We have a customer that notified us that they are on active duty and have requested their interest rate reduction. The loan is set up on a term loan; however they have made unscheduled payments along the way that have been applied as regular payments (prin. & int). What is the best way to "reimburse" the customer. Also, in the regulation it discusses reimbursing all fees and charges. Would this include reimbursing the loan origination and credit report charge that was charged at origination?

however they have made unscheduled payments along the way that have been applied as regular payments (prin. & int).

Is this a daily simple interest note? What does your loan agreement say about pre-payments? Most consumer loans are daily simple interest and prepayments due no extend the next payment due date. It reduced the current principal balance but does not alleviate monthly payment responsibilities. You have to find out what the legal obligation is first to determine how you lower the interest rate. If they got the loan prior to going to active duty, you don't refund fees accrued at loan origination.

It is set up as a single payment (prin. & int.) all due at maturity (no required monthly payments).

Then you reduce the rate to 6% on the day they enter active service and remove it the day they leave active service.

Following Randy's comments, you'll drop that rate (assuming it is >6%) and if those payments went to P&I you'll redistribute it allowing for the reduced rate and increased principal reduction. I can't see returning any payment made voluntarily and which wasn't called for.