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#1832811 - 07/15/13 01:40 PM Software error and understated finance charge
Red Raiders Offline
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Compliance Land
We had a software "glitch" on a couple of loans with PMI where the payment information was disclosed correctly, as was the amount financed and APR, however, the total of payments and the finance charges were understated.

When using APRWin, it shows the amount the finance charge is off but on the reimbursement screen it defaults to .25 and doesn't show any reimbursement amount.

My questions are:

1. Are we required to reimburse?
2. How do we determine how much to reimburse?
3. If we are required to reimburse, when we do are we supposed to send a revised TIL to the borrowers?

Thanks!
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#1832851 - 07/15/13 03:03 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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Toano, VA
Originally Posted By: raidersn2000
1. Are we required to reimburse?
2. How do we determine how much to reimburse?
3. If we are required to reimburse, when we do are we supposed to send a revised TIL to the borrowers?

The only times you are "required" to reimburse are:
1. when ordered by your regulator based on compliance exam findings, or
2. when ordered by a judge, or
3. when ordered by an investor as a precondition of buying the loan, or
4. when your internal policy requires it.

If the order comes from your regulator, you use APRWIN to generate the amount. The reason APRWIN told you the FC is understated but did not indicate reimbursement is because APRWIN implements the interagency "cross tolerance" rule. If the dollar equivalent of the 0.25% APR tolerance is larger than the FC understatement, the policy and APRWIN excuse you from reimbursement.

If the order comes from a judge, you follow Section 130(a) and (b) of the TILA. Section 130(a) applies whenever the FC or APR are materially understated and it does not contain the regulators' "cross tolerance" forgiveness.

By refunding the full amount of the FC that was not originally disclosed, you cause the original FC disclosure to be accurate. The TOP would remain understated, however, and you would need to redisclose the correct amount.

If you decide to hold the loan in your portfolio and make no reimbursement, DO NOT sent a "revised" disclosure. Doing so will highlight the error and serve as an admission of guilt if you're ever in court with this borrower. Section 130(b) allows you to cure an understatement, but states that you may charge no more than the FC you originally disclosed, i.e. a full reimbursement.
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#1834839 - 07/19/13 08:33 PM Re: Software error and understated finance charge Red Raiders
Red Raiders Offline
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Does anyone know if we are required to report an instance such as this to Fannie or Freddie once we discover it?

If so, can you let me know where to find information regarding this?
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#1834929 - 07/22/13 12:40 PM Re: Software error and understated finance charge Red Raiders
Dan Persfull Offline
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See Section 48.10 of the Freddie Servicing Guide.
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#1835248 - 07/22/13 08:11 PM Re: Software error and understated finance charge Red Raiders
Red Raiders Offline
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Thanks for the cite, Dan.

Do you (or anyone else) think that a finance charge understatement of anywhere between a few hundred to a couple thousand over the life of a 15-30 year fixed rate mortgage would "affect the eligibility of a mortgage" sold to them?

I really don't want to open a can of worms that doesn't need to be opened. As noted earlier, all of these are within regulator tolerances allowed using the "cross-tolerance" rule.
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#1835347 - 07/22/13 11:34 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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Originally Posted By: raidersn2000
all of these are within regulator tolerances allowed using the "cross-tolerance" rule.
While that may be the case, investors are more concerned about defending (and losing) lawsuits initiated by borrowers who received disclosures with understated FCs. The TILA is not the source of the "cross-tolerance" rule. The regulators dreamed that up on their own. If you are in court, a judge will look at the statutory FC tolerance. Understatements by more than that tolerance will trigger all the civil penalties. If I'm the investor, why would I want to buy paper with potentially expensive TIL defects and pay the same price as if there were no defects?
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#1835538 - 07/23/13 04:10 PM Re: Software error and understated finance charge Red Raiders
Red Raiders Offline
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Thanks, Richard. That being said, it sounds like we definitely should notify the investor and be prepared to take our medicine, correct (in your opinion)?

Also, in reimbursing if we have a loan that the finance charge was understated $300, do we reimburse $200 (since the tolerance is $100)?
Last edited by raidersn2000; 07/23/13 04:28 PM.
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#1835582 - 07/23/13 05:15 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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At a minimum, you should follow the investor's directions. Even if the investor allows it (unlikely) "keeping the tolerance" is a bad idea. Most likely, that practice would not satisfy the remedial prescription found in Section 130(b) of the TILA. It says you must make "whatever adjustments...are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed." Notice there's no mention of netting out the allowable disclosure tolerance. From the customer relations viewpoint, how would you explain the net reimbursement amount? ("Yes, Mr. & Mrs. Customer, it was our error. Rather than cheating you out of the full $300, however, we decided to only screw you out of $100! Have a nice day.")
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#1835597 - 07/23/13 05:40 PM Re: Software error and understated finance charge Richard Insley
RR Joker Offline
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laugh So eloquently said!
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#1835617 - 07/23/13 06:09 PM Re: Software error and understated finance charge Red Raiders
Red Raiders Offline
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Haha! Good point!
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#1835664 - 07/23/13 07:03 PM Re: Software error and understated finance charge Red Raiders
fmissle Offline
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Depending on if this was an actual software error, you may want to have counsel contact the software company and pursue a claim from them. Many of them offer warranties for just this type of thing.

Originally Posted By: raidersn2000
We had a software "glitch" on a couple of loans with PMI where the payment information was disclosed correctly, as was the amount financed and APR, however, the total of payments and the finance charges were understated.

When using APRWin, it shows the amount the finance charge is off but on the reimbursement screen it defaults to .25 and doesn't show any reimbursement amount.

