TILA Restitution

Question 1

Under TILA when do regulators have authority to carry out administrative actions? (enforcement actions / restitution)

Answer 1

When the true finance charge or APR exceeds the disclosed finance charge or APR by more than a specified accuracy tolerance. This includes unintentional errors and isolated violations.

Question 2

Under TILA when are regulators required to reimburse consumers due to an understatement of the APR or finance charge? (3)

Answer 2

• patterns or practice violations (occurred with a common cause, consistently or frequency, reflecting a pattern with specific type(s) of consumer credit)
• gross negligence
• willful noncompliance intended to mislead the person to whom the credit was extended.

Question 3

What actions can creditors take that may allow them to avoid regulatory order to reimburse a consumer for an understatement? (3)

Answer 3

• self identifying the error
• notifying the customer of the error within 60 days of the discovery
• adjusting their account within 60 days of discovery (consumer pay no more than lesser or finance charge disclosed or dollar equivalent of APR actually disclosed)

Question 4

If a disclosure error occurs, is the creditor required to re-disclose after a loan has been consummated or opened?

Answer 4

No

Question 5

What enforcement action can be used if a creditor refuses to voluntarily comply with restitution provisions?

Answer 5

The agency can use cease and desist authority

Question 6

What is the lump sum method of reimbursement?

Answer 6

Cash payment equal to the total adjustment will be made to the consumer

Question 7

What is the lump sum/ payment reduction method of reimbursement?

Answer 7

Total adjustment to consumer will be made in two stages:

• cash payment that fully adjusts the account up to the time of the cash payment
• reduction of the remaining payment amounts on the loan

Question 8

Is restitution available for overstated finance charges or APRs?

Answer 8

No restitution is only available for understated finance charges or APR that do not fall within the tolerances set under the act

Question 9

What is the De Minimis Rule for restitution?

Answer 9

If the amount of adjustment required is less than $1, no restitution will be ordered. However, agencies may require a creditor to pay it into the US treasury if more than 1 year has passed since the date of the violation

Question 10

What is the corrective action period for Open-end credit?

Answer 10

Will be subject to an adjustment if the violation occurred within the 2 year period preceding the date of the current examination

Question 11

What is the corrective action period for Closed-end credit?

Answer 11

Subject to an adjustment if the violation resulted from pattern or practice or gross negligence where:

• understatement and practice giving rise to violation was identified during current examination (loans with violations that were consummated immediately preceding the exam are subject to adjustment)
• Understatement a practice was identified during prior exam and was uncorrected by date of current exam. (loans with violation that were consummated since the creditor was first notified in writing of the violation are subject to adjustment)

For terminated loans, an adjustment will not be ordered if the violation occurred in a transaction consummated more than two years prior to the date of current exam.

Question 12

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 what (2)?

Answer 12

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

Question 13

Which party decides the method of adjustment?

Answer 13

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.

Question 14

How should the adjustment be determined in the following situation?

APR was required to be disclosed but was not

Answer 14

examiners will consider the contract rate listed on the note or TILA disclosure as the disclosed APR.

This rate will be used to calculate restitution as normal

Question 15

How should the adjustment be determined in the following situation?

APR was required but not disclosed, and no contract rate was disclosed

Answer 15

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.

Question 16

How should the adjustment be determined in the following situation?

Finance charge was not disclosed

Answer 16

No adjustment will be ordered

Question 17

What should be done if a creditor has not disclosed to the consumer in writing that credit life, accident, health or loss of income insurance is optional?

Answer 17

Insurance shall be treated as required but improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. Insurance will remain in effect for the remainder of the term.

Question 18

What should be done 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?

Answer 18

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.

Question 19

What should be done 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?

Answer 19

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.

Question 20

What is considered an understated APR?

Answer 20

Amort 10 years or less: disclosed APR, when increased by the greater of the APR tolerance in TILA or 1/4 of 1%, is less than the actual APR

Amort more than 10 yrs: disclosed APR which, when increased by greater of the APR tolerance (1/4 of 1% for irregular loans, 1/8 of 1% for all other loans) is less than the actual APR

Question 21

What is considered an understated finance charge?

Answer 21

means a disclosed finance charge which, when increased by the greater of the finance charge dollar tolerance specified in the Act or a dollar tolerance that is generated by the corresponding APR reimbursement tolerance, is less than the finance charge calculated under the Act.

For example, consider a single-payment loan with a one-year maturity that 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 actual APR will be 18.25%. The finance charge generated by an APR of 18% (applying the one-quarter of one percent APR tolerance to 18.25%) 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.

Question 22

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 one percent, the APR will be considered accurate and not subject to reimbursement if what? (2)

Answer 22

(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.

Question 23

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 one percent if the transaction is not considered to be an irregular transaction as defined by Regulation 12 CFR 226.22(a)(3)) or one quarter of one percent if the transaction is irregular according to the definition, the APR will be considered accurate and not subject to reimbursement if (2)?

Answer 23

(1) 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.

Question 24

True or false: In instances where restitution is required due to a clear and consistent pattern or practice of violations, gross neglect, or a willful violation. In such instances, a file search can be requested.

Answer 24

True, a file search may be requested to detect loans containing specific problems requiring restitution.

Question 25

True or false: Non Member banks cannot request relief from restitution from the FDIC

Answer 25

False, historically any such request has been treated as an application and the DCP director has the discretion to grant such requests, but this is rare.

Question 26

Should a nonmember bank wish to pursue a request for relief or reconsideration of restitution, the request will be processed within what time frames?

