We made an error in disclosing the initial interest rate for an adjustable rate mortgage (ARM) on the Closing Disclosure. This was a simple, one-time clerical error, but it does exceed tolerances (we think the error resulted in understating the finance charge by several thousand dollars). We know we owe the customer restitution and a new closing disclosure. Is it defensible to leave it at that? Also, if we provide restitution, do we have to pay it as a lump sum?

It may be possible to argue that the disclosure issue was an isolated incident, requiring only restitution and new disclosures, but that depends on the circumstances, and we do recommend consulting with bank counsel about the error and the best response for your bank.

The Truth in Lending Act (TILA) generally requires examiners to order restitution when they find a clear pattern or practice of violations or gross negligence, but it also permits examiners to order restitution for an isolated disclosure error. The TILA also provides lenders a defense to a civil lawsuit brought by a customer in cases where the lender can show “by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error,” but this “bona fide error” argument would not be a defense to an examination criticism or restitution order.

To ensure that your bank can avoid civil liability and exam criticism for understating the finance charge, the TILA requires you to notify and reimburse the customer within sixty days of discovering the error. While the TILA does not specify a calculation method for the required reimbursement, clear guidelines for calculating the reimbursements can be found in a joint guidance issued by the federal banking regulators, as well as in a calculator made available by the OCC. For example, joint agency Q&As on restitution permit you to calculate the required restitution for an error in disclosing the initial interest rate based on “the period of time before the first scheduled change in rate under the variable rate feature in the contract.”

Additionally, the joint agency guidance on restitution permits creditors to pay restitution by reducing the borrower’s loan payments, rather than paying a lump sum.

For resources related to our guidance, please see:

Joint Policy Statement, Administrative Enforcement of the Truth in Lending Act — Restitution, 63 Fed. Reg. 47495, 47497 (September 8, 1998) (The Truth in Lending Act “generally requires the [federal banking regulatory] agencies to order restitution 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.”)

Truth in Lending Act, 15 USC 1640(c) (“A creditor or assignee may not be held liable in [an individual or class action] . . . if the creditor or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programing, and printing errors, except that an error of legal judgment with respect to a person’s obligations under this subchapter is not a bona fide error.”)

Truth in Lending Act, 15 USC 1607(e)(6) (“A creditor shall not be subject to an order to make an adjustment, if within sixty 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 so as to assure 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 annual percentage rate actually disclosed, whichever is lower.”)

Questions and Answers Regarding Joint Statement, pages 6–8 (“Question 7. How will the Policy Guide apply if a creditor disclosed that a rate will be prospectively subject to increase, but the APR disclosed or the finance charge disclosed or both were originally understated? . . . If only the APR is understated, reimbursement will be required only for the period of time before the first scheduled change in rate under the variable rate feature in the contract. . . .”)

OCC APRWIN Download Page

Joint Policy Statement, Administrative Enforcement of the Truth in Lending Act — Restitution, 63 Fed. Reg. 47495, 47497 (September 8, 1998) (“3. ‘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) A reduction of the remaining payment amounts on the loan.”)