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Federal Deposit Insurance Corporation

Division of Supervision

550 17th Street NW, Washington, DC 20429

Reimbursable Violations of the Truth in Lending Act
FIL-20-98
February 25, 1998

TO:

CHIEF EXECUTIVE OFFICER AND COMPLIANCE OFFICER

SUBJECT:

Reimbursable Violations of the Truth in Lending Act

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The Federal Deposit Insurance Corporation (FDIC) is providing additional guidance to bank
management on how to prevent violations of the Truth in Lending Act and its implementing
regulation, Regulation Z. These violations have the potential to expose an institution to civil
liability and require adjustments to the accounts of individual consumers.

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Because of the statutory requirements of the Truth in Lending Act, the FDIC (as well as the
other federal banking agencies) has little supervisory latitude to negotiate settlements involving
reimbursements. See FIL-19-97, dated March 10, 1997, "Requests for Relief from
Reimbursement under the Truth in Lending Act."
There are two distinct areas we would like to highlight where examiners have occasionally
discovered reimbursable violations. The first involves the disclosure of credit life insurance when
it is written in connection with a credit transaction. The second involves the incorrect usage of
Appendix D in making disclosures for multiple advance construction loans.
Credit Life Disclosures

A violation occurs when an institution fails to provide required disclosures on insurance policies
written in connection with credit transactions. Some institutions incorrectly assume that if
insurance is not categorized as "credit life" insurance by state law, the disclosures in §226.4(d)
of Regulation Z do not apply.

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The provisions of §226.4(d) apply to the premiums for credit life, accident, health, or loss-ofincome insurance as well as debt cancellation coverage.
If a term insurance policy is written in connection with a credit transaction and the institution is
the beneficiary of the policy directly (or indirectly through assignment by the beneficiary), the
product should be treated as credit life. The institution must then provide the proper disclosures
to the consumer or it must include the premium in calculating the finance charge.
Regulation Z requires that the premium for insurance written in connection with a credit
transaction be included in the finance charge unless all three of the following requirements are
met:


A written disclosure that the purchase of the insurance is optional and is not required by
the creditor;



The premium for the initial term of insurance coverage is disclosed; and



The consumer signs or initials an affirmative written request for the insurance after
receiving the previous disclosures.

A number of violations of §226.4(d) requirements have occurred because the institution failed to
obtain the customer's affirmative written request indicating that the insurance coverage was
desired. Having the customer complete an application to the insurance company for the
insurance is not a substitute for obtaining the customer's affirmative request for insurance. At a
minimum, a "yes" or "no" box should be checked to indicate the customer's request. Violations
have also been cited because the institution failed to disclose the amount of the premium for the
initial term of the insurance.
Multiple Advance Construction Loans

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In interim construction financing involving multiple advances, Appendix D to Regulation Z may
be used to estimate the interest portion of the finance charge and calculate the annual
percentage rate (APR). Appendix D uses an approximation based on the premise that only onehalf of the money is outstanding for 100 percent of the time. Improper use of Appendix D may
result in understated APRs, which, if outside of the permissible tolerances, will require
reimbursement to the consumer.
In some interim construction financing, inclusion of the inspection fees within the title
preparation or title insurance costs has resulted in reimbursements to the consumer because
the fees were not identified as a finance charge. The Federal Reserve Board's "Truth in Lending
Official Staff Commentary to Regulation Z §226.4(a)" states that inspection and handling fees
for the staged disbursement of construction loan proceeds are to be considered as finance
charges.
Here are some suggestions to assist banks in avoiding the more common reimbursement
pitfalls involving the requirements of §226.4(d) and in using Appendix D properly:
Provide training for employees who prepare disclosures to ensure they are aware of the
more common pitfalls and know how to avoid them. Knowledge of the types of fees that
are considered finance charges is critical in making correct disclosures. Refer to the
Official Staff Commentary for §226.4, which provides examples of what should and should
not be included as a finance charge. When preparing disclosures for multiple advance
construction loans, refer to the instructions in Appendix D and the associated Official Staff
Commentary.

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



Develop procedures for the compliance officer/auditor to periodically verify the accuracy of
disclosed rates and finance charges. Test the processing system and/or calculation tools
whenever changes are made to the bank's loan processing system through vendor
updates, purchases of new services, or conversions. When the bank introduces new loan
programs, verify the accuracy of the disclosures.



Develop an ongoing internal compliance review system to monitor transactions for
compliance.

When violations are discovered that require reimbursement to consumers, FDIC examiners use
the "Joint Statement of Policy on Administrative Enforcement of the Truth in Lending Act" to
establish the corrective action period. For loans involving closed-end credit, the corrective action

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period has generally been from the current examination back to the "immediately preceding
examination." The banking agencies had uniformly taken the position that compliance with the
requirements of the Truth in Lending Act and Regulation Z would have been reviewed during
the "immediately preceding examination." However, courts have recently held that "immediately
preceding examination," means the examination of any type conducted immediately prior to the
current examination, including examinations in which no review of compliance with the Truth in
Lending Act was conducted. The banking agencies have directed their supervisory staff to
implement the policy as enunciated by the courts. Guidance has been transmitted by each of
the agencies to its examination and supervision staff regarding this change in policy. The
Federal Financial Institutions Examination Council's (FFIEC) Consumer Compliance Task Force
recently approved the attached question and answer guide on the appropriate time period for
taking retrospective corrective action when reimbursable violations are discovered. However,
once the violation has been brought to the attention of bank management, intervening
examinations of any kind will not relieve the bank of the responsibility for taking corrective
action.

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

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For further information, please contact your FDIC Division of Compliance and Consumer Affairs
(DCA) Regional Office on the attached list or one of the following FDIC staff members:
Ken Baebel, DCA Senior Review Examiner, (202) 942-3086, e-mail (Jbaebel@fdic.gov).
Pamela Coxe, DCA Review Examiner, (202) 942-3087, e-mail (Pcoxe@fdic.gov).
Andrea Winkler, Counsel in the Legal Division, (202) 736-0762, e-mail
(awinkler@fdic.gov).
Carmen J. Sullivan
Director

Attachments:

Interagency Questions and Answers Regarding Corrective Action Time Periods Under the Truth
in Lending Act Policy Guide(January 1998)

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FDIC Regional Offices (7 kb, PDF help or hard copy)

Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's
Public Information Center, 801 17th Street, N.W., Room 100, Washington, D.C. 20434 (800276-6003 or (703) 562-2200).