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#1644606 - 12/30/11 01:10 PM Interest Refund on Paid Ahead Mortgage
Mike Baker Offline
100 Club
Mike Baker
Joined: Dec 2002
Posts: 192
Tennessee
A few days ago I had posted this question in the Lending Compliance Forum, but perhaps this Forum is a more appropriate place...in any case, I apologize for the duplication, and I would appreciate your feedback...

Scenario: A mortgage loan is paid ahead by 6 months; the payment structure is a typical mortgage amortization; that is, interest is based on a 30 day month regardless of number of days in the month; interest is the same whether paid on the 1st or any other day of the month; that is, there is no "date of payment to date of payment" calculation. Also, to simplify matters, there is no escrow account. In addition to regular payments, the borrower paid extra principal each month, and those curtailments were applied correctly. The next interest amount charged was always calculated on the balance after the curtailment.
Event: Lender receives via wire transfer from another bank a payoff effective the 28th of November. Due date on loan prior to pay off was 5/1/2012. In this case, the payoff is going to be less than the principal balance because there is interest which has been prepaid [side note...lender is correctly showing as such, so that interest past the January 2012 payment is to be counted for 2012, not 2011...a moot point, though, since loan is paying off.]
Calculation: By my calculation, the borrower's interest refunds should consist of the following...interest as collected for the payment due dates, counting backward, of May 2012-January 2012...which with interest is arrears is for the time period April 2012-December 2011] PLUS 3/30 of the interest as collected from the December 2011 payment [which was for November 2011 interest] 3 days is for November 28-November 30. [We are assuming that borrower charges "day in" and not "day out" and that funds were received on November 28 prior to cut over to next posting date.]
Question: Is my calculation correct? Lender is trying to come up with a generic "per diem" and as a result comes up over $50 short on the interest due back to borrower. My contention is that, because this is likely an atypical case, the lender's software is just not handling this correctly. To try to rebate interest on the most recent principal balance is not correct since the borrower's past payments have been on higher balances.
Thank you for your time in looking at this matter.
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Lending Compliance
#1645155 - 01/02/12 03:35 PM Re: Interest Refund on Paid Ahead Mortgage Mike Baker
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 80,336
Galveston, TX
This is way to convoluted to me to follow.

Payments must be applied according to the note/loan agreement. I would think that if the loan allows for the loan to be paid ahead as you so indicate, any payments on the loan for after the pay-off date would have to be backed out of the loan and applied as principal curtailments and then you would apply the pay-off amount received.

Doesn't your system automatically calculate your pay-off amounts on these loans? In some States, if you send them a pay-off statement and it is wrong, you are going to be stuck with the pay-off quoted if it is short.
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#1648820 - 01/10/12 07:43 PM Re: Interest Refund on Paid Ahead Mortgage Mike Baker
Mike Baker Offline
100 Club
Mike Baker
Joined: Dec 2002
Posts: 192
Tennessee
Since it is another bank's system, I am not certain about the calculations. What I suspect, though, is that the interest refund is being calculated on the current lower principal balance, which is not correct. [Keep in mind that interest has been calculated "mortgage" style, with 30 days interest taken from each payment regardless of when made, and interest paid ahead for 2012 was held in a "bucket" and would not have been reported as paid interest in 2011. That is to say, this is not like an installment loan with interest calculated from date of payment to date of payment.]

I think that you are correct in the concept of reversing the payments and applying as principal curtailments. I have not yet calculated that approach, but it might result in an even larger difference than what I obtained just by calculating the interest rebate the way that I did, which was taking the total interest for all the paid ahead months and then adjusting 3 days for the month of the pay-off [received by wire on the 28th].

I cannot get the lender to understand that their payoff calculation methodology is in this case penalizing the borrower for having paid ahead. While this may be somewhat atypical for most situations, I think that this is a case in which the computer program just was not set to handle this instance properly.

Does anyone see this differently, and if so, could you help me to understand a different point of view? Thanks!
Last edited by Mike Baker; 01/10/12 07:44 PM.
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