Hello,

Does TN law dictate what calculation base is to be used for different types of loans? That is, can a financial institution use any base [30/360, actual/360, actual/365, etc] that it elects for any type of loan? Or are there certain parameters which dictate a particular calculation base? I have heard that deposit secured loans must use actual/365 [or I suppose for this year actual/366?]. Clarification would be greatly appreciated. Thank you very much.

I am going by memory of research I did several from several years ago. Any interest accrual base is permitted as long as it is disclosed in the loan contract. Never heard anything about the accrual base required for a loan secured by a deposit. If you are a member of TBA you could contact Tim Amos.

Thank you. I wouund up contacting someone who works with Tim, and for the benefit of anyone else who may want to know, here is the information which was provided:

"The only regulation/law governing this is under the Credit Card State Bank Act in Tenn. Code Ann. 45-2-1906, which specifically authorizes the use of a 360 day year for loans made under the Act, provided the provision is included in the loan contract. There are no other statutes that authorize the 360 day year.

The deposit account agreement is a separate contract and could be governed by different terms." [This answer was in reference to whether the calculation base for the loan needed to match the calculation base for the deposit account which secures the loan.]

"Below is the text from 45-2-1906 that would apply to the loan situation:


45-2-1906. Computation of interest.

(a) A bank may charge and collect the interest charges authorized by § 45-2-1904(a) on each credit extension under the credit card plan from the date the cardholder makes a purchase or obtains a cash advance through the date payment is credited to the account in accordance with applicable federal law.

(b) Subject to the terms of the written agreement between a bank and a cardholder, outstanding balances may be computed at the beginning or end of any period or on an average basis for the period. Outstanding balances may include any interest charges and other fees and charges posted to the account. Accordingly, a bank may compound interest charges on extension of credit under this part, on a daily or other basis.

(c) For purposes of determining the daily, weekly, monthly or quarterly rate of interest equivalent to an annual rate, the annual rate shall be divided by: three hundred sixty (360), if the written agreement so provides, or three hundred sixty-five (365), fifty-two (52), twelve (12), or four (4), as the case may be, without regard to the effect of leap years, periods of varying lengths, compounding of interest charges or other factors. A billing period shall be deemed to be a month or monthly if the last day of each billing period is on the same day of each month or does not vary by more than four (4) days from the same day.

(d) Payments received by a bank under a credit card account may be applied by the bank to purchases, cash advances and/or fees and charges imposed by the bank, in any order, and a bank shall not be required to set forth its payment allocation method in the account agreement or give notice of a change in its payment allocation method, except as required by federal law."

FWIW, we had an examiner tell us that it would not be good if we made a 360 loan secured by a 365 deposit account. The examiners in general did not like the idea of the loans and deposits being different, and this was about 4 years ago.

Thank you for the information. My personal feeling is that there should be consistency. Let me pose the following question here, as I have not yet received response in another forum. My belief in consistency extends to how interest is handled within the same loan account...e.g. a mortgage loan in which the interest portion of the monthly payments is calculated on 30/360; a nationally known lender does so, but on the payoff calculation uses 365 [or I guess 366 for this year]. Where this comes into an issue is with a borrower paid ahead several months, who is due interest back...the different calculation base makes a difference...in this particular case to the tune of over $50. Should interest on the same account be handled in the same way for all transactions? I think so, unless the note specifically states otherwise. Your thoughts?

I would think any examiner would want it treated the same for all transactions. Our examiners thought the difference on deposit account vs. loan would be unfair, so I'm sure they would not like the payoff being different.