Would appreciate another's opinion on this situation. In 2002 customer refinanced a consumer loan on which they purchased credit life insurance with a premium of $585.21. I thought I understood that credit life premiums can be excluded from the FC if the purchase is voluntary. However, it appears from the itemization that the bank included the premiums in the FC calculation. Our policy is that CL is always voluntary so this kind of surprises me. I went to the OCC APR WIN and recalculated "excluding" the premium and it came back with an understated FC in the amount of $585.21 which is the amount of the premium and indicated the FC adjustment would be $480.62. Was I correct in doing the recalculation this way and should our check be the amount of the FC adjustment? Thank you for any help.

Are you saying the voluntary insurance was included in the finance charge in error? If so, wouldn't your FC and APR be overstated?

Yes, you are correct. I was coming back to amend my question because it looks like I may have it backwards. Going back to the calculator, let me try again to see if I can make sense of this. Thank you!

Ari, here is what Reg Z says about exclusion of credit insurance from finance charge:

Premiums for credit life, accident, health or loss- of-income insurance may be excluded from the finance charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and this fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is disclosed. If the term of insurance is less than the term of the transaction, the term of insurance also shall be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under Sec. 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.
(iii) The consumer signs or initials an affirmative written request for the insurance after receiving the disclosures specified in this paragraph. Any consumer in the transaction may sign or initial the request.


Unless all the criteria above are met, the amount of the credit insurance premium is considered a finance charge. If the premium was financed, it would be subtracted from the loan amount to determine the amount financed for Reg Z purposes, essentially creating a prepaid finance charge for the amount of the premium.

If the premium was paid outside of closing, you would still subtract it from the loan amount to determine the amount financed.

If all the criteria above have been met, however, then you do not subtract the premium from the amount financed. It sounds to me as if you excluded the premium from the amount financed, which yielded the results you cite.

Thank you for your help. Since the lender did not have the borrower sign indicating she wanted the insurance, the premium is now a FC. Would someone please confirm for me my input into the APR WIN?

Loan amount: $41,002

Admin fee (PPFC): $100.00

Insurance premium: $585.21

Input: AF = $40,316.79 ($41,002.00 - $100.00 - $585.21)

Disclosed APR: 4.495

Disclosed FC: $1,846.39

Here's my output:

AF: $40,316.79
Finance Charge: $2,431.60 (which includes the premium)
Total Payments: $42,748.39
APR: 5.977%

APR understated by 1.4727% FC understated by $585.21 (which is the amount of the premium)

APR adjustment (lump sum) $509.76
FC adjustment $480.80

Reimbursement $509.76 since APR amount is greater

Does this look about right?

Thanks again for your patience. I just need to make sure I'm understanding this correctly.

Without the payment streams, it is not possible to determine whether your input is correct. Your thought process looks reasonable, though.

When we use the OCC APR WIN calculator and get a reimbursement result, it indicates the finance charge adjustment using a higher APR than the adjusted APR. This may be an elementary question, but I'm asking anyway. Why is the APR for the finance charge adjustment higher? Thanks.

I think I'm good with the payment streams, just wanted to see if my input looked correct. Another question: the APRWIN documentation indicates reimbursement by either lump/sum payment reduction method or lump sum method. The lump/sum payment reduction method appears to take into account the number of payments already made while the lump sum method covers the entire loan term. If the loan is not paid out, say the borrower has made 2 loan payments to date, can we do a lump sum payment for the 2 premium payments made or do we in fact have to reimburse for the entire loan? Hope that made some sense?

Actually, both numbers are adjusted for the payments made to date. If you change the number of payments made, the system will revise the reimbursements under both methods. The reimbursement policy permits you to elect either method, if the APR reimbursement is selected.

My recommendation is to take the lump sum method and be done with it. It is easier and cleaner. If you elect lump-sum/payment reduction, it is likely that you will have to adjust the interest rate of the loan on your system so that the revised payment will amortize the loan over the remaining life. This is a major pain to get right. It might not be a problem for one loan, but if you have a bunch, the time saved is worth it.

If you have one of these errors, you may have more. I would suggest that you make sure that this problem is an isolated incedent. If not, you may have others on your hands.