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#2236687 - 05/14/20 04:24 PM APR Tool - Payment Streams
Compliance NABW Offline
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It's been a long time since I messed around with APR Calculations and I know there are some strong APR Tool people on here.

With an ARM loan where the initial rate is locked for 3 years at a discounted rate to the ongoing Index & Margin, I would use the initial rate for the 1st payment stream at 36 months correct?

For the 2nd payment stream, on a 30-year amortizing loan, I would use the Index + Margin rate at the time of closing, correct? I would then use this payment stream for 324 months. We are not supposed to account for adjustments to the index within our blended APR, right? We just use the current Index + Margin? I would take the remaining principal balance after the 36 payments and then re-amortize using the new rate and a 27-year amortization to get the new monthly payment amount, correct?

Does it make sense that if the initial stream has a rate of 4.5% and the 2nd stream has a rate of 5.5% that a 7% APR would be an output? It seems high, but I don't think I did anything wrong. When you use the FFIEC Tool and you are working the dates section, for the 2nd payments stream there would be 0 odd days, right? You just take the date of the 37th payment as the "Loan Date" and that same date is also your "Payment/Advance Date"?

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#2236688 - 05/14/20 04:29 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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rlcarey
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Yes, that would be correct unless your adjustment caps would be triggered and then you might have more than two payment streams. Your core system should produce an actual amortization schedule to give you these payment streams. If all of your payments are monthly and there are odd days to your first payment, those odd days will stay the same for the entire transaction.

I should have added that you can use any index that was in effect at closing within the time period of your index lookback for future changes.
Last edited by rlcarey; 05/14/20 04:32 PM.
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#2236703 - 05/14/20 06:15 PM Re: APR Tool - Payment Streams Compliance NABW
Richard Insley Offline
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Two things are always wrong when calculating the APR.

1. Always disclosing "worst case." Even though you may jump from the (discounted) note rate to the fully-indexed interest rate at the time of the first adjustment, it's NOT because you're basing your payment calculations on the worst case--but rather it's because the rate change does not exceed the cap for that adjustment. Change the product slighty to a 1/1 with a 0.5% rate change cap, and it would take two step-ups in the interest rate and payment amount to get from a note rate of 4.50% to 5.50%.

2. Excluding borrower-paid MI premiums. If the loan has mortgage insurance and the fully loaded payments include MI renewal premiums, these must be included in the payment schedule that drives the APR until the future date when the HPA requires automatic termination of the MI.
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#2236710 - 05/14/20 08:12 PM Re: APR Tool - Payment Streams Compliance NABW
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Thank you both. Two of the strong tool people I was banking on smile. I'm just still a bit worried about the 7% APR. It seems big when the rate is only 4.5% and 5.5% for the length of the loan.

I have a $300,000 loan amount. 4.5% rate for the first 36 months. 5.5% rate for the remaining 324 month stream. Initial Payment of $1,520.06. Next payment stream is $1,689.28. $295,918.11 Amount Financed. No PMI.

Not sure what you mean @RL about keeping the Odd Days. I'm referring to Tab 4 (Payment Schedule) of the FFIEC APR Tool. What would be the "Unit Periods" and "Odd Days" for the 2nd Payment stream?
Last edited by Compliance NABW; 05/14/20 08:14 PM.
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#2236711 - 05/14/20 08:18 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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rlcarey
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We would need all the dates - but if there were no odd day periods with what you gave us the APR would be 5.3793%
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#2236714 - 05/14/20 08:30 PM Re: APR Tool - Payment Streams Compliance NABW
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Yeah, that's what the original system got. Hmmm. Can't figure out why this isn't working right for me. What did you do to get that result? I had loan date of 10/18/2019 with 1st Payment date of 12/1/2019. Would the interest accrual method make that big of a difference? I doubt it.
Last edited by Compliance NABW; 05/14/20 08:32 PM.
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#2236715 - 05/14/20 08:42 PM Re: APR Tool - Payment Streams Compliance NABW
Inherent_Risk Offline
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"When you use the FFIEC Tool and you are working the dates section, for the 2nd payments stream there would be 0 odd days, right? You just take the date of the 37th payment as the "Loan Date" and that same date is also your "Payment/Advance Date"?"

