Computing an APR with the new Mortgage Payment Disclosures

Had an interesting phone message from a colleague attending a Mortgage Bankers Conference yesterday.  It went something like this:

 

            “Just got out of a really interesting session.  A great deal of debate and discussion on being able to validate the TILA APR at mortgage closing with the new mortgage  disclosures.  Each of the panel members computed a different rate for the same loan. The animated discussion was about which one was right.  There is great concern that at closing you have to gather documents from multiple parties and pull information together from these various documents.  One mistake and you have a situation.” 

Sometimes, it takes a while for certain chickens to come home to roost.

Back in the fall of 2010 when the interim rule about what, at Carleton, we call the “MDIA Payment Disclosures” proposal was published, it was clear that one of the deficiencies of the attempt to overhaul mortgage disclosures was that the contract itself did not display the actual payment schedule that other TILA disclosures were derived from.

In short, there isn’t the proper information on the contract disclosure to compute/validate the TILA APR.

 

Since our focus is on the calculations and disclosures, that fact was a glaring drawback in our view.  We opined exactly this issue to the Federal Reserve Board of Governors, they actually promulgated the original interim rule, during the industry comment period.

 

At the time in exploring this issue with regulators at both the national and state level, we got pretty much the same response, “well, examiners have to look at the HUD-1 anyway, they can get the payment information from there”.

 

After 29 years in the Carleton Research Department, I can’t even tell you how many times I have worked with auditors, compliance officers, attorneys, and examiners who believed an APR value was incorrect only to realize the issue was with  in accurate data entered into the APR check program they were using. This when all the payment information required was still in the Fedbox on the contract.

Now the expectation is to pull critical information from other documents?  Have you ever noticed how many numbers reside on a completed HUD-1 form?

It just seems that the new disclosures have opened a huge door on the opportunity for inaccuracies ranging from simple lapses to egregious errors on the part of auditors who now have to play detective with an assortment of documents.

More information isn’t always better information.

 

*If you would like to view Carleton’s official comment letter to the FRB concerning the MDIA Mortgage Payment Disclosures, click on the link below:

http://www.carletoninc.com/services/Research%20Articles/Reg_%20Z_comment_letter_111910.pdf

 

Is Calculation Validation Included in Your Compliance Program?

Often we fall prey to not being able to see the forest because of the trees.  The details overwhelm us and we miss the proverbial big picture.  When it comes to the compliance of your credit calculations, I’m afraid these days the opposite may be taking place.

The nuances and parameters driving the calculations that create credit disclosures reside at such an esoteric, granular level that a long list of “900 lb. Gorillas” is currently over- crowding the room -- disparate impact, fair lending, ATR, QM, UDAAP, HMDA data -- none of which are focused on the integrity of how you calculate your traditional disclosures.

The consumer credit mathematics is often over-looked and, yes, taken for granted that it’s “just math” and influenced by the “we just need to find someone with an advanced mathematics degree” mind-set.

But if you have ever spent much time trying to unravel your institution’s settings, parameters, interest accrual methods, rounding options etc., you know the consumer credit math is its own animal when compared to mainstream, everyday arithmetic.

With the expansion of regulatory requirements it is paramount that all facets of a lender’s operation “cross foot and balance” so to speak.  We are calling that process “alignment.”

Alignment means the same methods are used throughout the life of the transaction.  The narrative description in the lending agreement states the lender will compute and accrue charges according to certain rules and parameters. The disclosure numbers populating the agreement are the product of employing those rules and parameters. The back end servicing calculations actually collect the charge in the exact same manner.  It all matches.

Sounds simple, right?

You would be surprised how often we see lending documents state that “charges will be computed on a 365 day year” in the promise to pay section, yet the numbers populating the form are generic,  periodic, 30/360, HP 12C type calculations. 

 

Those generic calculations are much simpler to program and compute and, most likely, have been embedded in the loan origination system for decades.  We’ve got an incongruity right off the bat and we haven’t even gotten to the servicing calculations yet.

There is a train of thought that “it all comes out in the wash” with the interest bearing, a.k.a. “simple interest”, transactions that dominate today’s credit market.  “The consumer isn’t going to make all of their payments exactly on due dates anyway, so what’s the big deal about the regular payment?”

 Well, beside the advent of debit/e-check/ACH payment proliferation rendering the previous adage practically unserviceable, there is the battle to define, determine, and evade the newly created CFPB two-headed specter of “deceptive” and “abusive”. 

What better defense than all phases of your operation accurately and consistently portraying the contractual obligation between the lender and the borrower?

 

It might be worthwhile to step out of the dense compliance forest for just a moment and take a close look at the tree that houses your system calculation engine.