APR Tool - Payment Streams

Posted By: Compliance NABW

APR Tool - Payment Streams - 05/14/20 04:24 PM

It's been a long time since I messed around with APR Calculations and I know there are some strong APR Tool people on here.

With an ARM loan where the initial rate is locked for 3 years at a discounted rate to the ongoing Index & Margin, I would use the initial rate for the 1st payment stream at 36 months correct?

For the 2nd payment stream, on a 30-year amortizing loan, I would use the Index + Margin rate at the time of closing, correct? I would then use this payment stream for 324 months. We are not supposed to account for adjustments to the index within our blended APR, right? We just use the current Index + Margin? I would take the remaining principal balance after the 36 payments and then re-amortize using the new rate and a 27-year amortization to get the new monthly payment amount, correct?

Does it make sense that if the initial stream has a rate of 4.5% and the 2nd stream has a rate of 5.5% that a 7% APR would be an output? It seems high, but I don't think I did anything wrong. When you use the FFIEC Tool and you are working the dates section, for the 2nd payments stream there would be 0 odd days, right? You just take the date of the 37th payment as the "Loan Date" and that same date is also your "Payment/Advance Date"?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/14/20 04:29 PM

Yes, that would be correct unless your adjustment caps would be triggered and then you might have more than two payment streams. Your core system should produce an actual amortization schedule to give you these payment streams. If all of your payments are monthly and there are odd days to your first payment, those odd days will stay the same for the entire transaction.

I should have added that you can use any index that was in effect at closing within the time period of your index lookback for future changes.
Posted By: Richard Insley

Re: APR Tool - Payment Streams - 05/14/20 06:15 PM

Two things are always wrong when calculating the APR.

1. Always disclosing "worst case." Even though you may jump from the (discounted) note rate to the fully-indexed interest rate at the time of the first adjustment, it's NOT because you're basing your payment calculations on the worst case--but rather it's because the rate change does not exceed the cap for that adjustment. Change the product slighty to a 1/1 with a 0.5% rate change cap, and it would take two step-ups in the interest rate and payment amount to get from a note rate of 4.50% to 5.50%.

2. Excluding borrower-paid MI premiums. If the loan has mortgage insurance and the fully loaded payments include MI renewal premiums, these must be included in the payment schedule that drives the APR until the future date when the HPA requires automatic termination of the MI.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 08:12 PM

Thank you both. Two of the strong tool people I was banking on smile. I'm just still a bit worried about the 7% APR. It seems big when the rate is only 4.5% and 5.5% for the length of the loan.

I have a $300,000 loan amount. 4.5% rate for the first 36 months. 5.5% rate for the remaining 324 month stream. Initial Payment of $1,520.06. Next payment stream is $1,689.28. $295,918.11 Amount Financed. No PMI.

Not sure what you mean @RL about keeping the Odd Days. I'm referring to Tab 4 (Payment Schedule) of the FFIEC APR Tool. What would be the "Unit Periods" and "Odd Days" for the 2nd Payment stream?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/14/20 08:18 PM

We would need all the dates - but if there were no odd day periods with what you gave us the APR would be 5.3793%
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 08:30 PM

Yeah, that's what the original system got. Hmmm. Can't figure out why this isn't working right for me. What did you do to get that result? I had loan date of 10/18/2019 with 1st Payment date of 12/1/2019. Would the interest accrual method make that big of a difference? I doubt it.
Posted By: Inherent_Risk

Re: APR Tool - Payment Streams - 05/14/20 08:42 PM

"When you use the FFIEC Tool and you are working the dates section, for the 2nd payments stream there would be 0 odd days, right? You just take the date of the 37th payment as the "Loan Date" and that same date is also your "Payment/Advance Date"?"

For the second payment stream, there would generally be ~36 unit periods and some odd days. You don't change the loan date for the second stream.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 08:51 PM

1 4.500% $1,520.06 $1,520.06 36 1 14
2 5.500% $1,689.28 $1,689.28 324 1 0

These are my two streams ^

I kept the Loan Date the same and it got down to 6.9493%. Still way off though.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/14/20 08:55 PM

If someone can get the FFIEC calculator to work - well more power to them. I have yet to be able to figure it out and why they ask for things like the interest rate that will apply to each payment stream.

