Computation of the Annual Percentage Rate (APR) should be a rote function after 50 years. That’s how old the Truth-In-Lending Act (TILA) is. But the issue of computing the APR when odd-days interest is involved does not seem to want to go away.

“Odd-days” is a reference to the time interval that runs on a closed-end, precomputed loan when the first payment due date does not “align” to the contract date. For example, if a one-year loan is made on March 1st, but the first payment due date is April 5th, the computation of the APR may take into account that the first payment due date is one month plus 5 days after the contract date and interest is running for these five days. But, must it? (We also know that TILA allows us to ignore that some months have 30 days or 31, or 28 or even 29 days.) And, anyway, doesn’t the software program take such facts into consideration in determining the APR? Probably.

However, the term of such a loan does not fit into a nice box. And, when a regulator or plaintiff’s attorney utilizes the Office of the Comptroller of the Currency’s APRWIN program to check the APR disclosure, if certain inputs are selected (as opposed to others), the result may spit-out an APR overcharge or undercharge error. So, now what do we do?

Well, after catching our breath, we note that the OCC APRWIN Program is but a tool and is not a legal authority for determining the actual APR. The legal authority is found in Regulation Z Section 1026.17(c) and Appendix J. Appendix J provides equations, terms, definitions, instructions and related examples for calculating APRs. I don’t have enough brain matter to explain Appendix J. But, I can offer this explanation of how I think this works:

1. Reg Z. Section 1026.17(c)(4) provides that in making calculations and disclosures, creditors may disregard irregularities in the first payment period within certain limits. For a transaction in which the loan term is less than 1 year, a first period not more than 6 days shorter or 13 days longer than a regular period may be disregarded. For longer term loans, the periods are even longer.
2. So, it is perfectly proper to disregard the above loan’s odd-5 days (longer) first payment that the calendar function of the OCC APRWIN program offers, and instead use 0 odd days function that the OCC APRWIN program provides.
3. The OCC APRWIN program incorporates most of the rules and equations found in Appendix J. However, it apparently lacks rules determining the “unit period” to be used in the APR calculations; and since Section 1026.17(c)(4) permits creditors to disregard the irregularity of the odd-5 days, the “unit period” computation in the OCC APRWIN program may not align to your software program.
4. So, if your software program is not doing that—i.e., not choosing to recognize odd-5 days—but the disclosure is being compared to an OCC APRWIN analysis that chooses odd-5 days, the APR disclosed in the OCC APRWIN program results will not agree with your disclosure.
5. Alternatively, if your program chooses to recognize odd-5 days, but the input into the OCC APRWIN program analysis does not choose that option, the APR disclosure will show an error message.
6. With this said, that doesn’t mean that your disclosure is necessarily out-of-tolerance or wrong. It likely is not. But, when your contract APR disclosure and the OCC APRWIN output do not agree, it is not easy to explain why to your regulator or a plaintiff’s lawyer.

Practice Pointer: The take-away message from this blog is to make absolutely certain that you and your software provider are on the same page when it comes to odd-days computations in closed-end, precomputed loans.

Please Note: This is the one hundred ninety-first blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.