Click to return to BOL home page



September 22
FinCEN's Beneficial Owners Proposal: What It Can Mean for You;
Sonja Kriegsmann and John Burnett

September 23
Bankruptcy 101;
Sam Ott

September 30
Revised Escrow Rules - Review and Update;
Jack Holzknecht and Mary Beth Guard

October 7
CRA - Digging for Credit;
Patricia Cashman

October 8
Applicants and Applications: Knowing the Players and the Rules;
David Dickinson

October 15
MasterCard and Reg E: Basic Debit Card Investigations;
Brian Crow



Topic Options
#190922 - 05/17/04 02:22 PM Actual/360 vs 360 simple interest
Anonymous
Unregistered


What is the difference between calculating interest on an actual/360 basis and a 360-day simple interest basis? I need to check whether a loan payment listed in a note is right, and I'm using a calculator I designed in excel for actual/360 and it is not matching the note, which calculates the interest based on a 360-day simple interest basis, and I'm not sure how to adjust it. (for actual/360 I currently estimate the payment amount using the PMT function, by taking the rate times 365.25/360, which I adjust for any loan shorter than 4 years to get a pretty accurate estimate).

Top
Lending Compliance
#190923 - 05/17/04 03:33 PM Re: Actual/360 vs 360 simple interest
Anonymous
Unregistered


When you calculate 360, it's just the loan times the rate divided by 360(assuming 30 days in a month)
360/365 is the loan times the rate divided by 360 times the actual number of days in the month
More interest is earned on 360/365

Top
#190924 - 05/17/04 03:38 PM Re: Actual/360 vs 360 simple interest
Jokerman Offline
10K Club

Registered: 11/24/03
Posts: 12846
daily simple interest = actual / actual
monthly simple interest (360 day simple interest) = 30 / 360
commercial interest = actual / 360

Monthly simple interest assumes twelve months with an equal number of days each year. The amount of interest accrued in each "month" is equal.

Top
#190925 - 05/18/04 01:32 PM Re: Actual/360 vs 360 simple interest
Darty Offline
Member

Registered: 10/10/03
Posts: 82
Loc: CT
If calculating anything w/actual - Don't forget it is leap year need to use 366 not 365

Top
#190926 - 05/18/04 02:15 PM Re: Actual/360 vs 360 simple interest
Anonymous
Unregistered


right, that's why I use the 365.25/360 to estimate actual/360 to double check payment amounts for longer-term loans.

how exactly would I adjust the rate for a "360-day simple interest" to get an approximate calculation in excel using the PMT function?

Top
#190927 - 05/18/04 02:22 PM Re: Actual/360 vs 360 simple interest
Dan Persfull Offline
10K Club

Registered: 08/28/02
Posts: 40756
Loc: Bloomington, IN
Actually under Reg. Z you do not have to take leap year into account for your disclosures.

226.17: General Disclosure Requirements (01/01/03)

(c) Basis of disclosures and use of estimates.

(3) The creditor may disregard the effects of the following in making calculations and disclosures.

(i) That payments must be collected in whole cents.

(ii) That dates of scheduled payments and advances may be changed because the scheduled date is not a business day.

(iii) That months have different numbers of days.

(iv) The occurrence of leap year.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Top
#190928 - 05/18/04 02:25 PM Re: Actual/360 vs 360 simple interest
Anonymous
Unregistered


Basis is a very misunderstood concept in banking. The numerator refers to the number of days you count in a month. The denominator is the number of days you count in the year. If you look at it that way there are six possible accrual bases. 30/360, Actual/365, Actual/360, Actual/Actual, 30/360, 30/365 and 30/Actual. Most mortgage accruals are done on a 30/360 basis, consumer accruals are often on a Actual/365 and commercial accruals are often on either Actual/360 or Actual/Actual basis. However, none of this is "carved in stone."

Top
#190929 - 05/18/04 02:25 PM Re: Actual/360 vs 360 simple interest
Jokerman Offline
10K Club

Registered: 11/24/03
Posts: 12846
Quote:

how exactly would I adjust the rate for a "360-day simple interest" to get an approximate calculation in excel using the PMT function?




I would just divide the contract rate by 12.

Top
#190930 - 05/18/04 02:35 PM Re: Actual/360 vs 360 simple interest
Jokerman Offline
10K Club

Registered: 11/24/03
Posts: 12846
Quote:

If you look at it that way there are six possible accrual bases. 30/360, Actual/365, Actual/360, Actual/Actual, 30/360, 30/365 and 30/Actual. Most mortgage accruals are done on a 30/360 basis, consumer accruals are often on a Actual/365 and commercial accruals are often on either Actual/360 or Actual/Actual basis. However, none of this is "carved in stone."




Yes but...

I guess technically there are an infinite number of possible bases. I only say this because you included two that aren't really bases, just coding errors (30/365 and 30/Actual).

And I would say that secondary market investors have pretty much carved in stone what basis you're going to use on their loans!

Top
#190931 - 05/18/04 03:02 PM Re: Actual/360 vs 360 simple interest
Anonymous
Unregistered


I agree that investors do dictate what basis you use on loans that you are selling to them. That is why virtually all mortgages are done on a 30/360 basis. I also believe that for in-house paper you should accurately reflect what your accounting system does for a particular loan when you calculate it.

I would dispute your assertion that the two bases you mention are "coding errors." I am a vendor and both of those bases are used regularly by our users.

Top
#190932 - 05/18/04 03:45 PM Re: Actual/360 vs 360 simple interest
Jokerman Offline
10K Club

Registered: 11/24/03
Posts: 12846
Quote:

I am a vendor and both of those bases are used regularly by our users.




Intentionally?

Top
#190933 - 05/18/04 03:55 PM Re: Actual/360 vs 360 simple interest
Anonymous
Unregistered


Yes. They are often used in commercial lending situations (you know how those commercial loan officers are ). They are rarely, if ever, used in consumer situations.

Top
#190934 - 05/18/04 04:28 PM Re: Actual/360 vs 360 simple interest
Jokerman Offline
10K Club

Registered: 11/24/03
Posts: 12846
I don't see the business purpose for using such an accrual basis and reducing your yield by 11 basis points. The ONLY purpose I could think of would be to obtain the business by offering the borrower a lower effective rate while reporting the higher nominal rate to a superior (senior lender, board).

Top
#190935 - 05/19/04 09:05 AM Re: Actual/360 vs 360 simple interest
CHT Offline
100 Club

Registered: 04/21/02
Posts: 100
Loc: Silver Spring, Maryland, USA
if you are verifying the way the payment is posting on a note, there is a big difference on most LAS [loan accounting systems] between a 30/360 amortized and a 30/360 simple interest.

a 30/360 will break down according to a strictly amortized schedule no matter when the payment is made. So -- if the customer makes their April 1st payment in January or in July, the breakdown is pre-determined.

a simple interest 30/360 will usually either pay interest as billed or interest to the date the payment is made.

it is more difficult to reconcile the accrued interest on the notes too. On ITI, the daily accrual showing on the note is not on the current principal outstanding, but on the scheduled principal balance, which may be greater or less than the current principal. Then, when the note bills or a payoff is calculated, the LAS makes the adjustment to give the customer the benefit of any additional principal payments. It is rather convuluted, and I have had to justify it several times to auditors, regulators and examiners so that they can see that the customers are receiving the benefit of additional principal curtailments.

an ACTUAL/360 is an interest accrual that we use primarily for commercial customers. Consumers usually have an ACTUAL/365 accrual
_________________________
IMNSHO, FWIIW

Top


Moderator:  Andy Z