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