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#2256465 - 07/08/21 09:31 PM Lump Sum Restitution on Paid Out Loan
terpsfan Offline
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If a finance charge error is identified after closing but the loan was paid off after 2 months before the error was identified would you still have to provide lump sum restitution calculated based on the entire term?

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#2256489 - 07/09/21 02:05 PM Re: Lump Sum Restitution on Paid Out Loan terpsfan
rlcarey Online
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I am not sure what you are asking. If you have a finance charge error - you give them back the charge that should have been included in the finance charge. You either do lump sum or lump sum plus a payment reduction. If the loan is paid off, it is a little hard to do the second one.
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#2256538 - 07/10/21 01:21 PM Re: Lump Sum Restitution on Paid Out Loan terpsfan
Richard Insley Offline
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The answer depends on the type of FC understatement. From the July 1999 Interagency Reimbursement Q&A:

Methods of Adjustment
1.Q. Must reimbursements resulting from understated finance charges always be made as a single“lump sum” amount?

A. No. Reimbursements resulting from the creditor’s failure to include prepaid finance charges in the total finance charge must always be refunded as a “lump sum” payment, but reimbursements resulting from failure to include finance charge components that accrue over time may be prorated on a straight-line basis (no time value) over the life of the loan and refunded under the lump sum/payment reduction method.
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#2256542 - 07/12/21 01:04 PM Re: Lump Sum Restitution on Paid Out Loan terpsfan
Andy_Z Offline
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At this point the loan is paid off. If there is any refund it has to be lump sum as it can't be via payment reduction.
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#2256603 - 07/13/21 02:58 PM Re: Lump Sum Restitution on Paid Out Loan terpsfan
Rocky P Offline
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Terps, the fact that it was not disclosed is a training issue.

Q. Was it within tolerances? If it was, a business decision to pay or not.

Since the loan has been paid-off, following Richard's advice, IMHO, it would have to be repaid lump sum.
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#2256636 - 07/13/21 06:22 PM Re: Lump Sum Restitution on Paid Out Loan terpsfan
Richard Insley Offline
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The only remaining question would be in cases where the understatement was due to a FC that accrues over time (not a PFC.) That might be something like omitted or understated MI renewal premiums.

The official guidance says that in these cases, the reimbursement may be prorated on a straight-line basis (no time value) over the life of the loan and refunded under the lump sum/payment reduction method. I've forgotten any guidance that's specific to loans prepaid by borrowers, but nothing in the Q&A I cited above limits this methodology to active loans.

Using the LS/PR method, the reimbursement is split into two stages. The first stage is the time that passes from consummation until the payment due date immediately following the date you make a partial lump sum payment. From then until the loan terminates, payments are reduced.

If the borrower terminates the loan prematurely (the case at hand), then the payment reductions end prematurely. If the OP's FC error is the "accruing" type, then the LS/PR method will result in a smaller overall reimbursement--because the pro-rated payment reductions will end on payment due date following prepayment of the loan. There can only be a single reimbursement payment to the borrower (because there are no remaining payments due), but the methodology is lump sum/payment reduction, not the "lump sum method."
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