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SARC-98-06 (July 28, 1998)

The Supervisory Appeals Review Committee (“Committee”) of the Federal Deposit Insurance Corporation (“�౦��Ϸ����”), on July 16, 1998, considered your appeal of violations of Regulation Z, which implements the Truth in Lending Act, cited in the Compliance Examination Report as of March 16, 1998.

The Committee, following a thorough and considered review of the material submitted by [Bank] (“Bank”) in its appeal, has concluded that the appeal should be denied. Although the Bank properly disclosed that insurance coverage was not required and disclosed the amount of the premium, the Bank did not obtain an affirmative written request for the insurance after making the required disclosures, as required by the Federal Reserve Board’s Regulation Z, and as further outlined in explanatory materials issued by the FFIEC and in place since 1980.

Background
The Bank utilizes a form which gives the customer the option to check a box indicating “I do” or “I do not” want voluntary credit life insurance. The Bank systematically obtained the applicant’s signature on the line under these options but did not have borrower check the “do” or “do not” want credit life insurance box. The Bank indicated that it obtained the customer’s signature on the line under the options only if the customer wanted insurance and expressed the view that the customer’s signature is satisfactory evidence of an affirmative request for insurance. The �౦��Ϸ����’s Memphis Regional Office Division of Compliance and Consumer Affairs (“DCA”), however, concluded that the customer’s signature was, at best, ambiguous, and that either the “do” or “do not” box should be checked to indicate the customer’s decision to make an affirmative request for the insurance or to decline such coverage.

In the absence of such an affirmative request for insurance, DCA concluded that the amount of the premium should have been included in the amount financed. The Bank, however, excluded the premium. DCA therefore cited apparent violations of section 226.18(b) and (d) of Regulation Z in the Examination Report on the grounds that the Bank understated the finance charge and annual percentage rate when it failed to include insurance premiums for credit life insurance. Section 226.18(b) requires the creditor to properly calculate and disclose the amount financed, with a brief description, and 226.18(d) requires inclusion of premiums in finance charge disclosure if the conditions described in 226.4(d)(1) are not met.

The Bank expressed the view that there was no violation and appealed DCA’s decision. The Bank noted that section 226.4(d)(1) states that credit insurance premiums may be excluded from the finance charge if the consumer signs or initials an affirmative written request for insurance, and contended that in all of the cases reviewed by the examiners such an affirmative written statement was present, citing to the aforementioned form. The Bank noted that the form disclosed that insurance was not required and the amount of the premium, and the consumer signed the request. The Bank also noted, among other things, that the customer received coverage and signed a health statement.

Discussion
The Truth in Lending Act (“TLA”) requires charges on premiums for credit life insurance, written in connection with any consumer transaction, to be included in finance charge unless, among other things, the creditor obtains the customer’s “specific affirmative written indication of his desire to do so after written disclosure to him of the cost thereof.”

Regulation Z of the Federal Reserve Board provides that premiums for credit life insurance may be excluded from the finance charge if (i) the insurance coverage is not required by the creditor, and this fact is disclosed; (ii) the premium for the initial term of insurance coverage is disclosed; and (iii) the consumer signs or initials an affirmative written request for the insurance after receiving the required disclosure. 12 C.F.R. §226.4(d).

In effectuating congressional intent, the federal banking agencies, through the FFIEC, issued a Joint Interagency Statement of Policy for Administration Enforcement of the Truth in Lending Act. As part of that issuance, a series of questions and answers were issued on July 11, 1980, to address particularly technical issues that arise in this area. The Q&As are entitled the “Questions and Answers Regarding the Joint Interagency Statement of Policy for Administration Enforcement of the Truth in Lending Act—Reimbursement.” The issue raised by the Bank was specifically addressed by the FFIEC in Q&A 16, as follows:

16. Q: How will the Policy Guide apply if:

(1) The consumer is charged for credit life, accident and health insurance premiums; and

(2) The creditor did not include the premiums in the APR or finance charge disclosures; and

(3) The creditor disclosed the optional nature and cost of credit life insurance to the consumer in writing and the customer signed or initialed close to those disclosures; and

(4) Either no affirmative statement indicating a desire to obtain the insurance was provided or the appropriate box or line was not checked or otherwise marked to indicate whether the customer did or did not desire the insurance?

A: If the disclosure provided a choice to the customer through statements such as “I desire the insurance” and “I do not desire the insurance,” and neither choice has been marked to designate the customer’s selection, the Policy Guide will apply because the creditor did not meet the requirements of 12 C.F.R. 226.4(d)(1)(iii).

The above example is on point in this case: the appropriate box was not marked to indicate whether the customer did or did not desire the insurance. Moreover, an affirmative statement indicating a desire to obtain the insurance was not provided. While it is true that appropriate disclosures were made as to the optionality of the insurance and the amount of the premium, disclosure is not the equivalent of an affirmative written request for insurance. The customer’s signature under the “I do” and “do not” boxes is not sufficient when neither box is checked; the disclosure of the amount of the premium is not the equivalent of an affirmative written request; and the customer’s signature agreeing to the term set out on page 1 and page 2 of the form agreement is not sufficient when the form does not contain any other independent affirmative written request for insurance. Nor is the submission of a certificate of good health considered to be the equivalent of an affirmative written statement requesting insurance.

TLA and Federal Reserve Board Regulation Z require an affirmative written request for insurance coverage. Implied consent is not sufficient to meet this specific statutory and regulatory requirement. Congress did not consider this requirement to be a technical requirement, but rather, to be a specific but substantive requirement. Congress considered such specificity to be necessary to overcome what they perceived to be as an imbalance in the relationship between the borrower and lender in small loan situations and based upon their view that creditors had an economic incentive to place insurance on as many loans as possible. As a supervisory agency, the �౦��Ϸ���� is charged with enforcing the laws enacted by Congress and the implementing regulations enacted by the Federal Reserve Board.

The Committee certainly did not believe that there was any apparent intent on the part of the Bank to deceive its customers and, in all likelihood, the borrowers involved were aware of the insurance and desire to purchase it. However, the Committee determined that while these were compelling facts, they could not overcome the lack of the required affirmative statement that the consumer desired to purchase the insurance and therefore the violation had to be affirmed.

The Committee also considered the Bank’s statement that the practice in question had been occurring for approximately 10 years without being criticized in prior examinations. The Committee observed that a bank examination is not an audit and that the very nature of the examination process, with limited sampling of credit transactions, may not uncover all deficiencies or violations during any one examination. The failure to discover a practice during prior examinations however cannot excuse non-compliance with the law or regulations.

And while not dispositive, DCA has noted that the Bank engages in both indirect and direct consumer lending and credit insurance is sold with both types of transactions. In DCA’s review of the loan files, the examiners found that the disclosures provided in the indirect loans met the requirements of the regulation, whereas this was not the case for the direct loans made by the Bank. While it is a matter of speculation, it may be that prior examinations involved reviews of indirect loans, which were in compliance.

The �౦��Ϸ���� considers this decision a final supervisory determination.

By direction of the Supervisory Appeals Review Committee of the Federal Deposit Insurance Corporation.