IBA Compliance Connection

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Our mortgage software understated the APR for several adjustable rate mortgage (ARM) loans by about 20 basis points. How should we calculate the cure amount? Are we required to pay the borrowers the difference between the total amount of interest that we should have disclosed and the amount that we did disclose?

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In order to avoid civil liability (and exam criticism) for overstating the APR on these loans, the Truth in Lending Act (TILA) requires you to notify and reimburse your affected customers for the overcharges within sixty days of discovering the error. While the TILA does not specify a calculation method for the required reimbursements, clear guidelines for calculating the reimbursements can be found in a joint guidance issued by the federal banking regulators, as well as in a calculator made available by the OCC.

The federal banking regulators have released a Q&A (linked below) that directly addresses reimbursement calculations for an adjustable rate mortgage. The reimbursement calculations are complex, and we recommend reviewing all of question #7 on pages 6–8 of the Q&A. For example, if only the APR was understated, the reimbursement calculation should take into account only the “period of time before the first scheduled change in rate.” If both the APR and the finance charge were understated, you must calculate both a finance charge reimbursement and an APR adjustment, as described in the Q&A, and provide the larger of the two.

If your mortgage software does not provide for reimbursement calculations, you may wish to use the OCC’s APRWIN software, which also can calculate reimbursement calculations for ARM loans.

For resources related to our guidance, please see:

  • FDIC Compliance Examination Manual, Lending — TIL Restitution, pages 1–2 (“Under provisions of the [Truth in Lending] Act, a financial institution will generally have no civil or regulatory liability if it takes two affirmative corrective actions. Within 60 days of ‘discovering’ an error (but before institution of a civil action or receipt of a written notice of error from a consumer), the financial institution must both notify the consumer of the error, and reimburse the consumer for overcharges.”)

  • Questions and Answers Regarding Joint Statement, pages 6–8 (“Question 7. How will the Policy Guide apply if a creditor disclosed that a rate will be prospectively subject to increase, but the APR disclosed or the finance charge disclosed or both were originally understated? . . .”)