Good Afternoon,

Wondering if someone may be able to assist me with this question. We have some 10/1 ARM loans that have understated APRs and understated Finance Charges. The incorrect index was used for the second payment stream. I have been researching and still have some questions on how to fix everything. Can someone please confirm the following:

1- They are past 60 days, so we could do nothing (no one at my Bank is suggesting this but want confirmation on what I'm reading). However, if it's discovered during an exam and looked at to a pattern or practice then we will likely need to reimburse anyway. Again, this isn't my recommendation. Just want confirmation in what I'm reading.

2- We reimburse the larger of the two- either the understated APR or the understated FC.

3- In order to come up with the understated APR reimbursement you need to enter in the CORRECT FC and payment stream information into APRWIN.

4- Let's say the understated APR Lump Sum is $5,400 and the understated FC is $5,000.00. You would reimburse the understated APR (because it's larger than the understated FC), but it can be prorated until the first-rate change period. In the case of a 10/1 ARM with a term of 30 years you would reimburse- $1,800 ($5,400/360 X 120).

5- You can do the $1,800 in one check or you can cut a check for the payments that have already been made and reduce the remaining payments until payment 121 for the reimbursement.

Is this all correct?

First time poster btw!

Can I ask if you are trying to pay restitution based on the regulators Administrative Enforcement guidelines or are you trying to eliminate civil liability?

Just the Administrative Enforcement Guidelines.

1. I have no idea what 60 days anything to do with restitution.

2. Yes, assuming that the proper tolerances were taken into consideration.

3. Yes

4. I am not sure where that is coming from.

5. You can do either, but I still do not know where this 10 year cut off is originating from.

For #4 and #5 APRWIN help guidance states:

Variable Rate Adjustments: If the APR is understated, the adjustment is calculated only to the first rate-change date (or to the actual first-rate change if no date is specified in the contract). If the Finance Charge is understated, the adjustment is calculated over the life of the loan. In some cases, the finance charge adjustment may be calculated only to the first-rate change date.

Then on the bottom of the APR tool there is guidance that reads:

For variable rate loans, if the rate change date has not yet occurred, the lump sum payment applicable to the entire rate change period may be calculated as of the date of adjustment (i.e., determine its present value for an APR adjustment or, if applicable, calculate the prorated share of the finance charge adjustment).

I take both of these to mean that if you have a 10/1 ARM then the lump sum payment gets prorated for the first 10 years. There were a couple of other threads that I had found about prorating as well. What are your thoughts on what this means? Thank you!

I would be visiting with my EIC on those points. They are not included in the Joint Statement of Policy on the Administrative Enforcement of the Truth in Lending Act—Restitution (Policy Statement).

It's been 15 - 20 years since I helped a bank with this kind of restitution problem, so take this for what it's worth.

I think Alan took this directly from the language in the Q&A that was issued shortly after the TIL Enforcement Policy was issued in 1998. This document can still be found on the OCC website, but I have no idea about its status these days. occ.treas.gov/topics/consumers-and-communities/consumer-protection/truth-in-lending/tila-joint-interagency-statement-q-and-a.pdf If it's still valid, go to "Calculating the Adjustment" #7, and see if that helps.

Thanks Richard, I was hoping you would pop in. I had forgotten about that old Q&A and like you, not sure if the CFPB recognizes it or not.

Incidentally, the logic in this variance between ARM and FR loans is that the applicant received an ARM "program disclosure" that covered the effects of rate adjustments on future payments. By dividing the loan into pre-adjustment and post-adjustment segments, the agencies were able to justify different treatment (for reimbursement purposes) of the two segments when there is a material APR understatement.

During the pre-adjustment period, the lender must reimburse in a way that causes the consumer to pay no more than the disclosed (understated) APR. There is no reimbursement during the post-adjustment segment.

In order to calculate the reimbursement amounts with APRWIN (or "the tool"?), the lender enters all of the disclosed values, and selects the "lump-sum/payment-reduction" method of reimbursement. The trick is to time the "as-of" reimbursement date as the date when the pre-adjustment segment ends and the first rate change will go into effect...not the date you are actually making the calculation and issuing a check.

For a 10/1 ARM, your "as-of" date will therefore be 8 to 10 years into the loan. The calculation gives you a lump sum and reduced amounts for future payments. Since there's no reimbursement during the post-adjustment segment, you throw away the payment reduction information. That leaves you with a lump sum that is 96 to 120 months into the future (for a 10/1 ARM.) Since reimbursement amounts reflect the time value of money, that future value should be "uncompounded" (reduced) with a plain vanilla FV>PV calculation using:
FV = the "lump sum" from APRWIN
N = the number of payment periods remaining in the pre-adjustment segment of the loan
I = the reimbursement rate (understated APR plus the reimbursement tolerance you decide to "keep") divided by 1200
PMT = 0.00
Solve for PV. The result is the amount you would give the consumer today to reimburse in full.