We use ARTA Lending from BankersSystems and recently we have been getting the following notice under the validation results of the loan:

"Use of the Actual/360 accrual method has been claimed to be an Unfair and Deceptive Trade Practice. Due to the unstable legal environment surrounding the use of the Actual/360 accrual method, we recommend that you do not use this accrual method. Lenders that choose the Actual/360 accrual method assume any liability resulting from the use of this accrual method."

Have other lenders seen this notice, if so, are you changing your accrual method or continuing to use the Actual/360 method and assuming any liability?

Also, could someone tell me what guidance or regulation states that this accrual method is an unfair and deceptive practice?

Thanks.

No one else has replied, so I will give it a try.

I don't believe there is any regulation that specifically states it is a deceptive practice.

The reason some consider it deceptive is because the creditor is charging interest for 365 or 366 days but using 360 in the calculation.

A year actually has 365 or 366 days, not 360. Thus, the effect is to multiply the stated interest rate by 365/360 (1.014). If the stated interest rate is 6% and the 365/360 method is used, the actual rate based on a true 365-day year is 6% times 1.014, or 6.08%. On loans subject to Reg. Z, this discrepancy would be reflected in the calculation of the APR.

As an example, BANK A offers an interest rate of 6% using the actual/365 method while BANK B offers an interest rate of 6% using the actual/360 method. Both loans are for $100,000 and require just one payment of principal and interest one year from the loan date. The payment due on the loan from BANK A would be $106,000 ($100,000 times .06 divided by 365 times 365) while the payment due on the loan from BANK B would be $106,083.33 ($100,000 times .06 divided by 360 times 365).

We actually got this same message and I called our software provider to find out why. All they would tell me is that a couple of years ago a commercial customer had filed suit against a bank for using this accrual method, and it settled out of court. That's all the information they would give me, so I don't know what the actual circustances were (for example, maybe the bank didn't disclose that they were using that method and that's why they were sued). Because I think this is flimsy evidence and we only accrue this way on commercial loans (and also disclose that fact), we've chosen to continue to use that method.

One question you need to ask is will this affect any warranty on the documents use? If you are getting this notice and continuing, you may be on a limb on your own if you also get involved in a suit.

The answer may be in what your state laws allow and how you cap any ceiling rate.

For calendar year of 365 days, 365/360 produces 5/360ths more interest than the other two methods

-effective rate of 10.139% on 10% loan
-Charging highest lawful rate would result in usurious interest
-If parties agree and effective rate is lower than highest lawful rate, then there should not be a usury issue

However, in Texas: The last time I looked there was a split of authority as to whether charging interest greater than contract but lower than legal limit is usurious:
-San Antonio and Amarillo Appellate Courts – no usury 741 SW2d 169 785 SW2d 190
-Austin Appellate Court– usury 779 SW2d 438

Is 365/360 a deceptive practice? I have not researched it, but it would be a state law question.

Commercial lenders in Texas regularly use 365/360. It is not a problem.

In California several older cases held the use of a 360 day year for interest calculation within the context of a "per annum" interest rate was problematic. Most lenders corrected the problem by explicitly stating the manner in which interest is accrued, e.g. 365/360 or 365/365, instead of using the term "per annum." I'm not aware of any recent cases challenging the use of a 365/360 interest accrual method when the method is clearly disclosed in the Note.

Further question. Does anyone use this for residential mortgages?

We only use this accrual method on commercial loans (and I did note the comment above that said "a couple of years ago a commercial customer had filed suit against a bank for using this accrual method"), however, we also disclose on the note itself that the interest is calculated this way. I think the verbiage is something like "Interest...and is to be computed on the basis of a 360 day year and actual days elapsed as follows..." So it's not like they can say they didn't know.

We have never used this method for any consumer related transactions.

Anon - most mortgage loans sold in the secondary market use a 30/360 basis. This means that all months are considered 30 days - or another way of saying that the monthly interest is 1/12th of the annual interest.

This is the way most amortization tables are created. The only differences are the first and last months which are actual interest.

So, how would interest be calculated using 30/360 method?

Are privite lenders allow to issue an Actual 360? I live in New York. Also my agreement state that that my fee to extand the loan would be $12,000, however, at the time of extion the lender charge $15,000 is this legal?

Are privite lenders allow to issue an Actual 360? I live in New York. Also my agreement state that that my fee to extand the loan would be $12,000, however, at the time of extion the lender charge $15,000 is this legal?

For legal advice and representation, you'll need to contact an attorney licensed to practice law in NY.