Answer:
This type of reimbursement is always complicated, but you seem to understand what you're doing. For starters, be sure you have the agencies' latest directives. Unless there have been recent changes, you should be using this document.
The next time your regulator drops in for a compliance examination, expect the pre-exam questionnaire to ask about any TIL reimbursements since the previous exam. Since you'll have to provide full details then, it's a good idea to run your proposed methodology and results by the agency for an opinion now--before you pay out a reimbursement.
APRWIN can give you most of the values needed to decide whether you are reimbursing the APR understatement or the FC understatement. It cannot, however, tell you whether your stepped payment schedule complies with OI # 10 under Section 1026.17(c)(1). You must perform this test manually and it must be based on the step-up from the note rate to the rounded rate-plus-margin in the manner spelled out in your note. Realize that this schedule is NOT based on a worst-case rate/payment increase and that the payments may NOT match what Section 1026.18(s) requires you to disclose.
Assuming the values presented above are all correct, I get a correct APR of 5.1902% and a correct FC of $30,364.40. These results confirm that both your APR and FC are understated. Turn to page 6 of the official Q&A document and follow the steps in #7.
In all types of reimbursements, the Interagency Policy requires you to compare the two understatements when both the APR and FC are understated and then reimburse whichever is larger. The concept is simple enough, but for ARMs, the math and methods are confusing.
You're on the right track focusing on the period before the first rate change. Because you are required to give "program disclosures" up front, the enforcement logic is that the consumer should rely on the transaction disclosures only until the first rate change. Thereafter, s/he should rely on information contained in the program disclosure. The reimbursement policy applies just to the transaction disclosure.
Using APRWIN with a 0% "reimbursement tolerance" and 60 "prior payments," you need only two of the calculated values. Ignore both the "APR Adjustment as of Final Payment" and the smaller value labeled as "Lump Sum Method." The comparative value for the APR understatement is $699.02--the value labeled "Lump Sum/Payment Reduction Method." It is the smallest of the three possible APR reimbursement values.
The second calculated value that's a "keeper" is the "Finance Charge Adjustment"--$2,896.20. The Enforcement Policy requires full reimbursement of any part of this value caused by a failure to include all Prepaid FCs in the disclosed FC. In certain cases (see the Policy), you're permitted to prorate the remainder of the FC Adjustment. If you're entitled to that allowance, after setting aside the amount attributable the the PFC error, divide the remaining "Finance Charge Adjustment" by the total number of payment periods (240) and multiply by the number of payments before the first rate change date (60.) Add this prorated value to the PFC set-aside and you arrive at the total FC adjustment which must be compared with the $699.02 APR adjustment.
For the sake of this explanation, let's say that none of the FC understatement was attributable to mishandled PFCs and that you are permitted to prorate the FC Adjustment. In that case, you would divide $2,896.20 by 240 and multiply the monthly value by 60--giving you a FC reimbursement of $724.05.Since $724.05 is larger than $699.02, you will reimburse the FC understatement and ignore the APR understatement.
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