My questions are:

1. Are we required to reimburse?
2. How do we determine how much to reimburse?
3. If we are required to reimburse, when we do are we supposed to send a revised TIL to the borrowers?

Thanks!

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#1835677 - 07/23/13 07:26 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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Toano, VA
Yes, you should discuss your findings with the software vendor until you reach agreement on the correct values to disclose. Maybe the vendor can point out an error in the method you are using to test the disclosures. It's strange that the payment schedule is accurate but the TOP is not. What's causing that? Do you and the vendor agree on the payment number when automatic termination occurs?
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#1838713 - 08/01/13 09:37 PM Re: Software error and understated finance charge Red Raiders
Shopping Mama Offline
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Posts: 29
Good afternoon. Glad to see this in the threads as I too stumbled upon a Finance charge issue while reviewing mortgage loans.

My question,to remedy the understated finance charge, must we send the customer a cashiers check or can we apply the amount of understatement as a principal only payment to the loan?

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#1838730 - 08/01/13 10:16 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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Unless you are up against an order from your regulator, a judge, an investor, or your own internal policy, nothing requires you to "cure" the understated FC. If you choose to do a "cure" follow the steps outlined in Section 130(b) of the TILA. Anything less than that will alert the borrower and leave you exposed to penalties.
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#1838755 - 08/02/13 12:54 AM Re: Software error and understated finance charge Red Raiders
Rocky P Offline
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One other caveat.

If the TiL (material disclosure) is out of tolerance and the loan is the refinance of a primary dwelling the consumer with ownership interest can rescind the transaction for 3 years.
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#1838882 - 08/02/13 03:17 PM Re: Software error and understated finance charge Red Raiders
Shopping Mama Offline
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I am confused. I understood from other postings that if I reimbursed the customer, this now causes my disclosures to be correct and therefore there is no extended ROR.

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#1838969 - 08/02/13 04:57 PM Re: Software error and understated finance charge Shopping Mama
Rocky P Offline
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ShoppingMom - Correct - if you make the original TiL accurate.
I was referring to any options to ignore it unless a regulator etc. brings it up.
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#1839092 - 08/02/13 07:08 PM Re: Software error and understated finance charge Shopping Mama
Richard Insley Offline
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Originally Posted By: Shopping Mama
I understood from other postings that if I reimbursed the customer, this now causes my disclosures to be correct
Reimbursement is part of the 130(b) cure, but you must also:
1. notify the borrower about the problem,
2. act within 60 days of discovery of the error, and
3. make a full reimbursement (recognizing no tolerance.)
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#1840272 - 08/07/13 06:20 PM Re: Software error and understated finance charge Red Raiders
Shopping Mama Offline
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Thank you. I appreciate your help.

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#1846398 - 08/27/13 07:26 PM Re: Software error and understated finance charge Red Raiders
KMK Offline
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Joined: Jan 2008
Posts: 72
Pennsylvania
May I please revive this thread with a related question? In our case, a construction loan was closed and the interest during the 6-month construction period was NOT included in the finance charge (per Appendix D of Reg Z), therby resulting in an understatement of the FC.

In this case, the construction period is over. Do we need to reimburse the full 6-months of interest OR the difference bwteen the 6-month amount that should have been included in the FC and the amount ACTUALLY PAID by the borrower?

For example, the amount of construction loan interest during the construction period was calculated to be $2,150. This amount was NOT included in the FC on the final TIL. We discovered the error after the construction was completed. The borrower actually paid $1,980 in interest during the construction period.

Do we reimburse the full $2,150 OR $170?
Any guidance is greatly appreciated!

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#1846497 - 08/27/13 09:52 PM Re: Software error and understated finance charge Red Raiders
Richard Insley Offline
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Toano, VA
Unless it is ordered by your regulator or a judge, reimbursement is a defensive move that is optional. By taking the 130b cure, you eliminate the possibility of paying damages and a penalty. Since the one-year statute of limitations automatically eliminates the possibility of paying damages and a penalty and your exposure window is down to less than 6 months, I would roll the dice and do nothing.
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#1847078 - 08/29/13 01:11 PM Re: Software error and understated finance charge Red Raiders
KMK Offline
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Pennsylvania
Thanks for the prompt advice. The clincher here is that when I say WE found the error, I actually meant our auditors found the error. This will place the issue in an audit report which will eventually be seen by the examiners. So, it appears we will take the high road and pay the reimbursement. I don't want to get into a "why didn't you" discussion with the examiners, even though the borrowers are totally unaware that this even happened.

With that in mind, we still wish to clarify whether we should be reimbursing the full construction loan interest amount (which seems a little unfair) or reimburse the difference from what the borrower actually paid during the construction period.

To err on the side of caution, our mortgage department is now going through other construction loan files to determine if there are other loans that have the same issue.

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#1847174 - 08/29/13 03:19 PM Re: Software error and understated finance charge KMK
Richard Insley Offline
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Richard Insley
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Toano, VA
Originally Posted By: KMK
With that in mind, we still wish to clarify whether we should be reimbursing the full construction loan interest amount (which seems a little unfair) or reimburse the difference from what the borrower actually paid during the construction period.

To err on the side of caution, our mortgage department is now going through other construction loan files to determine if there are other loans that have the same issue.
130(b) says that in order to get the cure you can charge no more than you disclosed. If you disclosed no interest, then you must turn this into an interest-free loan retroactively.

It's not an error to do a file search--your regulator will probably make you do it if you don't do it on your own. If you didn't already determine WHY this happened and fix it yesterday, stopping the bleeding would be at the top of my list.
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