We have about 150 loans where a $200 application and processing fee were left out as a prepaid, therefore understating the finance charge and the APR. Both are out of tolerance and most require reimbursement. ( I was on maternity leave and they implemented these changes and made their own decisions. See what happens with no compliance officer...banks can't live without us...well..they probable could but lets feel good about ourselves!)

This was not a deliberate mistake as they responded "we thought they had to pay them in advance to be a prepaid" -- examiners were just in and didn't catch it, safety and soundness will be in in December, and compliance won't be here for another 2 years.

Since it was stupidity and not a deliberate act to con the applicants would you reimburse? What about to the loans already paid off?

Help would be appreciated!

EEEEEEKkkkk!

Yeah, I would reimburse. But remember I come from a regulatory background so I'm inclined to be really conservative on this one. Reimbursing shows a good faith effort to correct a wrong that was done and would look good if anyone DID catch it somehow down the road. I also think it's the "right" thing to do in terms of rectifying the wrong that was inadvertently done to the consumer.

But this is just MY opinion and I'm sure the learned folks here will have better advice for you.

If the examiners didn't catch it, as I recall the rule from a court case some years ago, they can't go back any further than the last exam. If this is still the case you shouldn't have to worry about them. But the customers could still detect the error and get you a good one.

I'd recalc the disclosures and reimburse so you don't have to worry about the distressed borrower's attorney catching this years from now and hitting you up for more than $30M. Obviously management needs to be involved and weigh the risks under "Z", reputation, class actions, and the examiners knowing of this when they review your audit reports 2 years from now.

What are you pretending not to know? Reimburse ASAP!

Ouch! I had the same situation on construction loan inspection fees and I did reimburse. The damage was worth it though, because as Andy says it was not worth the worry of the borrowers attonery coming back later and the bank paying a lot more.

The CO needs to be very aware of the requirements and options before going to management and telling them $30M covers the general cost, but there will be additional expenses of $x estimated for file reviews, disclosures, etc. Do you recommend lump-sum or lump-sum payment reduction, what are the advantages based on the loans and who is servicing them... Read the Policy Guide on this and issuances such as OCC 99-34, Q&A, etc.

One question, hopefully easy to answer, is the financial health of the FI. In today's economy that shouldn't be an issue, but it could be. In the case of poor health, you read the rules, engage counsel and dicker with the regulators.

I want to say that the clock started ticking when the problem was discovered and you 30(?) days to correct it. Management needs a timeline. Your labor day may be a labor day reading regs. Be prepared when you discuss this or the whole problem can get messier. At least this is how I'd see it.

Good luck.

I disagree with most of the above advice. First, your bank has violated Regulation Z and reimbursement does not cure the violation. The tooth paste can not be put back into the tube, so to speak. You did not say when these loans were made, but the statute of limitations for restitution is one year. If the loans are one year old or older, or if they are approaching that age, I would let well enough alone and assume that the borrower will not recognise the issue, which if they have not already, they probably will not. Your examiners can require restitution for loans made prior to your last examination, and that means examination for anything. You say that you were just examined, so I presume that all of the loans predate your last examination. Accordingly, your examiners can not require restitution and relatively soon your customers will lose their right to do so. The more significant issue is rescission. You did not mention whether any of these loans were rescindable, and if so were your disclosures outside of the rescission tolerance. If they are, and if they were you have a more serious problem. For rescission the statute of limitations is three years. For these loans, you have two choices. One is to do nothing and again hope that your customers do not recognize the error. The other is to make restitution and give the customer a new notice of right to rescind. If three days passes and the customer does not rescind then you are home free. On the other hand if the customer elects to rescind under the new rescission period you have a real problem on your hand. In any event, the issues should be brought to the management of your bank with the various options and let management decide how it wants to proceed.

$200 makes me think these are mortgages. How many have already refinanced (or are in the process of refinancing)?

And this is why I posted the question...both the Reg Z issue and the Recission issue. I had already spoken to managment and told them these loans were reimbursable and recission is good for three years. I have basically left it up to them to make the management decision on what to do. I can only report my findings and what should be done. Managment will be the one to assume the risk not I.

These loans are mostly within the last year..although some are 1 1\2 years old.

All I can do is offer suggestions to management....also spoke with legal to get there view so we will see what happens.

Risk versus profits here.....glad I'm not responsible for the ultimate decision.

Read the Joint Policy Statement on Administrative Enforcement of the TILA-Restitution paragraph regarding Exemption from Restitution Orders. You have 60 days from discovery of the error to correct the accounts to ensure the borrowers will not be required to pay a FC in excess of what was actually disclosed. If you let this period pass, and this is discovered you subject to a restitution order (publicity included). Who knows, even if the examiners were just there, one of these borrowers could have a compliance officer from another insitution for a friend and may ask them to review their loan documents. I have done this for family members and in several cases incorrectly disclosed finance charges were refunded (from other insitutions). See, we are good for something every now and then.

These are home equity loans and alot have been paid off or refinanced? So now what?

In reply to:

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Your examiners can require restitution for loans made prior to your last examination, and that means examination for anything. You say that you were just examined, so I presume that all of the loans predate your last examination. Accordingly, your examiners can not require restitution and relatively soon your customers will lose their right to do so.

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"Your examiners can require restitution for loans made prior to your last examination", you mean cannot? "I presume that all of the loans predate your last examination. Accordingly, your examiners can not require restitution..." This reinforces my comment and yours if the first above was a typo. Not going back prior to the last of any exam dates to about 1997 and a 7th(?) Circuit case.


Where does it say that the consumer only has one year to file a suit? I am not familiar with that and was under the impression it could go longer.

Good questions Al.