Answer 26

Initial request:

• up to $25M within 60 days from regional office (WO NA)
• $25M and above RO and WO within 30 days
• Approval RO and WO within 30 days

Reconsideration: RO and WO within 30 days

Question 27

What are the four instances where the FDIC has discretion to waive restitution?

First three are standard, fourth has 4 requirements that must be met and is the most often exception cited when requesting relief.

Answer 27

• error involves a fee or charge that would otherwise be excludable in computing the finance charge
• error involved a disclosed amount which was 10% or less of the amount that should have been disclosed and either the APR or Finance charge was disclosed incorrectly
• error involved a total failure to disclose either the APR or finance charge
• All below must be meet to meet this fourth exception:
• -error resulted from unique circumstance
• -disclosure violations are clearly technical and non-substantive
• -disclosure violations do not adversely affect information provided to the customer
• -disclosure violations have not misled or otherwise deceived the consumer

Question 28

A creditor will generally have no civil or regulatory liability if it takes what two affirmative corrective actions within 60 days of discovering an error (must be before receiving written notice of civil or regulatory action)

Answer 28

• Notify the consumer of the error

- provide restitution to the consumer for overcharges

Question 29

When is an error considered discovered?

Answer 29

When the institution either identifies the error through its own procedures or if it is disclosed in a written examination report

Question 30

What are the general procedures for making a request for relief from restitution?

Answer 30

Institution should request relief within 60 days of receipt of the ROE requesting a file search and restitution.

The request should be sent to the RD and contain action requested, relevant facts, reasons and analysis used as basis for request, and supporting dox.

Question 31

If a request for relief is denied, can the institution petition the FDIC for reconsideration?

Answer 31

Yes, they can do so within 15 days of written receipt of denial by filing a request for reconsideration with RD.

The FDIC will acknowledge receipt within 15 days and will provide written notification of determination within 60 days of receipt of request.

Question 32

What can a creditor do if the loan that triggered restitution is delinquent, in default, or has been charged off?

Answer 32

The creditor may apply all or part of the restitution to the amount past due.

Question 33

What is the general process for making restitution, how should it be done?

Answer 33

Restitution must be made expeditiously. When lump sum payments to consumers are required to be made, they must be provided to the consumer either by official check or a deposit into an existing unrestricted consumer asset account, such as an unrestricted savings, checking or NOW account

Question 34

What should examiners consider to determine if a pattern or practice exists for restitution purposes during the review of their initial sample of loans?

Answer 34

• if the frequency of violation represents at least 10% of credit transactions sampled that have same features or are subject to same requirements (that is only 2 of 25 or fewer loans, or 6 of 55 loans)
• within the given category of credit transactions there are 2 or more violations of the same type
• examiners should determine if the cause of the violation is other than a random error. (expand sample to include additional loans of the same type)

Question 35

Satisfying any one of what three criteria will help demonstrate the existence of a pattern or practice leading to violations discovered during the sampling process?

Answer 35

• conduct grounded in written or unwritten policy, procedures, or established practice
• similar conduct by a creditor toward multiple consumers
• conduct having some common source or cause within the creditor’s control

Question 36

Is this a pattern or practice and how should the sample (denominator) be determined?

A review of two mortgage loans and three unsecured consumer loans, where credit life insurance was
financed as part of the transactions, all lacked the affirmative written request for insurance and accompanying initials or signature

Answer 36

Yes. Even though samples of unsecured installment loans are normally separated from home mortgage loans, it may be reasonable to combine them when a violation is discovered that involves the same or similar omission of credit insurance disclosures even though the types of loans are quite different.

Question 37

How should examiners select the sample (denominator) in this scenario?

it is discovered that a new loan officer in the installment loan area has not been disclosing the amount of the premiums for disability insurance to customers, yet the mortgage loan department provides the correct disclosure when offering that insurance to customers

Answer 37

It would be appropriate to separate the sample from both departments because the cause of the error is solely within the installment loan area and confined to one loan officer.

Question 38

Why is it important for examiners to properly identify the universe being sampled?

Answer 38

Because examiners should be certain that both the number of violations (numerator) and the total sample of credit features reviewed (denominator) support their determination of a pattern or practice violation and identifying the denominator is a key factor in that process.

Question 39

What is the frequency of violations in this example?

In a review of 65 consumer loans, errors in credit insurance disclosures were discovered in all six loans involving consumer purchases of credit life insurance; however, no errors were discovered in 59 loans where the consumer did not purchase credit insurance.

Answer 39

The frequency of violations in this case is 100 percent (six of six instances) as these were the loans where the disclosures were required to be made but were not made correctly.

Question 40

In the following example, what should examiners request for the expanded sample?

Violations were found involving PMI.

Answer 40

To further test whether this error would constitute a pattern or practice, the examiner should sample additional mortgage loans where the purchase of PMI was required. It would not be appropriate to consider loans where PMI was not a requirement for the loan.

Question 41

In the following example what should examiners request for the expanded sample?

violations discovered in construction loans.

Answer 41

It would not be correct to consider all real estate loans as the applicable universe. The universe in that situation should consist of only construction loans to determine whether a particular pattern or practice was the cause of the violation.

Question 42

What must be included as part of the violation write up to support the presence of a pattern or practice? (3)

Answer 42

• type of loan
• special characteristics or features if any
• number of loans sampled with reimbursement violations

For violations involving understatements of APR and finance charges the larger of the reimbursable amounts will be identified.