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#2200844 - 12/15/18 05:36 AM DPA - 0% Interest Rate, No Payment - What is APR?
Cristine Offline
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Joined: Feb 2017
Posts: 7
There are some DPA programs that are 0% interest rate with no monthly payments that are eventually forgiven if the borrower keeps the house for XX years (specific to the agency providing these loans). However, if they sell the house or refinance within that period, then they would have to pay back the loan. There could also be finance charges associated with these loans.

Some of the agencies require us to send out initial disclosures/LEs. Our LOS doesn't support 0% interest rate loans so we're trying to figure out what the actual APR is on these loans to manually complete the LEs.

Looking at this link: https://www.law.cornell.edu/cfr/text/12/appendix-J_to_part_226
This section leads me to believe that the APR would be 0.

(b) Instructions and Equations for the Actuarial Method
(1) General Rule
The annual percentage rate shall be the nominal annual percentage rate determined by multiplying the unit-period rate by the number of unit-periods in a year.


So if the rate is 0, then anything it’s multiplied by would be 0. Thus, it would seem that the APR on a 0% rate loan would be 0.

However, in discussing this further with one of our attorneys, he says that these loans can be perceived as single advance payments because the loan may need to be repaid. If borrower is given a loan of, say 5K and has a $100 origination Fee, and sells before the term, borrower has to pay back $5,100 ultimately. He thinks, given the $100 origination fee, this could result in a minimal APR.

Does anyone know what the APR is for these types of loans?

Thanks in advance!

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General Discussion
#2200848 - 12/15/18 03:45 PM Re: DPA - 0% Interest Rate, No Payment - What is APR? Cristine
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 83,225
Galveston, TX
We have done some work on these sorts of loans. You have to have a payment stream in order to calculate the APR. At what rate is the loan forgiven. A certain amount monthly, annually, or all at the end of the term? There will be an APR due to the origination fee. If the $100 is truly an origination fee and not an application fee, then the loans will be subject to TRID disclosures rather than 1026.18 disclosures per 1026.3(h).
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#2200849 - 12/16/18 04:13 AM Re: DPA - 0% Interest Rate, No Payment - What is APR? Cristine
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 10,179
Toano, VA
Originally Posted By Cristine
There are some DPA programs... the APR for these types of loans?
This isn't a simple matter, because you can't generalize--every program must be fully digested in order to determine what must be disclosed.

Section 1026.17(c)(1) tells us that "The disclosures shall reflect the terms of the legal obligation between the parties." Who are the parties? Typically, government-assisted financing involves three, maybe more, parties who are contractually obligated to do certain things.

Are you a bank, or some other type of lender? What is your role in a typical transaction? You mentioned that there is an "agency providing the loans." If an "agency" is providing the funds, isn't the agency the lender? If another entity is the lender, then what's your interest in the transaction? Unless you're the creditor, how can Regulation Z cover you?

Does the program involve "credit"? Section 1026.2(a)(14) defines "credit" as "the right to defer payment of debt or to incur debt and defer its payment." Is there a debt, or does the homebuyer only incur a contingent debt? Unless the contract documents for the program require the homebuyer to commit one of the acts that triggers partial or full payment, then the program may be a gift, not a loan. Gifts are not "credit"--even if there is a possibility that the gift could be cancelled at some future date. Coverage of Regulation Z is based on requirements, not possibilities. Therefore, if the buyer's obligations are to accept funds from a community development agency, live in the residence for ## years, and then own the property free and clear, there is no debt, no "credit", and no coverage by Regulation Z.

If the program's only gift to the homebuyer is waiver of fees and/or reduction of the interest rate to 0.00%, but the homebuyer will be required to repay some or all of the funds that were advanced toward the cost of acquisition, then you have a debt...which is "credit"...which triggers coverage by Regulation Z.

Assuming the program involves "credit" (even if the credit is accompanied by a gift), then you determine what the contract documents require the borrower to repay, how, and when. There could be no specific payment schedule (payable on demand), a single payment on a stated future date, or a series of installment payments. However the payments are scheduled, for APR calculation purposes, they must include all amounts that are classified as Finance Charges. That doesn't mean that payments must contain FCs...only that you can't leave FCs out. Amounts representing the recapture of gifts (because the homebuyer no longer qualifies to receive the gift), should not be included in the payment schedule used for APR calculation because these amounts are neither FCs nor repayments of a portion of the AF.

In order to calculate an APR, you only need one additional item--the Amount Financed. The AF is the "amount of 'credit' provided to [the borrower] or on [the borrower's] behalf." Since gifts are not "credit", you ignore them when calculating the AF--just like you left them out of the payment schedule.

To illustrate, let's say the homebuyer needs $12,000 in assistance in order to close on the purchase money loan (which we'll say is a separate transaction.) Because the buyer pledges to live in the home for ## years, the government agency will give (not lend) $4,000 if a lender will make an interest-free loan for twice that amount ($8,000.) The program allows the lender to charge an origination fee that works out to be $200. The lender requires 80 monthly payments of $100 (interest-free) and the govt. agency requires repayment of the $4,000 if (and only if) the buyer no longer meets the qualifications to receive the gift.

The TIL disclosures for this illustration take no account of the $4,000 gift, resulting in an AF of $7,800 (8,000 - 2,000) and 80 monthly payments of $100. Assuming the first payment due date is exactly one month after consummation, you will get an APR of 0.75%. As Randy observes, interest isn't necessarily the only FC in a loan of this type. Fees that are Prepaid FCs factor into the APR by way of the AF, not the interest-free payment schedule.
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#2201495 - 12/27/18 01:25 AM Re: DPA - 0% Interest Rate, No Payment - What is APR? Cristine
Cristine Offline
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Joined: Feb 2017
Posts: 7
Hi, thanks for your responses. We've reviewed further and ultimately, we believe, based on the formulas indicated in this link, https://www.law.cornell.edu/cfr/text/12/appendix-J_to_part_226 that there is an APR (for single advance payment loans with finance charge(s)) and the formula is as follows.

100[(total with fees/total without fees)^(1/years) -1]

For the following loan parameters

Loan Amount $5,000
Financed Fees $100
Loan Term 10 years

The APR would be:
100[(5100/5000)^(1/10)-1] = .20%

^ this symbol means to the power of

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#2201496 - 12/27/18 12:35 PM Re: DPA - 0% Interest Rate, No Payment - What is APR? Cristine
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 83,225
Galveston, TX
You have not told us what the terms of the DPA might be other than 10 years. How is the loan forgiven? Only after ten years, after certain intervals, etc.? What are the other terms, i.e., if they move out of the house does the whole amount become due and payable, etc. We need to know more about the legal obligation before just saying that it would be a single advance, single pay loan.
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#2201540 - 12/27/18 06:41 PM Re: DPA - 0% Interest Rate, No Payment - What is APR? Cristine
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 10,179
Toano, VA
Forget:
- the formulas in Appendix J
- the number, amount and timing of advances
- the term and payment(s)
- the fees and whether or not they are "Finance Charges" or "financed" or both
- what is or isn't the APR

Do you have credit or is this a gift with strings attached?

If the contract does not amount to "credit", as defined by Section 1026.2(a)(14), then it can't be "consumer credit." If it isn't "consumer credit", then it's not covered by the regulation, no disclosures are required, and you're wasting your time trying to figure out what to disclose.
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