We always refund to make sure the borrower pays no more than disclosed. Even if discovered after paid off or refinanced. We have even had instances where the refunds were quite high. For example one loan I recall where a loan booked in the commercial department (to an individual for consumer purpose) happened to have the borrowers home taken as additional collateral. This was a large loan and would have been exempt from Reg Z if not for the incidental collateral. They closed out of state to avoid state doc stamps and we charged a fee for traveling, etc.(about $1500) and as subject to Reg Z should have been disclosed as a prepaid FC. Of course it wasn't as commercial lenders don't come to compliance for assistance. When we discovered it, poof-$1500 gone from fee income.

When (and not if, because someone ALWAYS finds these mistakes) the mistake is found..and when (not if, because the media always finds the people who find these mistakes) the media gets a hold of this...what is the cost of the bad press (I can see the headline now) BIG BAD BANK STEALS $200 FROM HAPLESS POOR BORROWERS...

Refund now. A little splotch of egg on your face beats the heck out of drowning in eggnog!

Opinions expressed are my own and not necessarily those of my employer...although I believe I'm right 102% of the time

Restitution cannot be required by your regulator unless there's a case that the vios were willful. (It sounds like you have a pretty good argument that this was gross ignorance in the absence of the C/O.) In court, you risk discovery of the problem & judges seem to be willing to allow consumers to use TIL as a defense indefinitely. If you leave these customers alone (no collection suits) then they have no way to use TIL after the one year statute of limitations runs. The bottom line is that you may want to save the cost of the file search, audit, reimbursement & aftermath and be self-insured.

Unless your auditor has documented the problem in gory detail for your regulator to see and use in future compliance management ratings, I vote with the "sleeping dog" delegation. Even if the auditor HAS spelled it all out, I wouldn't worry if executive management wants to assume the direct responsibility for a decision to sweep this one under the rug.

If I were a compliance officer in this case, I would do what others have suggested here and give my management team the information it needed to assess the cost of not reimbursing vs. the cost of reimbursing. What is that information? (Seems to be some confusion about this.)

o Regulators may require reimbursement if the violation is a pattern or practice; is due to gross negligence; OR if it is willful. (One post incorrectly said it must be willful for us to require reimbursement.) There are some exceptions in which we may not require reimbursement. See Section 108(e)(2) of the TIL Act itself.

o For closed end credit, loans containing the violation and consummated since the date of the immediately preceding examination of any kind are subject to an adjustment. (That's bureaucrat-ese for reimbursement.)

o For open end credit, loans containing the violation and consummated in the two years preceding the current exam date will be subject to the adjustment.

o If you don't reimburse, potential civil liability exists. In other words, someone could discover the error on their own and sue you. There is a one year statute of limitations on this, with some exceptions. See Section 130 of the TILA. This one year statute of limitations on civil liability does not apply to regulators, so the second and third bullets above still apply.

o Cost to reimburse looks like it will be around $30,000.

o Consider the consumer activism of your community.

o Consider the cost to your reputation if this becomes public.

Roll all this up and it will probably become clearer as to whether it is economical to reimburse or not. As with ExGovtBabe (I LOVE that nickname, BTW!) I usually suggest reimbursing. AR.

Hold the phone, AR. My comment about reimbursement being limited to "willful" cases could have been clearer, but reflected the water that's already over the dam.

The examiners came, missed this problem (I wonder how that could have happened if it was a pattern & practice?), and left. Since the current visit represents the "last clean exam", the only way a regulator could reach back to the time period when the vios occurred would be to declare that they were willful and therefore are subject to reimbursement at any time.

So basically I am still in the same stage of "what to do" as I was when I posted the question. So much to take into consideration and therefore my post. I was hoping for that definate Yes or NO which is not to common when problems like this arise. I did write it up in my audit report but it was more or less this is the problem...that was it. Not to gory or over detailed. I guess this is one for management and the attorney to decide.

Thanks for all the responses.

Unfortunately, these questions do not always generate a clear "yes" or "no" answer. It's basically a risk management decision for your company. All you can do is spell out those risks, the $ amount of the consequence of ignoring those risks, and let them decide. There are those who also consider this a moral/ethical decision as well. Your management also needs to consider those issues and decide for themselves.

I was under the impression that these were recent violations as you indicated you were on maternity leave. In my bank, that would typically be within a month or 3, but it could be longer. And I assume the procedure has been corrected.

There is no easy answer and the circumstances and risks have to be weighed. Your job should be to present the facts and potential ramifications along with a recommendation, to management.

Mr. Insley: As I was typing my first message in this string, I was questioning the sanity of contradicting you. I don't often step into Reg Z discussions here just because of the level of knowledge displayed by you, Mr. Z, et al. I obviously lost my mind and apologize for saying you were incorrect. Thanks for clarifying. AR.

I was on Maternity leave in early 2001...this is my first audit of this area since then. I do both I\A and Compliance as well as any other big project relating to either... I had just did an audit right before I left on maternatiy leave and I audit every 18 months. With privacy, customer safeguarding and some employee fraud I was investigating it got pushed a little past 18 months. Therefore it has been about 1 1\2 years worth of problems. They automatically corrected it when I first caught it but I am just trying to gather all I can to present the recommendations to management. I currently have the department calculating all reimbursements to provide management with a dollar amount.

That's the problem sometimes when you have one person doing both Internal audit and compliance...things may not get caught as soon as they should. $350 million bank with 11 branches and 1 person doing both. As long as we continue with perfect audits and 1 compliance ratings I will continue my own jorney. Their theory is we are going good why change.

So would you reimburse to 0% or the allowed tolerance?

I'd never want to say that we over charged you, so here is most of your money back. We're keeping what is allowed for minor errors, so now we're over charging you just a little.