Despite the compliance program that a creditor maintains and the training a creditor offers to its lending personnel, an occasional truth in lending mistake is inevitable. Assuming that the creditor does not discover the error when the creditor receives a class action complaint, the creditor generally asks two questions upon learning of the error: "What is my liability?" and "How can I correct the problem?" Section 130 of the Truth in Lending Act ("TILA") 15 U.S.C. § 1640 imposes civil liability for certain disclosure violations but also provides various protections to creditors that have made mistakes. These range from complete protection from liability in some situations, eventual protection pursuant to a limitations period in others, and corrective measures that a creditor can take to "cure" a violation. Although these various safeguards are all welcome, a creditor whose back is against the wall due to a pervasive truth in lending mistake may find the protection TILA offers illusory. In this commentary, Robert A. Cook and Daniel J. Laudicina discuss various protections offered by Sections 130(b) through 130(g) of TILA and the pitfalls that surround some of these "protections." They write:
[T]his ability to “cure” a violation has serious limitations. First, a creditor must act within 60 days after discovering an error. Second, in order to avoid liability, the creditor must not only notify the consumer concerned of the error but also make the adjustments in the account necessary to ensure that the consumer does not pay an amount the lower of the excess of the charge actually disclosed or the dollar equivalent of the annual percentage rate actually disclosed. Thus, the correction mechanism requires a creditor to offer to the affected consumer the benefit of the creditor’s mistake. If a typographical error causes the creditor to disclose a 10% loan as having a 1% annual percentage rate, the creditor must correct the mistake by not only informing the consumer that the creditor should have disclosed a 10% annual percentage rate, but also adjusting the loan to a 1% annual percentage rate transaction. Given this adjustment requirement in Section 130(b), many creditors do not take advantage of this opportunity to cure major mathematical mistakes in their truth in lending disclosures, particularly in light of the limited dollar amount of damages available under TILA and the one-year statute of limitations.
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A creditor can avoid liability for a truth in lending violation if it 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. The statute notes that born [sic] fide errors include such errors as clerical, calculation, computer malfunction and programming and printing errors. TILA does not classify an error of legal judgment as a bona fide error.
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A consumer must file an action to recover damages against a creditor or assignee within one year of the date the violation occurs. Failure to make the required disclosures at the time the transaction consummates does not constitute a continuing violation, and the one-year period begins to run on the date of the transaction. However, if a creditor fails to provide the required disclosures on each open-end periodic statement, every periodic statement constitutes a “fresh” violation for purposes of the one-year statute of limitations. TILA does not require periodic statements for closed-end loans; thus inaccurate closed-end statements do not give rise to violations each time a creditor sends such a billing statement.
(citations and footnotes removed)
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