Question & Answer

Question: We are in the process of calculating restitution for underdisclosing the APR on a group of discounted variable rate loans. Our bank would like to apply the restitution funds to each borrower's principle. Is this permissible?

Answer: No. Amounts paid in restitution belong to the customer and the customer must be free to decide how to spend them. The bank may not attach any conditions to the funds paid in restitution.

Most banks resent paying restitution for Truth in Lending violations, especially when the violation was to underdisclose the APR on a discounted variable rate mortgage. When the customer already got a good deal on the loan, paying restitution to make it an even better deal can be a bitter pill to swallow. It may seem fair to keep the money in the bank by asking the customer to credit the restitution payment to the principle on their loan. Arguably, this would benefit the consumer by reducing their obligation and thereby also reducing their total finance charge.

It's important to remember that this is the consumer's money. By underdisclosing the finance charge, the bank collected funds in the form of finance charges that it did not have the right to collect. By law, that money belongs to the consumer.

Making restitution payments, and making them in full is important. Failure to do so can result in civil money penalties. Examiners will review the calculations - and the checks - when restitution is involved. They will look at the amount of the check, the date of the check, and the endorsement to make sure that the bank made the full payment and did not impose conditions on the payment.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 7, 6/97