Excluding daily interest from APR calculation

Posted By: Many Hats

Excluding daily interest from APR calculation - 02/07/13 01:10 AM

Would it be okay to discontinue including odd days interest at closing (and will not be included in the APR). Instead, would it be okay to give the borrower a bill at closing that will be due the 1st of the following month (i.e. close on 2/6/13 - will get a bill at closing for the # of days through the end of the month, due March 1st, then regular P&I payments will begin April 1st)?
Posted By: rlcarey

Re: Excluding daily interest from APR calculation - 02/07/13 01:22 AM

Sure you could if your loan agreement supports it and then that amount is included in the payment streams to calculate the APR.
Posted By: Richard Insley

Re: Excluding daily interest from APR calculation - 02/07/13 02:10 AM

Many - I once worked for a bank in a state that required this method. It's messy and you might have problems with investors if these loans are being sold. As Randy observes, a 30-year loan will now have 361 payments.

For TIL purposes, you won't treat the odd days' interest as a PFC, but it's still included in the FC. Similarly, odd interest that is billed doesn't impact the APR quite as much as if it is prepaid, but it can't be excluded from the APR calculation all together.

Before making this switch, decide how you will handle cases where the borrower fails to make the billed interest payment. Will your note allow you to assess a late charge? Will you report a delinquency to the CB? When the first P&I payment rolls around, will you use all of it to cover as much matured interest as possible? If the matured interest exceeds the amount of the first P&I payment, will you amortize the loan negatively? If you don't amortize negatively how will you track the remaining unpaid interest? Will you be able to capture the billed interest for 1098 purposes?
Posted By: Many Hats

Re: Excluding daily interest from APR calculation - 02/07/13 02:50 PM

So the key would be to have the loan agreement reviewed to ensure it allows for it.....is there certain language that I should be looking for?

And, to verify...it would mean 361 payments....so does that mean the GFE and the TIL should reflect 361 months?
Posted By: Richard Insley

Re: Excluding daily interest from APR calculation - 02/07/13 02:59 PM

Someone else will have to explain how RESPA applies, but Reg. Z requires you to include this billed interest in the payment schedule (the 1026.18(g) version, at least), TOP, FC, and APR.

As far as contract language goes, just think about all the possibilities (other than the customer paying in full on the date stated in the bill) and then read the note to see if it covers the situation. If not, you may need to have counsel review and adjust your documents.