In order to compute the periodic rate used in calculating the finance charge and the corresponding APR, you take your rate and divide it by 365-day calendar. My question is since next year will be a leap year, should we now be using a 366-day calendar to compute the periodic rate? Thanking you in advance.

The Staff Commentary to Reg Z 226.17(c)(3) says:

"Creditors may base their disclosures on calculation tools that assume that all months have an equal number of days, even if their practice is to take account of the variations in months for purposes of collecting interest. For example, a creditor may use a calculation tool based on a 360-day year, when it in fact collects interest by applying a factor of 1/365 of the annual rate to 365 days.

I can't find it right now, but there is also language in TILA that states that you do not have to take into consideration the exact number of days in a month or year to calculate the TIL. They give an example of Leap Year.

Section 226.17(c)(3) applies to closed end credit. I didn't see a corresponding section regarding leap year in the open-end section.

We're trying to determine the effect of changing the daily periodic rate calculation to 1/366 for our HELOCs for next year's leap year.

I'm assuming that if we change our system to calculate at 1/366 instead of 1/365, we'll need to disclose the 1/366 daily period rate on our HELOC instead of the 1/365 rate?

Thanks.

Can anyone provide guidance?

§226.14: Determination of Annual Percentage Rate (01/01/93)
(d) Calculations where daily periodic rate applied. If the provisions of paragraph (c)(1)(ii) or (2) of this section apply and all or a portion of the finance charge is determined by the application of one or more daily periodic rates, the annual percentage rate may be determined either:
(1) By dividing the total finance charge by the average of the daily balances and multiplying the quotient by the number of billing cycles in a year; or
(2) By dividing the total finance charge by the sum of the daily balances and multiplying the quotient by 365.

I don’t think you have the option. You use either 1 or 2.

Other opinions?

Reg Z Commentary - Definitions

Quote:

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2(a)(21) Periodic rate.
1. Basis. The periodic rate may be stated as a percentage (for example, 1 1/2% per month) or as a decimal equivalent (for example, .015 monthly). It may be based on any portion of a year the creditor chooses. Some creditors use 1/360 of an annual rate as their periodic rate. These creditors:

• May disclose a 1/360 rate as a daily periodic rate, without further explanation, if it is in fact only applied 360 days per year. But if the creditor applies that rate for 365 days, the creditor must note that fact and, of course, disclose the true annual percentage rate.

• Would have to apply the rate to the balance to disclose the annual percentage rate with the degree of accuracy required in the regulation (that is, within 1/8 of 1 percentage point of the rate based on the actual 365 days in the year).

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Emphasis added.

Will this help?