So we have an ARM and apparently the Closing Disclosure that was generated and signed at closing did not include the index in the #'s populated in the Loan Calculations table TOP, Finance Charges, Amt Financed, APR, TIP).

The AIR table on page 4 of the CD reflected 1 Year LIBOR + 3.250% for the Index + Margin, but my understanding is that the numerical index was not entered into the LOS, so the Loan Calculations on p. 5 were essentially populated using a value of "0" for the index. I'm waiting on further clarification on this piece from the business unit.

Less than a week after closing, this error was discovered and a corrected post-consummation CD was sent to the borrower. But, the corrected finance charge amount was approximately $17,000 more than what was disclosed on the CD signed at consummation.

The APR on the corrected PCCD was not greater than 0.125% than that of the CD signed at consummation.

Thus, my understanding is then that the finance charge disclosed at consummation was inaccurate but the APR was accurate. Is this correct?

If so, is the general "cure" for an understated to Finance Charge to refund the borrower the difference (i.e. the $17k in this instance)? I'm really hoping the answer is no...

Through my searching, I found this thread:
https://www.bankersonline.com/forum/ubbthreads.php/topics/2106137/re-finance-charge-tolerance-cure

I'm trying to understand the post by Docs in that thread, in a way that would help me find resolution to this problem. But I'm struggling. What I am getting from that post is that the borrower would only be liable to pay interest on the amount disclosed at closing. Is that correct?

Would be grateful for any feedback or insight. Thank you!

We would need a lot more information to understand what the problem is. What interest rates were disclosed in the note, what type of ARM is this? 1/1, 5/1, etc., Note amount , amort. period, payment streams used to calculate the disclosure, prepaid F/Cs, etc. etc. Saying that a value of 0 was entered doesn't really tell us how it impacted the calculation.

While we're awaiting all the loan details Randy mentioned, one recommendation is clear--your post-closing procedure should be revised.

Disclosure errors involving understatement of either the FC or APR can't be corrected with a simple redisclosure. Corrections are made for the purpose of reducing/eliminating possible penalties and assuring loan acceptance by investors. The only way to cure a TIL disclosure error involving an understated FC or APR is to take whatever actions are necessary to assure that the borrower pays no more than the disclosed FC or the dollar equivalent of the disclosed APR. Borrower notification is also required, but the purpose is to announce the remedial actions, not to tell the borrower s/he owes more than you disclosed.

I will suggest that the real problem is your pre-disclosure procedures. Check the written routine/instructions for populating the fields in the LOS that are used in producing the closing disclosure. Is the routine bullet-proof? How about verification of the closing disclosure before delivery? What can prevent this horror show from being repeated?

You can be sure that, if the holes in your process aren't fixed and there's a repeat of this error of a similar magnitude, heads will roll. Your board will demand it.

Wanted to re-up this one because I have a similar situation occurring currently. An investor rejected a 5/1 ARM that closed 6 months ago due to a Total of Payments underdisclosure of roughly 12K. It was escalated to me to look at, and upon review, I see the issue is actually an incorrect index causing a finance charge underdisclosure, and subsequently the TOP underdisclosure (oddly enough, they never mentioned the finance charge underdisclosure).

The index was .16% lower that what should have been used. So the future payments after the first five years were estimated at 7% instead of 7.125% interest (rounding to the nearest 1/8). Due to the size of the loan (500K) the APR is actually within tolerance (.074% underdisclosed).

I'm definitely looking into how the bad index got in our LOS, but in the meantime trying to figure out if the entire 12K needs to be refunded.

Finance Charge Reimbursement for ARM Loans
Divide the finance charge adjustment by the amortization schedule to get the payment adjustment and multiply that by the number of months to the first change date.

Assuming 360 month amortization.

$12,000/360 = $33.33 * 60 = $2,000.00

Thank you!

If you calculated the true payment schedule (as outlined in OI #10, Section 1026.17(c)(1)) in order to determine the understatements of the TOP and FC; and you used this true OI #10 payment schedule to verify the APR is in tolerance, what did APRWIN say about the disclosed FC? Did it say there is a $12,000 FC understatement, but provide no reimbursement information? If that's the case, it's due to the "cross-tolerance" provision in the Reg Z enforcement policy. It doesn't come into play very often, but when it happens, it could excuse a sizeable FC understatement.

And then, there's Section 130(a) of the TILA. It provides no "bonus" tolerance and could be the basis for a consumer lawsuit to claim the $12,000 as actual damage (in addition to the penalty and court costs.) This exposure is just that, a risk, until/unless the borrower sues you. Many lenders are willing to take that risk and do nothing.

Correct, APRWIN identifies the underdisclosure in the finance charge of 12K, but states the reimbursement amount is $0.00. Can you point me to that cross tolerance provision? I don't believe I've ever read that.

Thanks!

Federal Register, Volume 63, Number 173 (Tuesday, September 8, 1998)
"Administrative Enforcement of the Truth in Lending Act--Restitution"
Page 47497, third column, number 5. and footnote 7

https://www.govinfo.gov/content/pkg/FR-1998-09-08/pdf/98-24057.pdf

Thanks Richard, that was on the tip of my tongue and you just beat me to it. (HA!)

(Where do you and Randy come up with this stuff! - Amazed again)

Thank you!