I am curious about what interest accrual method other banks are using on consumer loans, in particular home equity term loans. About six months ago we changed our accrual from 365/365 to 365/360 in order to make the additional yield. It is my understanding from Reg Z that we are permitted to use whatever method we want, as long as we disclose that method to the customer. Now, some customers are starting to ask why there is a difference between the stated rate and APR, when there are no fees. Are we at a competitive disadvantage? Or worse, are we violating a regulation?

Our bank's method is 30/360 for that type.

Sorry, but I had a few seconds to go back & read some older posts. Does Reg Z require us to disclose the accrual method? do we have to state the accrual method in our note forms?
My mind was thinking this was a state by state issue.

Reg. Z doesn't require it, but it is usually a part of the contract, defining the terms of the obligation.

Reg Z doesn't require you to disclose the accrual method - but you have no right to charge more than the interest rate you disclosed. That's a basic part of contract law to which I think Richard was referring.

So if in your note the customer agrees to pay interest at the rate of 7% per year and you turn around and accrue at higher rates, you have a potential legal problem. I have written letters for friends of mine to whom this happened, and the creditor had to refund. I'm sure it wasn't an intentional error, but it was an error.

Richard's other point is that if you want to sell the loan, the standard for mortgage markets is 30/360. I know of many banks who hold their own non-conforming mortgages and accrue at Actual/360, but they do disclose the accrual basis on the notes as something like "interest will be accrued based on the actual days elapsed in the payment period and a year of 360 days".

Kathy