They already fail to comply with TRID on the Total Interest Percentage on 1x close loans. I doubt they had any bankers test this thing for functionality.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/14/20 08:57 PM

The second payment stream starts in unit period 37 odd days 14
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 08:59 PM

The Total of Payment, The Finance Charge, and the Total Interest Percentage are basically the same as the original system now. But, the APR is way off. How could all those other things be exactly right and the APR be off so much?
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 09:05 PM

Okay, @RL, that gets me much closer. Even more so if I have the odd days "0" in the 2nd Payment stream. So, what does the "Unit Periods" column represent? I thought it was you are telling it this is monthly. It represents how long until the stream begins? Wouldn't the Odd Days be "0" in the 2nd Payment stream because now you have no gap in timing when the recast is done? In the initial payment, you have where it takes place on ths 1st date following the next month, so like 44 days or whatever. But, in the 2nd payment stream don't you just have "0" because it is due on the 1st just like all the rest of the payments?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/14/20 09:07 PM

I got it to work.

Amount Financed

$295,918.11

Finance Charge

$306,130.77

Annual Percentage Rate

5.3608%
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/14/20 11:43 PM

Yep, that's what I got with the 14 Odd Days in the 2nd Payment Stream. When I knock the Odd Days in the 2nd Payment Stream to 0, then I get an APR of 5.376% with the Finance Charge and Amount Financed staying the same. The system generated CD has an APR of 5.379%. Amount Financed: $295,918.11 and Finance Charge: $306,130.86.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/15/20 11:09 AM

When I knock the Odd Days in the 2nd Payment Stream to 0

You should not do that - that is not when the payments happen. It is all based on loan funding date to payment date. Your monthly payment date does not change from the 36th payment to the 37th payment.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/15/20 12:57 PM

Yeah, I figured out how to enter the dates correctly in the tool. I figured out I just use the payment date in the 2nd stream and it does the Unit Periods and Odd Days automatically. This takes me further away from the CD result though. 5.3608% vs. 5.379%. I guess it's still only 0.018%. All the other numbers I am getting within a few dollars. Thank you all for helping me figure this out! I believe I have the hang of this FFIEC APR Tool, at least to a decent extent.
Posted By: Richard Insley

Re: APR Tool - Payment Streams - 05/15/20 03:15 PM

The whole/fractional unit period time measurement always runs from the date of the first payment in each stream back to the date of consummation--not to the date of the preceding payment.

Most people never read Appendix J, but its paragraph (b)(5) explains the process clearly:
If the unit period is a month, the number of full unit periods between two dates shall be the number of months measured back from the later date. The remaining fraction of a unit period shall be the number of days measured forward from the earlier date to the beginning of the first full unit period, divided by 30.

With a closing date of 10/18/2019 and first pmt. date of 12/1/2019, you count back (in whole months) from 12/1 to 11/1 and get one whole U/P. Then, you measure to remaining fraction of a month (14 days) by counting forward from 10/18 to 11/1. Counting back from 12/1/22 to 10/18/19, you get 37 whole U/Ps and 14 odd days.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/18/20 10:59 AM

Awesome. Thank you Richard. So, it is what I mentioned above, i.e. the time period until the next stream, except the Regulation explains it by counting backward, rather than projecting forward.

As we discussed above the second payment stream is determined based on the current index and margin. If the index moves prior to closing, do you still use the amount at consummation as long as the note doesn't call for calculating the change date 45 days (or some other number) prior to the change date? I found this in the Official Interpretation:

[i. When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use any index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.]

What if the note doesn't indicate anything about such prior period? You would still use the rate at the exact consummation date, correct?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/18/20 11:25 AM

If you are talking about ARM loans subject to 1026.19(b), you have to have at least a 45 day lookback in order to comply with 1026.20(c) and (d).
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/18/20 01:20 PM

Where is 45 days noted as a specific requirement? I searched the entire CFR XML for "45 days" and they are always caveated by "if the contract" statements.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/18/20 01:48 PM

Since you are require to deliver the ARM payment adjustment notice at least 60 days prior to the payment change date, without having at least a 45 day lookback, that would be virtually impossible.

1026.20(c)(2) Timing and content. Except as otherwise provided in paragraph (c)(2) of this section, the disclosures required by this paragraph (c) shall be provided to consumers at least 60, but no more than 120, days before the first payment at the adjusted level is due.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/18/20 04:24 PM

Ok, got ya.

So, where the Note doesn't specify the amount of days before the Change Date that the rate will be set, what is the correct method for calculating the blended APR? Do we use the rate at consummation? Or, do we have the option to use the rate at consummation or use the rate based on any index value in effect within the 45-day period prior to consummation? The Official Interpretation reads like the creditor basically has the option to use either one. But, I found it difficult to believe that there isn't a set way to perform this calculation, especially because if the index moves in that period and you pick "Option A" vs. "Option B," you would potentially get APR differences that would be out of tolerance variations.

[The rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors *MAY* use *ANY* index value in effect during the 45 day period before consummation in calculating a composite annual percentage rate.]
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/18/20 04:55 PM

If you have no lookback in your note, then you have to use the index and margin that would have been applicable on the day of consummation:

When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation.

