Our customer signed an unsecured consumer loan agreement last year. Payments were to be made in the amount of $100 per week. In a separate agreement, we agreed to automatically debit the payments from the customer’s account. However, we entered the automatic payments into our system incorrectly as $100 per month, instead of $100 per week. The customer noticed the discrepancy about a year later and owes approximately $3,000 more on the loan than they would have owed at this time had the loan been paid according to the agreement. The customer also has paid approximately $100 more in interest than they would have paid if the loan had been serviced correctly. We believe we likely need to reimburse the customer for the excess interest and provide a new amortization schedule with an explanation of our calculation. We also will re-write the note with an extended maturity date if the customer does not make up the missed weekly payments. Are there any regulations or guidance specific to this situation? We believe this error could be considered a UDAAP violation.

Sep 9, 2019

—

No, we are not aware of any regulations or guidance specific to the situation described. Although the Truth in Lending Act requires restitution to be paid when a lender fails to make accurate disclosures, it does not appear that your bank made any inaccurate disclosures about the loan’s terms. In other words, this was an operational error, not a disclosure error.

It appears that both your bank and the customer have breached certain contractual obligations — the bank has breached its obligation to automatically debit $100 weekly, and the customer has breached its obligation to pay $100 weekly. Consequently, we recommend consulting with legal counsel regarding how best to address these breaches, which may simply involve both parties agreeing to modify the loan terms and waive the previous breaches.

We agree that your bank may be found to have engaged in an unfair, deceptive, or abusive act or practice (UDAAP) if it does not take steps to rectify this error (although, as a one-off situation, it likely would not be viewed as a “practice” under UDAAP). We generally agree with your proposed steps — to reimburse the customer for the excess interest they have paid, and to offer an extension of the loan’s maturity date, with an updated amortization schedule. In addition, your bank should examine its policies to determine whether they require you to report the customer’s delinquency to the credit bureaus, although we assume that rewriting the loan will bring it current, and a documented decision to waive any such policy would seem to be justified in this case. Mistakes happen, and in our view, taking these steps would help defuse any potential UDAAP claim.

For resources related to our guidance, please see:

Consumer Financial Protection Act of 2010, 12 USC 5536(a) (“It shall be unlawful for (1) any covered person or service provider . . . (B) to engage in any unfair, deceptive, or abusive act or practice.”)

Joint Policy Statement, Administrative Enforcement of the Truth in Lending Act — Restitution, 63 Fed. Reg. 47495, 47497 (September 8, 1998) (The Depository Institutions Deregulation and Monetary Control Act of 1980 . . . authorizes the federal Truth in Lending enforcement agencies to order creditors to make monetary and other adjustments to the accounts of consumers where an annual percentage rate (APR) or finance charge was inaccurately disclosed. It generally requires the 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 1607(e)(1) (“In carrying out its enforcement activities under this section, each agency referred to in subsection (a) or (c), in cases where an annual percentage rate or finance charge was inaccurately disclosed, shall notify the creditor of such disclosure error and is authorized in accordance with the provisions of this subsection to require the creditor to make an adjustment to the account of the person to whom credit was extended, 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. . . .”)