For the second payment stream, there would generally be ~36 unit periods and some odd days. You don't change the loan date for the second stream.

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#2236718 - 05/14/20 08:51 PM Re: APR Tool - Payment Streams Compliance NABW
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1 4.500% $1,520.06 $1,520.06 36 1 14
2 5.500% $1,689.28 $1,689.28 324 1 0

These are my two streams ^

I kept the Loan Date the same and it got down to 6.9493%. Still way off though.
Last edited by Compliance NABW; 05/14/20 08:53 PM.
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#2236720 - 05/14/20 08:55 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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If someone can get the FFIEC calculator to work - well more power to them. I have yet to be able to figure it out and why they ask for things like the interest rate that will apply to each payment stream.

They already fail to comply with TRID on the Total Interest Percentage on 1x close loans. I doubt they had any bankers test this thing for functionality.
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#2236721 - 05/14/20 08:57 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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rlcarey
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The second payment stream starts in unit period 37 odd days 14
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#2236722 - 05/14/20 08:59 PM Re: APR Tool - Payment Streams Compliance NABW
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The Total of Payment, The Finance Charge, and the Total Interest Percentage are basically the same as the original system now. But, the APR is way off. How could all those other things be exactly right and the APR be off so much?

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#2236723 - 05/14/20 09:05 PM Re: APR Tool - Payment Streams Compliance NABW
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Okay, @RL, that gets me much closer. Even more so if I have the odd days "0" in the 2nd Payment stream. So, what does the "Unit Periods" column represent? I thought it was you are telling it this is monthly. It represents how long until the stream begins? Wouldn't the Odd Days be "0" in the 2nd Payment stream because now you have no gap in timing when the recast is done? In the initial payment, you have where it takes place on ths 1st date following the next month, so like 44 days or whatever. But, in the 2nd payment stream don't you just have "0" because it is due on the 1st just like all the rest of the payments?

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#2236724 - 05/14/20 09:07 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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rlcarey
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I got it to work.

Amount Financed

$295,918.11

Finance Charge

$306,130.77

Annual Percentage Rate

5.3608%
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#2236731 - 05/14/20 11:43 PM Re: APR Tool - Payment Streams Compliance NABW
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Yep, that's what I got with the 14 Odd Days in the 2nd Payment Stream. When I knock the Odd Days in the 2nd Payment Stream to 0, then I get an APR of 5.376% with the Finance Charge and Amount Financed staying the same. The system generated CD has an APR of 5.379%. Amount Financed: $295,918.11 and Finance Charge: $306,130.86.

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#2236733 - 05/15/20 11:09 AM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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rlcarey
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When I knock the Odd Days in the 2nd Payment Stream to 0

You should not do that - that is not when the payments happen. It is all based on loan funding date to payment date. Your monthly payment date does not change from the 36th payment to the 37th payment.
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#2236735 - 05/15/20 12:57 PM Re: APR Tool - Payment Streams Compliance NABW
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Yeah, I figured out how to enter the dates correctly in the tool. I figured out I just use the payment date in the 2nd stream and it does the Unit Periods and Odd Days automatically. This takes me further away from the CD result though. 5.3608% vs. 5.379%. I guess it's still only 0.018%. All the other numbers I am getting within a few dollars. Thank you all for helping me figure this out! I believe I have the hang of this FFIEC APR Tool, at least to a decent extent.

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#2236746 - 05/15/20 03:15 PM Re: APR Tool - Payment Streams Compliance NABW
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The whole/fractional unit period time measurement always runs from the date of the first payment in each stream back to the date of consummation--not to the date of the preceding payment.

Most people never read Appendix J, but its paragraph (b)(5) explains the process clearly:
If the unit period is a month, the number of full unit periods between two dates shall be the number of months measured back from the later date. The remaining fraction of a unit period shall be the number of days measured forward from the earlier date to the beginning of the first full unit period, divided by 30.

