I am conducting an audit and found several instances where the APR was overstated by more than .125% on the contracts. This issue alone may not require any corrective action. However, the system is charging interest at the overstated rate.

Any concerns with CHARGING the overstated rate? Are corrections needed, such as crediting accounts, to remove any civil liability?

Interest on a loan is not charged based on the APR. If the loan interest rate on the promissory note is correct and that is how the interest is charged, no problem. The APR becomes different than the rate when there are pre-paid finance charges charged in connection with the loan. The APR is just the complete cost of credit expressed as a percentage. In any event, you must charge the rate disclosed on your promissory note. If the rate on the note is higher than what it is supposed to be, refund any overgage and adjust the rate with a modification agreement.

To clarify...these are auto loans with no prepaid finance charges, so the APR and interest rate are the same. The APR is not disclosed accurately, and the system is charging interest at the disclosed rate (which is not correct).

So, for example, what you found are notes that state an interest rate of 6.00% with an APR of 6.15% and your servicing system is calculating interest at 6.15%?

No. They're the same because there are no prepaid finance charges.

Disclosed APR = 10%
Disclosed Rate = 10%

Based on APRWIN calculator, APR should be 9.75%, which means interest rate should be 9.75%, right?

System is charging 10%.

Looks like there's a calculation problem--either in the loan setup or your data entry into APRWIN. Post the following so we can help you troubleshoot what's going on:

Principal amount and date of consummation:
Additional funding dates and amounts if the note calls for multiple advances:
Date interest begins to accrue (if different from date of consummation):
Interest rate:
Payment frequency (if other than monthly):
Total number of payments:
First payment amount and due date:
Regular payment amounts:
Final payment amount and due date:

The loan has weekly payments. Here's what I entered from the contract:

Amount Financed: 12191.81
Disclosed APR: 19.00%
Disclosed F/C: 3456.59
Select "Actual Days" = 7
Pmt Amount: 110.20
Term: 142
Contract Date: 1/3/15
First Payment Due Date: 1/16/15

It says APR is overstated by .2477%

I'm pretty sure I've narrowed down the problem with the overstatement. If I use 7 days to first payment, the 19% APR is accurate. The violation is only occurring on contracts where the first payment date exceeds 7 days.

I'm more concerned about actually charging too much interest than what's on the contract. The values on the contract are exactly what is being amortized in the system.

Does the note state:
1. the principal amount is 12191.81?
2. the interest rate is 19.000?
3. that interest will accrue @ actual_days/365?
4. that all payments are 110.20, including first and last?

Yes to all of those.

Unless you didn't start the interest accrual clock until 1/9 then your payment schedule is understated.

Run a daily simple interest amortization and you will find there will be an unpaid balance of $50.60 after the 142nd payment is applied. In order to pay the balance in full, the borrower would have to pay a final payment of $160.80, not $110.20. Since you understated a payment, you also understated the TOP and FC. Using an adjusted final payment of $160.80, APRWIN will calculate an APR of 19%.

Another way to view the problem is to say that the first payment was understated by the 6 days' interest that accrued from 1/3 through 1/9. If you add that amount ($38.08) to the first payment (bringing it up to $148.28) and run APRWIN, it will calculate an APR of 19%.

The root of this problem is your loan origination calculations. Your loan origination software is computing the payment schedule that would be appropriate for a loan originated on 1/9--including 7 days' interest, not 13. Your servicing system, however, will take 13 days' interest out of the first payment. That puts the loan's amortization behind schedule and it never recovers.

The simplest way to calculate the appropriate adjustment is to load the disclosed APR and FC into APRWIN along with the adjusted payment schedule (1 @ $148.28 due 1/16, followed by 141 @ $110.20), and let it calculate a full lump sum adjustment as of the appropriate point on the payment schedule timeline.

Thanks so much, Richard! I really appreciate the help.