If these transactions are subject to 1026.20(c) - you have a serious gap in your legal documentation.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/19/20 04:43 PM

I know . . . dumb question/excuse, but might as well throw it out there . . . if the note says "Before each Change Date" is that a lookback? I.e., no amount of days is provided, just "Before."

If a lookback did exist, do you conclude that an institution has the option to use the rate at consummation or the rate in effect within the 45 day period prior to consummation?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/19/20 04:57 PM

Typically, you are going to see something like this in the note. If you do not, you need to get with your legal counsel pronto:

The Index
Beginning with the first Change Date, Borrower's interest rate will be based on an Index. The Index is the
monthly average yield for U.S. Treasury Securities adjusted to a constant maturity of five years. Information
about the Index is published by the Federal Reserve in Statistical Release H.15. The most recent Index figure
available as of the date 60 days before each Change Date is called the Current Index. If the Index is no longer
available, the Note Holder will choose a new index which is based upon comparable information. The Note Holder
will give Borrower notice of this choice.

Yes - you can use the index plus margin at consummation or any index in effect prior to consummation within the specified lookback period in the note.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/20/20 04:17 PM

Thank you for your responses. Interesting that you can use either option when that can make a material difference in the APR.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/05/21 05:56 PM

@Richard . . . There is a trick to construction loans where the Unit Period is calculated a certain way. Being that we discussed going back to the consummation date, do future streams include initial construction unit period calculation even when the loan gets on amortizing monthly payments. So, with an initial 1-year construction phase, you get 6 unit periods. If the Perm Phase starts the month right after the construction is over, then would that stream be 6 Unit Period as well? And, then if you had another stream in 5 years, would that next stream be 66 Unit Periods? Or, would you flip back to months and use 12 and 72?
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/05/21 06:00 PM

Has anybody used the tool yet on a Construction-Perm one set of disclosures with an ARM feature to the Perm Phase, or even without an ARM feature. I think I remember seeing a thread where people were saying they couldn't get the tool to work right with Construction loans. Are there known issues with the tool for Construction Loans? Getting APR violations and Finance Charge violations vs. the Final CD. Not sure if it is the tool, the inputs being used, or the CD is actually calculated inaccurately.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/05/21 06:36 PM

I have not checked it recently and I got tired of e-mailing them that they had an error with no response. They were failing to account for the interest during the construction phase. But if I recall it was only on the TIP disclosure. Are you inputting the payment streams correctly?
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/05/21 07:12 PM

I believe I am inputting them correctly, but not totally sure about the Unit Periods column.
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/05/21 07:20 PM

Are you using the calendars. You do not input the estimated construction interest payments and the unit periods and odd days for your first permanent payment will be half of the construction period plus the period from the end of construction to your first payment date.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/05/21 08:46 PM

I did use the calendars. It gave me 6 Unit Periods for the Construction phase and 6 periods for the 1st Payment Stream on the Perm phase. Should then Construction Phase unit period just be '1' since they are making the interest only payment monthly?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/06/21 10:56 AM

There are no payment streams entered for the construction interest payments. You only enter the payment streams for the permanent phase of the loan. The interest for the construction period is already accounted for and it really does not matter when it is paid within the construction period.

So, if you make a construction loan on 01/05/21 that ends on 01/05/22 - which is 12 unit periods and your first permanent P&I loan payment for $x,xxxx is due 02/05/22, then your unit periods to the first payment would be 12 divided by 2 plus 1, which would give you 7 unit periods to the first payment.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/06/21 04:41 PM

It seemed like when I used the calendars it had a payment stream for the Construction phase, but perhaps that was just my own assumption that that is what the payment stream with 6 unit periods represented. Taking it away does pretty much get the APR Tool results closely in line with the Closing Disclosure. So, for a Construction-Perm loan with an ARM feature, let's say a 5/1, you would only have 2 Payment Streams? The first one for the 5-year initial perm phase with the calendar Unit Period calculation (I got 6 periods with 10 odd days). And, then, you would have a 2nd Payment stream representing the ARM adjustment with 66 Unit Periods and the 10 odd days?
Posted By: rlcarey

Re: APR Tool - Payment Streams - 05/06/21 05:34 PM

If you have a premium or discounted ARM start rate, that sounds correct.
Posted By: Compliance NABW

Re: APR Tool - Payment Streams - 05/06/21 05:53 PM

Okay . . . Awesome. Thank you for the back and forth. Appreciate the help.
Posted By: Richard Insley

Re: APR Tool - Payment Streams - 05/06/21 11:25 PM

Originally Posted by rlcarey
If you have a premium or discounted ARM start rate, that sounds correct.
Yes. As a reminder the rule you are following when you do this is Section 1026.17(c)(1), OI #10.