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#482 - 01/18/01 04:24 PM Reg Z Reimbursement
Jan94 Offline
Platinum Poster
Joined: Mar 2001
Posts: 828
USA
Would like someone to confirm this for me. When I use the APR software to calculate a reimbursement and I have an understated APR and FC adjustment, I am to look to the larger amount for the reimbursement. The instructions state that the APR adjustment is as of the final payment. However, in my situation the customer has only made 1 payment so far, so am I correct in assuming the reimbursement would only be for that first payment or do I have to look at the life of the loan assuming it goes to maturity? Apologize if this is elementary, but I'm not 100% comfortable with calculating reimbursements. Thank you for any assistance.

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#483 - 01/18/01 04:57 PM Re: Reg Z Reimbursement
Andy_Z Offline
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There is a "lump sum" and a "lump sums-payment reduction" method. I believe you'll want the latter where you refund what has been paid and reduce the payment for the future stream.

If you use an APR Examiner from Richard Insley's APR Systems, he has reimbursement methods and calculations in his manual.

The ABA has published several articles dealing with this in their Compliance Magazine. A favorite of mine (that I hope I don't need) is Winter 1989, Curing TIL Violations by D. Edwin Schmelzer and Walter E. Zalenski and Spring 1991, Truth in Lending Adjustment Calculations by Alan Dombrow. There is also Autumn 1989 How to Prepare for a Pounding-Restitution, The Truth in Lending Enforcement Hammer by Robert P. Chamness.

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Andy Zavoina
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#484 - 01/19/01 01:46 AM Re: Reg Z Reimbursement
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 10,085
Toano, VA
Be careful with LS/PR. This option isn't what it first appears. Reducing payments on a simple interest loan accomplishes nothing unless you simultaneously reduce the interest rate or principal to be sure the new (lower) payments still pay the loan to $0.00. If you're going to write down the principal, why not just call it a full lump sum reimbursement and be done with it? Likewise, if you reduce the interest rate, you should mark the loan's value to market--again resulting in a lump sum. LS/PR was created for the add-on environment that most banks have forgotten.
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#485 - 01/19/01 01:59 AM Re: Reg Z Reimbursement
Andy_Z Offline
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Andy_Z
Joined: Oct 2000
Posts: 27,546
On the Net
Thankfully I haven't had to address these options for quite some time and it was on a precomputed note.

Refresh my thought process here, wouldn't it make more sense to LS/PR and reduce the rate on a SI note as you mentioned, rather than a lump sum reduction up front? If the loan pays off early the reimbursement may be excessive.

Certainly some of this decision would be based on the loan amount and terms.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

_________________________
AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#486 - 01/19/01 11:33 AM Re: Reg Z Reimbursement
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 10,085
Toano, VA
LS/PR might be a viable option for a few consumer loans, but not for a portfolio of mortgages. In these cases, it's apparent benefits are an illusion.

Although the TIL policy may permit LS/PR, FASB standards may force you to mark the value of these repriced assets to market (i.e.-an additional lump-sum charge-off.) Assuming rates haven't changed significantly from the time of origination until the APR understatement is discovered, you will be charging off the loss that is created when you devalue your loan by reducing its yield.

Needless to say, if the loans have been sold to an investor, you will not be able to change any of the loan terms unless/until you repurchase the faulty loans. Now you add a trading expense to the cost of the adjustments. When you're done adjusting the payments and interest rates, you have loans that can't be sold again at par because their yields are below prevailing market.

The only time LS/PR makes sense is when you're committed to holding the reduced-yield loans in your portfolio until maturity. Otherwise, you're going to suffer the full lump-sum loss, no matter how you handle the reimbursement.

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#487 - 01/24/01 09:40 PM Re: Reg Z Reimbursement
Lucy Griffin Offline

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Lucy Griffin
Joined: Nov 2000
Posts: 1,544
There are a few more tricks to use in restitution. First, if the loan is a variable rate, you may only have to adjust the rate for the first year -- or whenever the rate adjusts. If it is a fixed rate loan, you are stuck with the above procedures.

If for some reason, you want to make a full lump sum payment -- even if the customer can pay off early -- you can also calculate the present value of the restitution amount, thus reducing the lump sum somewhat.

But the bottom line is that the bank made a loan at the rate actually disclosed.


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