With a closing date of 10/18/2019 and first pmt. date of 12/1/2019, you count back (in whole months) from 12/1 to 11/1 and get one whole U/P. Then, you measure to remaining fraction of a month (14 days) by counting forward from 10/18 to 11/1. Counting back from 12/1/22 to 10/18/19, you get 37 whole U/Ps and 14 odd days.
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#2236792 - 05/18/20 10:59 AM Re: APR Tool - Payment Streams Richard Insley
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Awesome. Thank you Richard. So, it is what I mentioned above, i.e. the time period until the next stream, except the Regulation explains it by counting backward, rather than projecting forward.

As we discussed above the second payment stream is determined based on the current index and margin. If the index moves prior to closing, do you still use the amount at consummation as long as the note doesn't call for calculating the change date 45 days (or some other number) prior to the change date? I found this in the Official Interpretation:

[i. When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.]

What if the note doesn't indicate anything about such prior period? You would still use the rate at the exact consummation date, correct?

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#2236795 - 05/18/20 11:25 AM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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If you are talking about ARM loans subject to 1026.19(b), you have to have at least a 45 day lookback in order to comply with 1026.20(c) and (d).
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#2236800 - 05/18/20 01:20 PM Re: APR Tool - Payment Streams Compliance NABW
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Where is 45 days noted as a specific requirement? I searched the entire CFR XML for "45 days" and they are always caveated by "if the contract" statements.

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#2236803 - 05/18/20 01:48 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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Since you are require to deliver the ARM payment adjustment notice at least 60 days prior to the payment change date, without having at least a 45 day lookback, that would be virtually impossible.

1026.20(c)(2) Timing and content. Except as otherwise provided in paragraph (c)(2) of this section, the disclosures required by this paragraph (c) shall be provided to consumers at least 60, but no more than 120, days before the first payment at the adjusted level is due.
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#2236824 - 05/18/20 04:24 PM Re: APR Tool - Payment Streams Compliance NABW
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Ok, got ya.

So, where the Note doesn't specify the amount of days before the Change Date that the rate will be set, what is the correct method for calculating the blended APR? Do we use the rate at consummation? Or, do we have the option to use the rate at consummation or use the rate based on any index value in effect within the 45-day period prior to consummation? The Official Interpretation reads like the creditor basically has the option to use either one. But, I found it difficult to believe that there isn't a set way to perform this calculation, especially because if the index moves in that period and you pick "Option A" vs. "Option B," you would potentially get APR differences that would be out of tolerance variations.

[The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors *MAY* use *ANY* index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.]

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#2236831 - 05/18/20 04:55 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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If you have no lookback in your note, then you have to use the index and margin that would have been applicable on the day of consummation:

When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation.

If these transactions are subject to 1026.20(c) - you have a serious gap in your legal documentation.
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#2236918 - 05/19/20 04:43 PM Re: APR Tool - Payment Streams Compliance NABW
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I know . . . dumb question/excuse, but might as well throw it out there . . . if the note says "Before each Change Date" is that a lookback? I.e., no amount of days is provided, just "Before."

If a lookback did exist, do you conclude that an institution has the option to use the rate at consummation or the rate in effect within the 45 day period prior to consummation?
Last edited by Compliance NABW; 05/19/20 04:47 PM.
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#2236919 - 05/19/20 04:57 PM Re: APR Tool - Payment Streams Compliance NABW
rlcarey Online
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Typically, you are going to see something like this in the note. If you do not, you need to get with your legal counsel pronto:

The Index
Beginning with the first Change Date, Borrower's interest rate will be based on an Index. The Index is the
monthly average yield for U.S. Treasury Securities adjusted to a constant maturity of five years. Information
about the Index is published by the Federal Reserve in Statistical Release H.15. The most recent Index figure
available as of the date 60 days before each Change Date is called the Current Index. If the Index is no longer
available, the Note Holder will choose a new index which is based upon comparable information. The Note Holder
will give Borrower notice of this choice.

Yes - you can use the index plus margin at consummation or any index in effect prior to consummation within the specified lookback period in the note.
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