions, and by one percentage
point in a ll other transactions.
3.
In cases where a finance charge was not disclosed, no adjustment w ill be
ordered.
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V iolations Involving the Improper Disclosure of Credit Life , Accident, Health,
or Loss of Income Insurance
1.
2.
Through March 31, 1982:
a.
I f the creditor has not disclosed to the consumer in w riting that
credit l i f e , accident, health, or lo ss o f income insurance is optional,
the insurance shall be treated as having been required and improperly
excluded from the finance charge. An adjustment w ill be ordered i f
i t resu lts in an understated APR or understated finance charge. The
insurance w ill remain in effect for the remainder of i t s term.
b.
I f the creditor has disclosed to the consumer in w riting that credit
li f e , accident, health, or lo ss of income insurance is optional, but
there is either no signed insurance option or no disclosure of the
cost o f the insurance, the creditor sh a ll, unless a claim was made on
the insurance policy and paid, be required to send a written notice
to the affected consumer d isc lo sin g the cost o f the insurance and
no tifyin g the consumer that the insurance is optional and may be can
celled within 45 days to obtain a fu ll refund of a ll premiums charged.
I f the creditor receives no response from the consumer within 45 days,
the insurance w ill remain in effect and no further corrective action,
with respect to that loan, w ill be required.
After March 31, 1982, the above v io la tio n s of section 106(b) o f the Act w ill
be treated as APR or finance charge v io la tio n s for adjustment purposes, as
applicable.
Special Disclosures
Adjustments w ill not be required for v io la tio n s involving the d is
closures required by sections 106(c) and (d) of the Act.
Obvious Errors
I f an APR was disclosed correctly, but the finance charge required
to be disclosed was understated, or i f the finance charge was disclosed cor
re ctly but the APR required to be disclosed was understated, no adjustment
w ill be required i f the error involved a disclosed value which was 10 percent
or le ss of the amount that should have been disclosed.
Agency Discretion
Adjustments w ill not be required i f the agency determines that the
disclosure error resulted from any unique circumstance involving a c le a rly
technical and non-substantive disclosure v io la tio n which did not adversely
affe ct information provided to the consumer and which did not mislead or
otherwise deceive the consumer.
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Safety and Soundness
In connection with loans consummated before A pril 1, 1980, i f fu ll
adjustments would have a s ig n ific a n tly adverse impact upon the safety and
soundness of the creditor, p artial adjustments which do not have such an
impact may be required. In connection with loans consummated after March 31,
1980, fu ll adjustments w ill always be required. However, the affected cred
ito r w ill be permitted to make the f u ll adjustment in p artial payments over
an extended period in order to minimize the adverse impact on i t s safety and
soundness.
Exemption from Restitution Orders
A creditor w ill not be subject to an order to make an adjustment
i f within 60 days after discovering a disclosure error, whether pursuant to
a fin al written examination report or through the c re d ito r's own procedures,
the creditor n o tifie s the person concerned of the error and adjusts the
account to ensure that such person w ill not be required to pay a finance
charge in excess of the finance charge actu a lly disclosed or the d o lla r
equivalent of the APR disclosed, whichever 1s lower. This 60-day period
for correction of disclosure errors is unrelated to the provisions of
f 130, C iv il L ia b ilit y , of the Truth in Lending Act.
@FedFRASER